Excuse all the following numbers, but they are necessary to teach the method of how to pay off debts and use those debt payments to build a safe and secure tax-free income at retirement that you cannot outlive.
Let me establish the basic information first, then I can apply the method:
Doug and Karen Smith are age 40. Doug purchased a $115,000 whole- life policy with Northwestern Mutual Life Insurance Company 19 years ago when they got married.
- The premium was and still is $89 a month.
- Cash values today total $26,000.
- They have 4 debts totaling $23,000, not including their home.
- The average interest rate charge on these debts is 19.6%.
- The total payment each month for these 4 debts is $604.
- Doug cannot save 3% of his income to qualify for the employer’s match to his 401(k).
- Doug and Karen do not have a spending plan and have not been able to save any extra money.
- Their desired retirement age is 28 years from today.
- Doug and Karen have always had to finance their cars, new and used.
Here’s the action plan for our example couple:
- Borrow $23,000 from Doug’s whole-life policy and pay off their debts.
- Doug and Karen will keep making the same payments of $604 (the former debt payment) and $89 (the whole life insurance premium) a month to their life insurance company for the next 28 years, until retirement.
- Doug and Karen will create a spending plan and hire a personal financial coach for a modest fee to hold them accountable for three months. (To sign up for your own personal coaching, choose the Select Plan from the Money Mastery online site.)
Now, here’s what’s going to happen to Doug and Karen as they follow this plan:
- The cash values on the life insurance policy will grow to almost $441,000 in 28 years.
- Doug and Karen can borrow from their cash values over the 28 years to purchase five new cars and pay these loans back to themselves, never losing any money, except depreciation. Subtracting the negative expense of depreciation of an estimated $15,000 for each of the five cars purchased will leave them with about $363,000 in cash at the end of the 28 years.
- They will turn on the annual lifetime income from the policy of $30,500 at age 68. There will be no more taxes on growth of the cash values, or on withdrawals during Doug’s lifetime, nor upon death. I repeat: No more taxation!
So let’s analyze what all this means for you. The traditional method of managing debt you’re probably using is to keep paying down and borrowing and paying down and borrowing and paying down. But by using a simple whole life policy to borrow from, you recapture all of these payments.
What about the interest rate you will earn on a whole life investment? The direct answer is 2 to 4% annually over the lifetime of the person, but to recapture all the debt payments makes the real rate of return over 200%.
If you want more information about how life insurance can be used to get out of all consumer debt quickly and begin saving for a nice retirement, contact me for a no-cost conversation: firstname.lastname@example.org. I can explain this using your age and debt payment information. Basically you will be borrowing from yourself.
By establishing a reserve cash value fund, you accomplish the following:
- No market risks.
- No more taxes.
- If you die too soon, the death benefit completes the cash savings.
- If you live too long, income continues until death.
- If you become disabled the insurance company pays the premiums.
Sounds to good to be true? There is a cost to this that needs to be addressed. For you it may be too big of a cost but if you’re smart you won’t see it that way as I have explained how to get help with the following various issues. Here are the requirements to make this work for you:
- You will need a financial coach to help you change your spending and borrowing habits (see how to get one at a minimal fee above).
- You will need to be healthy enough (or young enough) to qualify for and be able to afford the premiums on a whole-life insurance policy.
- You need to control your spending so you can learn how to save extra surplus each month.
- You will need to discipline yourself so when you pay off a debt, you won’t turn around and borrow again. You will need to use the debt payment to deposit into the whole-life policy (this is a where a personal financial coach and the right tools can really be vital).
- When you do need to borrow again, which you will certainly will, you will need to use the cash values in your own policy to do so.
Note; If you are not healthy or young enough to do a whole-life policy I suggest you find a family member who is and use them. You can stay the “owner” and control deposits and withdrawals. You should not put so much money into this cash value account that it will affect taxes. Your agent and insurance company should guide you with this.
This whole-life policy can be compared to a horse on a cattle ranch. The purpose of the cattle ranch is to grow the herd and sell off the beef for profit. But you must have a horse to manage this cattle because they will do things that cattle cannot. Whole-life insurance properly structured, will do four things for you at the same time:
- Provide a death benefit
- Grow your money.
- Pay premiums if you become disabled.
- Eliminate taxes.
Like a horse on a cattle ranch, a whole-life insurance policy will do things you cannot get your money to accomplish. For example a mutual fund will not pay you a larger death benefit when you die; your money in the market is subject to losses; your bank will not keep putting in money for your savings if you become disabled; and your 401(k) does not grow without paying taxes upon withdrawal.
I suggest you read and re-read this article so you can compare with what you are currently doing with your debt payments. Are you recapturing all of this money to be used for your future? Are you getting your money to do four things for you at the same time? Only a properly structured whole-life insurance policy from a dividend-paying company will accomplish this.