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Take Your Debt Payments and Turn Them into Tax-free Retirement Income for Life

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 screen-shot-2016-11-28-at-4-50-02-pmago 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 Debtborrowing 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:  peter@moneymastery.com.  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: 

  1. Provide a death benefit
  2. Grow your money.
  3. Pay premiums if you become disabled.
  4. 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.

What Is a “Life Bank” and Why Do You Need One?

A “life bank” is a properly structure whole life insurance policy purchased from a dividend-paying life insurance company.

Here are the 6 main benefits to having one:  

1. A gigantic death benefit for your family.  A whole life insurance policy will help you create the most cash values possible, which translates into a pretty hefty death benefit. When you die, the benefit will replace your income if you die too soon. The death benefit will provide college education for your children. And the death benefit will leave an amazing legacy for your loved ones. To purchase a whole life insurance policy you must learn to control your spending to create surplus.  When you are confident you can save money on a predictableCemetery basis, then place this surplus into a properly structured whole life policy so as to create the most cash values possible.  While this death benefit I’ve been going on and on about is very important, for the purpose of this discussion, I want to emphasize the living portion of a whole life policy more, so now onto more of the living benefits of a “life bank.”

2. You can use the cash value of the policy to pay off all consumer debt. This will get you quickly out of the debt that can cost you the most and prevent you from taking advantage of other opportunities that can come your way. Once debt is paid off, you should consider using the cash value to start a small business that will help create passive income you can use to fund retirement. If you aren’t the kind of person to strike out on your own, that’s okay.  But if you have any interest is creating a small business and making additional income, Debtthen cash values can act as the seed-bed for this purpose.

3.  A properly structured whole life policy has no tax liability.

4. Its cash values are extremely safe, while generating an average of 4% guaranteed interest year after year. While the dividends themselves are not guaranteed, once paid, they become
guaranteed as they flow into the cash values of paid-up additions. Paid-up additions are a type of rider on your insurance policy. This rider lets you increase the policy’s death and living benefit by increasing its cash value; it can earn dividends, meaning its value compounds over time.

5. All through the years you can use the money as needed for your money-in-motion purposes. Whole life can be used to recapture all principal and interest payments on any kind of debt, personal or business. Recapturing this expense is putting your money in motion to make more money and is worth far more than any “rate of return” from a bank or the stock market. It can be worth greater than the “match” from an employer’s sponsored 401(k) contribution.

6. In retirement, dip into your “life bank” and live on the tax-free income the policy provides, or, live on the passive income you have created from the funds that were available to you through your shutterstock_128683532 (534x800)whole life policy I have outlined above.

At the end of your life, after using all of these living benefits, you will still be able to leave a tax-free legacy of great value to your family through the paid-up additional life insurance that goes along for the ride, even after your death.

When you see a properly structured whole life policy in operation, you will start to understand its power to create a life bank you can use now, and a “bank” for your family after you die.

For more information about how to structure a whole life insurance policy, contact me: peter@moneymastery.com.

I Take Issue with Dave Ramsey’s Retirement Plan

With regards to Dave Ramsey’s suggestions for how to retire based on taking risks with mutual funds, they don’t seem to take into consideration any of the following and I find myself wanting to ask Ramsey…

  • What if a person doesn’t have the ability to save any money to invest in mutual funds?
  • What if they live until age 93?
  • What if they have to go into a long-term care center?
  • What if mutual funds drop 43 percent in value when they reach age 57 like in 2008?
  • What if the premium paid on a term life insurance policy for 20 years is $63/month ($15,120 equity) and they outlive their term insurance and then they die?
  • What if their health isn’t good enough to qualify for a new 20-year term life insurance at age 57?
  • What if their children don’t leave home, or they do leave home one-by-one and come back 2-by-4 with grandchildren?

Here is my retirement plan:

  • Get your spending under control using a simple, efficient trackable Spending Plan so you can find wasted money that will allow you to save 10 percent of your income.
  • Deposit this money into a properly structured whole life insurance policy.
  • Make sure that 96 percent of the premium goes into cash values the very first year and beyond, and make sure you use a “mutual” dividend-paying life insurance company.
  • Elect the dividends to buy paid-up-additional life insurance so that at age 57 you will have paid-up-for-life insurance of over $700,000 so whenever you die this comes to your spouse tax-Docs and glassesfree and far and away exceeds the risky part of a $700,000 taxable mutual fund.

The genius of whole life insurance. In addition to the above benefits, whole life insurance that is paid-up gives a person permission to do a reverse mortgage and access more money for income. With paid-up whole life, it doesn’t matter if your health changes and you cannot qualify for a new 20-year term life policy, you already have it.  And this paid-up life goes until age 121 on a guaranteed basis. When you die, the benefit goes to your heirs tax-free!

I take issue with Ramsey’s recommendation of mutual funds as the way to fund retirement. His suggestions that mutual funds will just miraculously grow to $700,000 at age 57 are ludicrous, there are no guarantees of that.  Why give people such false hopes!??

When I suggest using whole life it’s because it IS guaranteed! You know that when a dividend is paid, it goes into guaranteed paid-up additional life insurance.   Of course dividends are not guaranteed, but once paid on an annual basis, this dividend goes directly into a guaranteed investment.

Dave Ramsey teaches sound money management principles and I respect him for that.  He pushes getting your spending under control and so do I. He emphasizes getting out of debt. And of course these two things are fundamental first steps to creating wealth.  But his opinions on 20-year term life and investing in mutual funds as a way to manage later years is way off base and can hurt a lot of people who rely on this method of retirement planning.

I strongly suggest you look at whole life insurance before going with the rest of the herd over the 20-year-term-life-insurance cliff.

The Truth about Life Insurance

I have learned much over 45 years of  helping people solve financial problems using insurance products.  I am sure I average 120 hours each year of  classroom continuing education.  If you add up 45 years of this, it means I have over 6,000 hours of advanced life insurance training.  I am at the very least, competent to discuss concerns you need to know about life insurance.

First of all, I would like you to think of life insurance like a parachute:  If you ever need a parachute and don’t have it, you will never need one again.  I am not trying to be funny.  I hope you can see what I have witnessed over and over again in my career as a financial coach when people choose not to be prepared. Most people have family values like college education for children, or income security, or family vacations, or a comfortable retirement.  But ask yourself what would happen to these values if you died today?  Usually upon your death, values will remain, but too many times these values and dreams associated become impossible to achieve financially.

When you purchase life insurance, it is to help in the event of death.  Life insurance is truly an act of love.  The person buying it will never see the benefit during their life.  They trust the insurance company will be honorable to their contract and pay when they die.  So in short, if a person is making an income of $80,000 a year and works for 45 years, that equals a $3.6 million potential income for Don'tWaitthat family. But if the person dies in the first ten years of employment and doesn’t have life insurance, spouse and kids will lose $3 million or more. Families struggle all the time when the main income earner in the family dies.

Questions and Answers about Life Insurance

  • How much life insurance should you have?
  • What kind should you purchase?
  • How will you pay for it over the years?
  • How should you select which company to work with?
  • How do you find an agent who holds your values and interests before theirs?

How much life insurance should you have?  Generally speaking you should purchase a policy that will cover seven years of income or you should have enough money to pay off all debts and funeral expenses, and leave enough money for children’s education and savings in the bank earning enough to pay for all expenses for the life of the surviving spouse.

What kind of insurance should you buy, term or whole life?  The kind of life insurance to purchase has mostly to do with your age and health, not your budget. Most people do not realize that you really buy life insurance with health, not so much with money.  For example, a 10-year term policy of $500,000 might cost $12 a month for a healthy male age 40.  But what if the ten years passes and premiums are going to increase because you are older and more likely to die?  How much can you afford then?  And what if your health changes and you cannot find an insurance company to give you a contract at all.  This is a bad position to be in, simply because if your health deteriorates you cannot buy life insurance.  When people have health issues, they will also die much sooner than normal life expectancy.  So term insurance is really only for those who are younger and healthier. They would purchase this insurance in the event that they got suddenly sick or were killed at a relatively younger age in order to protect their family.

Another statistic about term life insurance shows only 1 percent of all life insurance pays the death benefit.  People usually do not die until after the term life premiums get so expensive they have to quit paying, and then they die.  The only way to win is to purchase whole life that offers a level premium with cash values building up until you die, and is guaranteed to pay up and until age 121. The problem is, whole life can be very expensive the older you get.

In future posts I will discuss more how whole life works and when it is desirable to purchase. Understand that life insurance companies have millions of lives insured and they can predict with utmost certainty how many will die this year, or next. They know how to play the insurance game, and so should you. More to come about companies to consider, how to pay for whole life, and which agents to work with.

Dave Ramsey is Wrong about Internal Rate of Return on Whole Life Insurance

Dave Ramsey has said many times on his radio show that whole life insurance is a terrible investment.  He likes to harp on his calculation of the internal rate-of-return (or IRR) on the premiums deposited and the resulting cash value growth, pointing out that the most you can ever hope for over many years with the IRR is 2.6 percent annually.

But let’s consider how whole life works.  The insurance company calculates mortality rates (death rates), their overhead expenses and then investment returns. The problem with Ramsey’s claim is that he is comparing apples to oranges, comparing a whole life policy to a mutual fund. Mutual funds don’t pay $500,000 if you die, for heaven’s sake but whole life does! And whole life pays at age 88, or at age 92, or age 105.  Whole Life is always there to pay your beneficiaries a tax-free death benefit as long as you pay the premiums.

For the sake of argument, let’s use Ramsey’s way of thinking in pushing mutual funds as a good investment and see where they fall short in some ways compared to whole life.  Mutual funds have fees, sales charges, on-going trading costs and market risks.  If the market goes down at a time in your life you plan to retire, oops!! You just had an unpredictable event.  Whole life returns are not based on the market so you can predict how much money you will have and how long it will last at any age in your life.  

Let’s say you place $5,000 into a mutual fund… how much money would your beneficiaries get back when you die? shutterstock_166288760 (640x427)Net of cost, probably close to $4,885.  Now place $5,000 into a whole life policy…how much do you get?  Answer is $500,000 tax-fee!!  Now let’s go down the road 10 years while depositing $5,000 each year into a mutual fund and the same into whole life.  The mutual fund is totally unpredictable.  You may very well LOSE 25 percent of this money.  However, the whole life policy has a 150-year history of always being there at 2.6 percent  (if you use Ramey’s calculations). This means you will have cash values of $56,274 you can use or in the case of death, $500,000 for your loved ones, tax-free. Upon death at the end of 10 years, this is a 47.4 percent tax-free IRR.  If you continue these calculations out for 20 and then 30 and further to 40 years, the lowest IRR your family will receive is a 12 percent tax-free death benefit.

How would your mutual fund have done?  Don’t know, plus the gains are taxable. All the gains in a properly structured whole life policy, while living, are tax-free.  So the 2.6 percent IRR is an effective IRR of 3.4 percent in a 25 percent tax bracket.  In today’s unsettled economy, a 3.4 percent IRR predictable rate is still very attractive, especially when you just might die.  All through the years, you have access to the cash values inside the whole life policy to use as you wish, even to finance your own loans so you don’t pay principal and interest to a financial institution. By saving all that principal and interest on your debts, the IRR could be equal to 48 percent, not 2.6 percent.

Why does Dave Ramsey insist on comparing apples to oranges?  The answer could be that he has an interest in a term life insurance company.  It could also be that he has never seen a properly structured whole life policy? Properly structured, a whole life policy will be worth a fortune to you.  I suggest you think out of the box and see how such a policy can help create additional wealth for you and your family.  One thing I am quite sure of, is that you will die and when you do, owning a whole life policy will far outshine a measly mutual fund.

How to Legally and Ethically Stop Paying Federal Income Tax

This is serious business right here and now.  Can you imagine what it would mean for you not to pay any income tax?  As you read and implement the information in this post, you will be well on your way to a tax-free environment.  I’ll treat the basic methods in this blog, then dig deep into the specifics in future posts.

FACT:  Three areas that keep you from paying Federal Income Tax.

  1. Life insurance cash values
  2. Tax-free bonds.
  3. Converting your qualified 401(k) or IRA’s over to a Roth IRA.

First, know that as long as you play by the rules, there will not be income tax on the gains within a properly structured whole life policy.  There are many advantages to owning such a policy; I will elaborate more in upcoming posts.

Second, a tax-free bond has long been known as a safe place to save money and avoid taxes.  Many stock market investors park their money in these bonds when they don’t have an appetite for risk.  Bonds can be held to maturity and earn tax-free interest, or can be sold when there is a nice gain on the face amount.  Check specifics with your registered investment adviser.

Third, convert a traditional tax-deferred retirement account to a Roth IRA.  Of course you must pay taxes now on the current balance, but as you continue to deposit funds into the account (that you have already paid tax up front on) there will be no further taxes due at the time you withdraw. The principalSeed and the gain are all tax-free at withdrawal.  I ask:  “Do you want your money to double and then pay tax?”  Why not convert to a Roth IRA and only pay the tax due today, then allow the money to double over time and not pay tax ever again? This is not rocket science.  Remember the key question: “Would you rather be taxed on the seed or the crop?” And don’t be fooled by the idea that you will be in a lower tax bracket when you retire. That isn’t going to help you much at retirement, especially when you will be living on more of a fixed income and possibly dealing with higher cost of living issues.

What about your concern that tax rates might decline?  They could.  Anything is possible. But consider our current government expenditures doubling the national debt in just eight years!  What about that?  What does it mean when our government has to borrow money to pay just the interest on that debt?  If you are a betting person, our income taxes are likely to go up, not down or even level out.  Plan for up, just to be safe.

Concerns also swirl around about taking money out earlier than age 59.5 from your 401(k) or IRA.  This creates a 10 percent penalty plus you pay tax on the amount withdrawn.  I am sure this is designed to stop early withdrawals because so few people have adequate savings for their long-term retirement years.  However, you may use Section 72(t) and just retire the account early and not pay the 10 percent penalty, even though you are age 48, or 52.  I will offer these details in subsequent posts.

The government can change the tax rules at anytime, sure.  But usually when they propose a change, they allow grandfathering back to the old law, for anyone who has already been using the old law.

Most people do not pay much federal income tax right now, (the real gouge is FICA tax) so why should you be concerned?  The reason is everything is constantly changing… soon your children will grow up and ChildHomeworkthe child tax credit will be gone.  If you get a personal exemption and have three children, this gives you five exemptions!  This provides is a ton of savings.  But those tax credits won’t be around forever. In addition, if you are managing your money as you should be and getting out of ALL debt, including your mortgage, any mortgage interest expense will decrease, as it should, along with the tax benefits this provides. As you get older, the tax credits you have relied upon will go away. Like my 68-year-old client, “Richard” who recently told me that he has never made so little income and had to pay more in tax in his lifetime. Your tax CPA will tell you how much their older clients pay in real money, and then as it relates to their income. It will shock you, hopefully, into making better plans to protect your money now from taxes that will act upon you later. Don’t wait to take advantage of whole life insurance, Roth IRAs and tax-free bonds. These three strategies will reduce your taxes a great deal, and if you plan correctly, you could pay zero income tax.  At retirement you may be able to file using standard deductions, along with personal exemptions and this totals $30,000 of income that you can have before you rely on tax-free income.

Why a Properly Structured Whole Life Insurance Policy Can Maximize Your Money

Much has been said about whole life insurance, or indexed universal life.  Both are considered “permanent” policies because they can be guaranteed to pay a death benefit up and until age 121.

My research online found hundreds of articles and videos for, and against, using permanent insurance as an investment, or as a place to store money for retirement.  My research was pretty thorough as I checked out every site on several pages on my Web browser until I found a treatment on whole life insurance that I consider fair and comprehensive. I have included the links to several short (5 minute) videos that will teach you why purchasing a whole life policy, properly structured from a dividend-paying insurance company, can be the best tool for accumulating wealth during your lifetime and then leave a strong legacy to your loved ones upon your death.  I have no idea who created these clips but in my 45 years of selling insurance products, they are very good.

CAUTION:  The personal application of the information contained in these videos requires a licensed and trained professional insurance agent.  I encourage you to watch them to broaden your perspective about how to better fund retirement.  

________________________________________________

Becoming Your Own Banker, Concept 1:  Sets up the premise of keeping your money within your own control by putting it in motion to make more money for you. This is an introductory video for the clips that follow explaining how to be your own banker using the techniques that will be outlined in each subsequent clip. 

https://www.youtube.com/watch?v=M0mjqO8HohI

 

Becoming Your Own Banker, Concept 2:  

https://www.youtube.com/watch?v=_SERjnvQvtU

 

Becoming Your Own Banker, Concept 3:  

https://www.youtube.com/watch?v=semaQn07gew

 

Becoming Your Own Banker, Concept 4:  

https://www.youtube.com/watch?v=pP21GpG42e4

 

Becoming Your Own Banker, Concept 5:  

https://www.youtube.com/watch?v=bByEcL9rMI4

 

Becoming Your Own Banker, Concept 6:  

https://www.youtube.com/watch?v=bObmNaOqjTY

 

Becoming Your Own Banker, Concept 7:  Explains whole life insurance vs. term insurance.  If whole life is properly structured, the cash values can be used but it will still earn money.

https://www.youtube.com/watch?v=eqPT5rj8ydk

 

Becoming Your Own Banker, Concept 8:  Compares two accounts.  Stresses that rate-of-return is not the most important to compound your wealth.

https://www.youtube.com/watch?v=-9PJoz8e6s8

 

Becoming Your Own Banker, Concept 9:  

https://www.youtube.com/watch?v=PXtdQQzxVsY

 

Becoming Your Own Banker, Concept 10:  Explains that whole life is flexible.  Teaches how to use money over and over again, for anything and maintaining control and use of your money.

https://www.youtube.com/watch?v=bZD6kCxWmGA

 

Becoming Your Own Banker, Concept 11:  

https://www.youtube.com/watch?v=m0ufhqgwqfw


Becoming Your Own Banker, Concept 12:  
Can use whole life just like a bank would to qualify for a loan, except you are the president of the bank.  No qualifying, no collateral, no credit checks, no fees, and no taxes.

https://www.youtube.com/watch?v=OdUyxjEHlpY

 

Becoming Your Own Banker, Concept 13:  After you have your own whole life policy for awhile you learn to like not paying an interest expense, no more cycling of interest rates up and down.  Your self-confidence increases, as you don’t have to pledge your home or cars as collateral.  And you have less anxiety by not wondering about market risks.

https://www.youtube.com/watch?v=nzCtcMYzYc4

 

Just as a final note and my own personal recommendation,  I have found two policies types to be the best.  The best for you will depend on the amount of your cash flow.  Contact me for a specific illustration for either one:

  1. High Early Cash Value policy (HECV), from Mass Mutual.
  2. Patriot 100, from Lafayette Life.

(801) 292-1099, ext. 2, peter@moneymastery.com.