Category: Borrowing Strategy

Borrowing Against Whole Life Insurance at a Bank

This post originally appeared as an article on Kim Butler’s Partners for Prosperity website at www.partners4prosperity.com/collateral

We thought this to be valuable information to also share with the Truth Concepts community. 

 

We get many questions on using life insurance policies with cash value as collateral for bank loans.

First, you can ONLY borrow against a policy with cash value, such as whole life insurance. You cannot use this strategy at all with a term insurance policy.

Often, local (as opposed to large/national) banks and credit unions will lend against the cash value of life insurance. So you may want to start with your local banker.

Additionally, the banks listed below have been referred to us as providing this service nationally. Please contact them directly for more information.

Loan-to-value limits are usually 80 or 90%. (You could borrow up to $80k to $90k with $100k of cash value as collateral.) Bank rates are often lower than the interest rates for policy loans, with current rates as low as prime.

Brittnay Wittnebel
Kensington Financial Associates
2875 NE 191st Street, Suite 603
Personal AND “Direct to Business” loans
OK to use multiple policies for collateral
Kensingtonfa.com
Aventura, FL 33180
(305) 466-0577  ext. 102
(608) 346-3205

Kensington Informational Flyer

Brandon Miller
State Bank

Lines of credit from $20k
Georgia
Brandon.miller@statebt.com
404.290.0050 (cell)
404.239.8664 (office)

State Bank information flyer

Matthew Hale
Heritage Bank

Greater Atlanta Area
matthew.hale@heritagebank.com
404.933.5144 (cell)

Patricia Davino
Valley National Bank

1455 Valley Road
Wayne, NJ 07470
PDavino@valleynationalbank.com
(862) 261-3065 (direct)
(973) 934-5886 (cell)

Kathy Smith
AVP, Portfolio Manager
3490 Piedmont Road NE, Suite 700
Atlanta, GA 30305
404.814.8006 | f: 404.393.9925
kathy.smith@lionbank.com

For more information about how to use your life insurance to benefit you now, see Kim D. H. Butler’s book, Live Your Life InsuranceKim and Jack Burns’ new book,  Busting the Life Insurance Lies.

 

 

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Should I Borrow Against My Life Insurance Policy?

“Should I borrow against my life insurance policy?” Are you ever asked that question? I bet you are.

Recently we conducted an annual review with a client.  This client is a transfer client.  They moved to our town about 8 years ago.  About the same time, their other advisor retired so we were lucky.  The conversation was very informative and because of the Truth Concepts calculators, the whole truth was easily demonstrated.  Let’s join the conversation partly through the review…..

“I am going to purchase a new car this summer,” Mark said.

“Great idea.  How are you planning to finance the purchase,” I inquired.  “Remember you finance everything you buy.”

“Yes, thank you for reminding me and yes I remember that,” He replied.  “You need to remember that I am my own banker.  I plan to take a loan against my policy and finance the car with a policy loan,” He gleamed.

“Do you own a hammer,” I asked.

“What,” He said with a puzzled look on his face.  “What does that have to do with financing a car?”

“When there is something to repair around the house do you always grab your hammer to make the repair,” I said ignoring his question for the time being.

“Of course not” He emphatically said.  “I use the correct tool for the job at hand.”

“I am relieved to hear you say that,”   I said with a smile.  “Why are you not doing the same thing when it comes to your financial life?”

“What do you mean,” He asked.

“You told me you were going to finance your car using your whole life policy because you are your own banker,” I said.  “That is similar to using your hammer to do all the repairs in your house.”

“Before you get excited about that statement let’s just take a look at a few figures.   I am going to use a few calculators from my Truth Concepts software package.  This is great software for me to look at a financial question or problem from a non-subjective, whole picture point of view,” I explained.  “For starters, if we look at your policy that you purchased from your former advisor, it now has an IRR of about 3.1%.  Remember that means that your policy is growing as if it had yielded 3.1% every year since it was first started.”

“I did not know that is what that means,” Mark said.  “How does this help me?”

“Let’s assume the car you are going to purchase will cost $30,000.  Using a future value calculator we can see what your $30,000 will be worth in 5 years,” I said turning my computer screen so he could see.

“Ok,” He said.  “My cash value should be worth $35,023.”

“Well, your $30,000 will grow to that figure.  This is an attempt to isolate the $30,000 and just see what it will do, removing additional premiums and dividend fluctuations.”  I said.

“Ok so if you take a loan against your $30,000 what is the interest rate you will be paying to the insurance company,” I asked.

When I called yesterday it was 5.0%,” He answered.

Nodding to him I inputted into the payment calculator the date to get the following:

“Based on that information you will have a $566.14 a month payment going to the insurance company,” I said.  “Furthermore you will pay a total of $33,968.”

“It so happens that I have been in the market looking for a new car as well,” I admitted.  “I went to the credit union over on Maple Street and they are offering a car loan at 2.99%.  If you were to use the credit union your payment would be $538.93.”

“And, you will pay a total of $32,336,”  I said.

“Why do you want to have a $27 dollar higher car payment a month and pay a total of $1,632 more for your car,” I asked.

Mark sat there for a moment contemplating what I had shown him.  Finally, he said, “Because I am my own banker.  When I take a loan against my policy I will have $35,023 in cash value when I am done paying for my car.”

“Was that a statement or a question,” I asked Mark.

“Well I am not completely sure,” Mark responded.

“Please allow me to ask you a few questions to help you reason it out,” I said.

“First, if you did not purchase a car or take a loan against your policy how much will your $30,000 be worth in 5 years,” I asked bringing the original Future Value calculator to the top of my screen.

“It will be worth the $35,023 we discussed earlier,” Mark said.

“Second, since your company is a non-direct recognition company, how much will your $30,000 be worth if you do take a loan against your policy cash values,” I asked.  “And by the way even if you were with a direct recognition company, we could calculate how much your $30,000 would be worth.”

“It will be worth $35,023 right,” Mark said more asking than stating.

“You are right,” I said.  “Do you see it, your cash values are going to grow to the same number regardless if you take a loan or not.”

“So here is my third question, sorry it is the same question I asked before.  Why do you want to spend $27 more a month or $1,621 more for your car by taking a loan against your policy versus getting a loan at the credit union,” I asked?

“I don’t,” Mark said.

“Right, you are your own banker.  What that actually means is you are in a position of control.  You can use your cash values if you want, but you do not have to use them.  You need to figure out the cost of capital.  It does not matter the source of the capital.  Determine the best sources of capital and then if all other factors being equal, use that source,” I explained.

“I guess this is why I need to come to our annual reviews,” Mark said.  “I am not an expert, but having someone like you and your Truth Concepts software available to me is well worth my time to meet with you.  Thank you.”

“My pleasure,” I said with a smile.  “Now let’s talk about………………..”

 

-Jason Henderson for Truth Concepts

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15-Year vs 30-Year Mortgage: Which is Better? (John & Jane Jones Pt. 4 of 9)

“I am so glad you two were willing to come back so soon after our third meeting,” I greeted John and Jane as they came into the office.  “There are a number of things I want to discuss with you, but before I do, do you have any questions?”

“As a matter of fact, we do have something we wanted to talk to you about.  Since our meeting last week, Jane and I have decided we need to discuss more of our financial decisions with you,”  John said.  “We should have talked to you

when we got our raise 5 years ago, but we thought we knew what we were doing.”

“No need to concern yourself over the past; you cannot change it, nor can I.  Let’s just try to do the best we can from here on out.  I know for myself, I always try to get the whole truth about things before I make a decision.  Yes, I actually do what I teach others to do,” I explained.

John continued, “When we first met, I wanted to get rid of the policy Jane’s parents purchased for her.  I am so glad I listened to my mother-in-law and came to speak to you.  You showed us how to get out of credit card debt in the most efficient way.  But I also expressed a desire to purchase a home eventually.  Well, we’ve been saving money; in fact, we have saved $25,000 to use as a down payment and have been looking at a house over on Maple Street.  We filled out paperwork to get a 15-year mortgage, but we wanted to get your opinion,” John said.

“Thank you for asking and trusting me enough to consider my opinion.  In fact, I am glad you asked because the difference between a 15-year mortgage and a 30-year mortgage is poorly understood.”  I started to explain, but then thought to ask, “What is your understanding of the difference between a 15 and 30-year mortgage?”

“Well, the banker says the 15-year mortgage is better because we get our house paid off sooner and there are fewer costs to the mortgage,”  Jane said.

“Is getting your house paid for as soon as possible one of your goals?”  I said looking at Jane.

“Yes, it is.  As John’s parents got close to the end of their mortgage, his dad lost his job and they lost their home.  It was rather traumatic for John and he does not want to go through that again, nor does he want me to ever experience it,” Jane said sympathetically.

“Oh, I’m sorry. I’m sure that was unpleasant,”  I responded. “Let’s remember the goal of getting your house paid off as soon as possible as well as the desire for peace of mind as we discuss the costs of a mortgage, ok?  I can tell John has a valid concern about having a mortgage hanging over his head in the event there is a job loss or some other unforeseen situation.  This is not unique to you. Most people are worried about their ‘monster’ mortgages. But what I have found is often, when we have fears, we make decisions that increase the likelihood of that fear actually occurring. In other words, a decision made to pay off a house as soon as possible to avoid the scenario your family experienced, might actually lead to a greater risk of losing the house.  This will become clearer as we go along.  I am going to use a special calculator that will help you see the whole truth about 15 and 30-year mortgages.”

Opening my ‘loan analysis’ calculator, I first input their numbers on the left side of the calculator and called that loan 15-year mortgage.  I pointed to the screen and asked if the calculator had come up with the same payment they were shown at the bank.

John said, “Yes that is the principal and interest portion of our payment.  But it does not include our private mortgage insurance payment.”

“I just love working with you two.  You are intelligent, honest, and don’t miss much.”  I complimented John.  “I will discuss the PMI in a little while, but for now let’s focus just on the loan.”  I then entered the same loan amount and interest rate for a 30-year mortgage.  I also pulled up the comparisons between the two as a starting point for a discussion.

Pointing to the calculator I asked them, “with which loan will you be paying the least amount of interest?”

 

Jane was quick to answer, “The 15-year mortgage, just like the banker said.”

“Good. Let’s put a fine point on this issue.  If we take the total payments using the 15-year mortgage – $299,574 – and subtract the original balance of the loan, we end up with $74,574.  Doing the same with the 30-year mortgage we come up with $161,706 ($386,706-$225,000).  With this simple calculation we are able to say the 15-year mortgage has fewer interest payments, right?  However, can we comfortably say the 15-year mortgage costs less than a 30-year mortgage?”  I asked.

“Well, yes we can.  Can’t we?”  Jane said.  “Knowing you there is probably more to it.”

“Jane, you are learning quickly. With this simple calculation, all we can really say is the 15-year mortgage requires us to pay less interest.  But one of the big problems with this simple calculation is the whole truth is being ignored.  For starters, this simple comparison is comparing a 15-year mortgage over 15 years to a 30-year mortgage over 30 years.  Is that really an equitable comparison?  And, could that comparison obscure some potentially detrimental information?” I asked.

“No, now that you point that out, it is not equitable.  To answer your second question, yes I would imagine there are issues that might cause the total costs of the two mortgages to change,”  John answered.

“Yes, John,” I agreed.  “You should realize the vast majority of Americans look at this comparison and say the 15-year mortgage costs less, so therefore, I should use that mortgage.  Please, please notice my careful choice of words.  I have talked to you about interest expense or interest payments, but not cost.  Most people equate the two words.  Although interest payments are costs to the mortgage, they are not the TOTAL cost of a mortgage.  Let me explain it a different way.

“Most people would say the cheaper of the two mortgages is the 15-year mortgage, right?  But considering interest payments, what would really be the cheapest way to purchase the house?”  I asked.

Both John and Jane looked at each other and were silent for a while.

I finally broke the silence and said, “In other words, what method of buying the house requires me to pay the fewest interest payments?”

“Oh I see what you mean,” John said.  “I would pay the least amount of interest payments by paying cash for the house like my uncle.”

“Exactly,” I said.  “If you took the cash out of your current assets and paid for the house, you would have zero interest payments.  That is absolutely true.  However, no consider this: what would be the cost paying cash over 30 years?” I quickly called up a future value calculator and input $225,000 earning 4% for 30 years.  “Now assuming I could make 4% on my money for those 30 years, how much have I missed out on in 30 years?

Mumbling to himself, John said, “745,537 minus 225,000 is $520,537.  Wow, that is a lot of money any way you look at it.”

“Yes, it is.  Do you think you would be happy if you realized you passed up that much money because you thought the cheapest interest payment ‘mortgage’ was to pay cash for your house? Before you answer, what else needs to be considered?  Didn’t you free up a monthly mortgage payment?  How much would you have after 30 years if you diligently put $1,074.18 – the same amount you would have paid the bank with the 30-year mortgage – into an account earning 4%?” I asked pointing to a new calculator.

“The same number?”  Jane asked.

“I know that is a little puzzling, but yes, the same number.  If you took $225,000 out of your assets and purchased the ‘least interest payment mortgage’, i.e. paid cash, and then put the 30-year mortgage payment into an account earning 4%, you would end up with $745,534 in that account and own your house outright.  On the other hand, if you purchased the ‘maximum interest payment mortgage’, i.e. the 30-year mortgage, and left your money in your account, after 30 years, you would have exactly the same amount of money ($745,534) and you would own the house.  Now comes a very important question: “When comparing paying cash to a 30-year mortgage over 30 years, which of these two methods ‘costs ‘ you the most?  The ‘least interest payment mortgage’ or the ‘maximum interest payment mortgage’?” I asked and waited for them to think it through.

“Um, there is no difference in cost between the two.  So it must also be true that there is no difference in cost between a 15-year mortgage and a 30-year mortgage either when you look at over a 30-year timeframe,” John mused.

“Spot on John,” I said.  “Remember, the 30-year mortgage had a total interest charge of $161,706. When the interest rates are exactly the same, there is no difference in cost when comparing the three different mortgages.  But, and that is important BUT, there is a huge difference between the three when we take into consideration other factors, or…” motioning them to say it with me, “the whole truth,” we said in unison.

“For a few minutes let’s analyze the three from a safety and security point of view.  Jane, you told me John’s dad lost his job and was unable to make the monthly mortgage payments which resulted in the family losing their home.  We do not want that to happen.  With which of the three methods would we be the most likely to lose the house if we could not make the payments?”  I asked.

“The 15-year mortgage has the highest monthly payment requirement, so that would be the hardest one to keep going in the case of job loss or something similar,”  John said.  “So I suppose from a safety and security point of view, paying cash is the safest.  But we don’t have $225,000 to pay cash.”  John frowned.

“Neither does most of America, so what is the next best thing?”  I asked.

“Well, the next best would be to have the smallest monthly payment,”  John responded.

“But you have been considering the 15-year mortgage with a payment of $1,664.30 a month -”  I was saying when John cut me off.

“Oh yeah, I see what you are saying, get a 30-year mortgage but pay the $1,664.30 every month, then if something happens we would only need to pay $1,074.18,”  John said with a smile.

“Well, that is a good thought, but let’s look at it more closely.  If you make the higher payment, you would be paying $590.12 extra toward your principal every month.  This would allow you to pay your house off sooner.  But let’s assume for a moment you lose your job in the beginning of the 11th year of the mortgage.  At that point you would have paid $590.12 x 10 years x 12 month = $70,814.40 extra principle.  How much of that money would the bank allow you to access after your job loss?”  I asked

“A big fat zero,”  John said.  “My parents had paid extra payments on their house and we still had to move.”

“Right again,” I agreed.  “What if instead of making the $590.12 extra principal payment each month you make the same $1,074.18 payment and then put the $590.12 into an account that is readily available in case you lose your job?  Take a look at our example of you losing your job at the beginning of the 11th year.  If you had saved the $590.12 each month in a different account, you would have more than $70,814.40.  That amount would allow you to continue to make the mortgage payments if you lost your job for almost 5 and a half years.  How long was your dad out of work when you were younger?”  I looked at John

“A year,”  John answered.  “Just long enough for things to get really tough.”

“Can you see why the 30-year mortgage might be a better choice at this point?” I asked.  “There is still more to consider; let’s now talk about these three options in light of taxes,” I suggested.

Using the Loan Analysis Calculator, I input the savings interest rate and then put in a 25% tax bracket for the two of them.  Pointing to the calculator I asked, “Which of the two mortgages is more costly when we include tax deductions?”

“How is that possible?”  John asked.  “The 15-year mortgage is roughly $40,000 more expensive.”

“The reason it’s more expensive is that with the 30-year mortgage you get more tax deductions,” I answered.

“This is all great information and helpful, but there is one problem I see here,” Jane chimed in. “The banker said he would lower our interest rate if we took the 15-year mortgage.  In fact, he said he would give us a 3.75% interest rate.  Does that make much of a difference?”

“Great question Jane,” I said. “That is easily answered by plugging in that number.”  I changed the interest on the 15-year mortgage to 3% and said; “I am going to go even further down on the interest rate to 3.0% to emphasize a point.  Does the lower interest rate change the overall decision?”

“Well, the lower interest rates do make a difference, but the 30-year mortgage still appears to be cheaper by about $3,400,”  Jane responded.

“What about inflation? Does that have any bearing on a mortgage?  Should we include inflation in our decision process?” I asked, and then answered, “Inflation is a factor in all financial decisions.  Let’s take a look at how it impacts these mortgages.”

“Mortgages are a rare case when, in a sense, inflation is on your side.  You see, with each passing year, you are paying with dollars that are decreasing in value.  Put another way, each year the payment of a monthly mortgage becomes easier and easier because it’s a fixed amount.  In theory, our income is increasing which means the mortgage payment is a lesser part of your total income,” I explained.  “Using a future value calculator I want to show you what your mortgage payment will feel like in 30 years.”  I started the calculator, and input the numbers for them to see.

“Is that for real?”  Jane asked.  “Our mortgage will feel like $331.19?  That doesn’t seem possible.”

“Yes, a little hard to believe,” I agreed with Jane.  “But that is the effect inflation has on our money over time.  I want to be clear here.  You will still write out a check for $1,074.18.  The check will FEEL like $331.19.”

“Now, we are going to circle back to an issue you brought up before John, private mortgage insurance. In order for you to avoid paying the PMI, you would need to put $50,000 down on the house on Maple Street, correct?”  I asked.

“Yes, but we do not have that much money,”  John confirmed.

“Do you remember what we talked about in our first meeting John?” I asked.  “In case you have forgotten, by looking at things in a ‘big picture’ frame of mind you were able to refinance your debt and get that paid off in about five years.  How have you done with that plan?”  I asked, knowing the answer.

“Yes, I remember.  It was a real eye-opening meeting for me.  I am proud to report that we have followed the plan pretty close to how it was originally laid out.  We have had a few hiccups along the way, but for the most part, we are on track. We were supposed to have the debt totally paid off in 62 months but it is going to end up taking 68 months.  We will have that debt paid off in 5 more months,” John reported.

“Great.  I am so happy to hear you say that, but probably not as happy are you are being able to say it.”  I nodded to both of them.  “The best part is that lousy whole life policy Jane’s parents purchased for Jane now has more than $52,000 thousand dollars in cash value, just waiting for you to use for a great opportunity.  What if you borrowed enough money against your policy so you can avoid paying PMI?”  I suggested.  “You need 20% down on the house on Maple to avoid paying PMI. Looking again at our calculator, that would mean your total loan amount would be $250,000.  Can you see what your monthly loan payment would be?”  I asked as I pointed to my screen.

“It would be $1,193.54,”  Jane answered.  “I do not understand, wouldn’t we have two loans?”

“Yes, that is correct you would have two loans, I am just combining them here.  You will have a $200,000 loan from the bank on the new house.  You will also have a loan for $50,000 against your policy cash values.  This also means you will have two payments to make each month.  You will write a check for $954.83 to the bank on the $200,000 mortgage, and one for $238.71 to the insurance company.  Going this route will save you a ton of money that you would have otherwise paid for private mortgage insurance.  Well, let’s calculate just how much PMI would cost you over time.  The first year the PMI would cost you $3,937.50 ($225,000 x 0.0175).  Then each year for 14 additional years, you would pay $225,000 x 0.0045 or $1,012.50 per year.  Making the grand total $3,937.50 + ($1,012.50 x 14) = $18,112.50.  Additionally, the $1,012.50 (paid in monthly payments of $84.38), would be eliminated.

“When you came into the office today you were thinking of a 15-year mortgage at 3.75% which would require a monthly mortgage payment of $1,636.25 and a PMI charge of $84.38 per month, or a total of $1,720.63.  May I propose that you continue to allocate the same amount each month to pay off your home?  The first two portions of the $1,720.63 are being paid to the bank and the insurance company leaving you $527.09 per month.  Are you following my calculations?” I asked.

With a pleased look on his face, John said, “Yes, yes I am.  This is great. Please keep going. Oh, wait a minute I have a question.  What about the $25,000 in cash we have saved up for the down payment?  What are we going to do with that since we are borrowing $50,000 against Jane’s policy?”  John asked.

“Wasn’t that fun to ask me what you are going to do with $25,000 in cash you have saved up?” I grinned at John.

“Now that you say that, yes that felt good,”  John replied winking at Jane.

Jane quickly spoke up and said, “Shouldn’t we just borrow $25,000 from the policy and use our $25,000 in cash?”

“Good question.   Before I answer, let me ask you both a question.   Before today, how were you looking at your $25,000 down payment?  Was that just money lost?  Or were you planning to get that back?”  I quizzed them.

“It is just a down payment.  Nothing more, nothing less.  We have to have it to buy a house,”  John said.

“I have said this a number of times, but it’s very important you understand this fundamental principle – it is critical to your financial prosperity: You finance everything you buy,” I said emphasizing the last part.  “You are – or were – going to be ‘financing’ that down payment whether you realized it or not. But you had not considered how you were going to recoup the value of that $25,000.  Even though it is a cash down payment, YOU are financing it.

“Now, back to your question, Jane. You should borrow against your policy the full $50,000 and pay that loan back with interest to the insurance company,” I said. “Once you close on your house, take your $25,000 cash and pay down the loan against your policy. Of course, at that point, you will only owe $25,000. Then, if you make the proposed payment of $238.71 per month, how long will it take for you to pay off the loan against your policy?”

“That is a long time,” Jane said.

“Not really,” John said.  “That is just a little longer than 10 years.”

“Last week you both filled out applications for a $3,000 per year policy.  Did you both reduce your qualified plan contributions to $1,000?”  I inquired.

“The very next day!”  Jane said.

I chuckled at Jane’s enthusiasm.  “Here you are a week later, and if you choose to follow what I have proposed, you will have an additional $525.09 available each month.  That is $6,300 more available to you every year.  What if we modified your applications and made them each for $6,150 each?”  I asked.

“I don’t see why not,”  John said.  “But what about the $370 per month we will have available once the credit card debt is gone? If I remember correctly, we’re planning to purchase a policy on me with that money.  Could we increase my policy from $6,150 to…” John used the calculator on his phone to multiply $370 by 12 and add it to $6,150.  “… $10,590?”  John asked.

“John, if you twist my arm I might be convinced that would be a good idea,”  I replied as seriously as I could.

Both John and Jane laughed.

“I can tell both of you like the idea of modifying the applications you filled out last week,”  I said.  “But before we do that, I want to back up a little and review what we have talked about today.  When you walked in you were excited to purchase your first home.  You were fairly convinced that a 15-year mortgage was the best mortgage for you to have.  One of the reasons you liked the 15-year mortgage was you were going to have your house paid off in a shorter time period, thus reducing the risk of a repeat of John’s childhood tragedy when his family lost their home because dad was out of work for a year.”

“Now you are thinking about going with a 30-year mortgage.  You are thinking that is the best mortgage for you because the total costs are the least.  The risk of losing your home due to economic trouble is less.  You will get the best tax advantages with the 30-year mortgage.  But don’t you want to have your house paid off?”  I asked them.

“Yes, we do,”  John said.

Turning back to the Loan Analysis Calculator I scrolled down to the 121st  month and said, “At the beginning of the 11th year of the mortgage, how much will you owe on your mortgage?”

 

“We will still owe $196,960.00,” Jane said.

I then put on my computer screen the funding calculator showing the cash values of the new $10,590 annual premium on John and said, “Notice the new policy will have $124,849 of cash value.”

“Please write that number down,” I instructed them.

I then imported the values from the policy Jane’s parents had originally purchased for her into the same calculator.  Pointing to the screen I asked, “How much cash value will be in Jane’s policy?”

“Wow, $97,810,”  Jane said softly.  “Mom and dad sure were smart to buy that policy for us.”

“Remember I showed you it would take 130 months to pay off the $50,000 loan for your 20% down payment you are going to take against this same policy.  So the number will not be quite $97,000 -”  I was saying.

John interrupted, “But pretty close.”

Smiling, “Right.  So add $97,000 to the number I had you write down.  What do you get as a total?”  I asked.

John and Jane looked at each other as Jane said, “$221,849!”

“This is unbelievable,” John said.  “We will be in a position to pay off the house in 121 months from now.”

“Sooner than that,” Jane said.  “I am also getting a policy for $6,150 a year remember,” looking at me.

“Isn’t this fun?”  I asked.  “You are right Jane.  However, some opportunity might come along – you may want to use the cash in your policy as seed money for another venture.  I remember you saying that you would like to start a business from home so you can be with the kids.”

“I want to address something John just said.  Will you really be paying the house off?  Or will you be in a position to refinance your house?” I asked.

“We finance everything we buy,”  John said.

“Right,” I agreed with him.  Let’s modify those applications.”  I said. “And remember, I’m always as your coach to help you understand the whole truth and thereby make better decisions.”

“Yes, let’s do that.”  Both John and Jane said together.

 

-Jason Henderson for Truth Concepts 

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The Myth of Zero Percent Financing for Cars (John & Jane Jones Pt. 2 of 9)

Both Jane and John Jones were smiling as they walked into my office for the second meeting with them.  The first meeting had gone well and I was excited to meet with them.

After a few minutes of catching up and pleasantries, I asked John, “If you were talking to a good friend and they asked what our office was doing for you, what would you tell them?”

John was contemplative for a moment and then started to speak. “Well the first thing I would tell them is that you have completely changed my thinking about whole life insurance and its value.  You did not just convince me, but you helped me by using your special calculators, see the whole truth about how money works.  In fact, I would probably tell them that your office has not tried to tell me what to think, but has rather helped me to learn how to think.”

“That is quite a compliment, thank you.  I hope you have opportunities to say exactly that to people you care about,” I replied.  “But I want to make sure you understand one critical thing: I never want you to assume my opinion to be correct.  I want you to question everything I tell you. I want you to make your decision on your own – always.  With that as a starting point, I want to approach an issue that I think is rather important.  Are you ready to get into the serious side of our discussion today?”

Jane answered, “We definitely are!  And, just so you know, my parents are so happy you helped us to see the wisdom in their decision to purchase that whole life policy for me when I was a year old. They send their thanks.”

I couldn’t help but smile.  “Why thank you, Jane. That is very kind of you to report.”  Getting a down to business, I told them about a recent study done by Lexis-Nexis.  “Do you realize that 43% of American families own no life insurance?  And of the 57% that do own it, 30% of those believe they have inadequate amounts of life insurance.  Why do you think such a large portion of Americans are either under-insured or uninsured?”

“But I thought we were going to talk about purchasing a car – that is what we told you we wanted to talk about,” John said.

“Yes, I want to talk about that,”  I replied, but humor me a little as I help you to see a very important financial truth. So why are so many people uninsured or underinsured?”

“Well, I guess it is because people have never met someone like you?” Jane said, almost questioning.

“Or maybe it is because they do not understand the value of life insurance,”  John added.

“You are both on the right track.”  I complimented them.  “Have you noticed there is a disturbing trend in America that people do not understand the value of work?”

“Yes!” was their unified answer.  “It seems that many of my peers do not know how to work or even value the fact that they have a job,” John added.  “They just figure they can get another one if they don’t like what they’re doing or if something goes wrong with their employment.”

“It is a bit alarming, isn’t it?”  I responded.  “But an issue I believe is even more fundamental, is the confusion most people have about which of their assets is most important. What do you think most people would say is their most important asset?”

 

Once again both Jane and John answered together, “Their house.”

“You’re absolutely right – most people consider their home to be their biggest, most important asset. And it’s pretty safe to say that almost everyone has their house insured. But I disagree with that view. In fact, I think that perspective causes a serious lapse in financial judgment. A home – although definitely an important thing to have – is not the MOST important asset. The most valuable asset almost everyone has is the ability to earn their other assets. I believe – and tell me if you agree – that a person’s most valuable asset is their ability to work and make money. And yet very few have that asset protected sufficiently.”

John spoke up and said, “There you go again, helping us to see the bigger picture.  When you put it that way, I can’t help but agree with you.  I was surprised by the statistics you gave us, but knowing that information, it is even more surprising.  Everyone should insure their best asset.”

“So then, how much insurance should they have on their most valuable asset?”  I asked.

“As much as they can, of course.  At least, that is what everyone does with their house,” John answered.

“I am so glad you said that John. Let me show you why. I want to show you another calculator called the Maximum Potential Calculator.  I am going to use numbers for you both individually as you both are making about $45,000 a year.  I am going to illustrate this until age 65.  Let us assume that you will have a cost of living increase of about 4% each year.”  Pointing to my computer screen I asked, “How much money will each of you potentially earn in those 41 years?”

“Wow that is a big number,” was Jane’s first comment.  “Really?  We are both on track to make nearly 4.5 million dollars by the time we’re 65?” Jane asked.

“Yes, that is the amount of money that will come into your life in the form of payment for your ability to work.  Pretty valuable isn’t it?”  I said.  “There’s another important number to notice on this chart – what is projected to be your salary during the last year when you are 65?”

“$216,046.  Wait, is that for real? It would be great to earn that kind of money.”  John sounded a bit excited.

“Well John, let me ask you a question: will that $216,000 purchase more when you are 65 than your $45,000 salary purchases for you today?”  I asked.

“Of course it will.”  John blurted.

“Actually, the truth is this calculator shows the $216,000 salary you’d earn 41 years from now, is the equivalent of a $45,000 salary today.”  I continued, “In fact you most likely will be able to purchase even less because of taxation.”

“That is depressing.  But knowing that now can help me in the future.  But what does all this have to do with our most valuable asset?”  John inquired.

“The whole goal of home insurance is to replace your home if there is a complete loss. The same is true of life insurance.  What is being replaced is your ability to work and earn money.  In order to know how much life insurance you need, you need to estimate how much you will earn over time.  Let me put this another way –  what amount of money would you need in today’s dollars compounding at the same 4%, to be able to replace your ability to work and earn money?  But we are getting ahead of ourselves.  First, we need to look at another calculator, this one is called the cash flow calculator.  Again using the same 41-year time frame we are going to use your net income ($29,250) instead of your gross income ($45,000) because the government will always get their share.”  Pointing to the screen I asked, “what is the compounded value of your total net income?”

Looking for the red circle, John answered, “$7,367,704.”

“Great, but that is in dollars of 41 years from now.  What we need is to know the present value of that amount in today’s dollars.”  I quickly brought up a present value calculator and input the numbers. “What amount of money do we need today to make sure your ability to work and earn money can be replaced?”

“About a million dollars,” John said.  After thinking a moment, John looked at Jane and said, “It looks like we each need an insurance policy for $1,000,000.”

“Yes, we do. We better do as we are learning and do the most important things first,”  Jane said.  Turning to me, she said, “We need to get going on protecting our family’s most valuable asset.”

“I am glad that issue is out of the way.  I wanted to cover that with you before we got to your questions about purchasing a car.  Like John said, we like to help our clients discover, learn and understand the whole truth about their financial environment.  When you understand the whole truth, it becomes easy to know what decisions need to be made first.  You two are great students and have a bright future ahead of you,”  I said.  “Now on to another important concept, purchasing a car….”

“Did you get the proposal we sent to you?”  John asked.  “You know that 0% interest loan seems like a no-brainer to me.  But Jane really wanted to get your perspective before we made that purchase.”  John added.

“I am so glad you did because there are a few nuggets of truth you need to understand.  To start off, answer this question for me, ‘How does a car company make money?'”  I asked John

With a puzzled look on his face, John answered, “By selling cars.”

With a little chuckle, I said, “You are right. But think further; why do all the major car manufacturers offer to finance your car for you?  Is it possible they make money financing cars for people?  In fact, the car companies make more money financing the purchase of cars than selling their cars.”  I explained.  “But then there is the interesting offer of 0% financing.  If the financing is the major way they make money, why would they give that up?”

 

“I am not sure why they would, but isn’t that what they are doing with the 0% financing?”  John answered and asked at the same time.

“How much does the car you are considering cost if you financed it with the manufacturer?”  I asked.

“$35,000.”  Jane volunteered.  “Which will give us a monthly payment of $729.17.”

“Great.  How much will it cost if you pay cash or finance it through an outside source?”  I asked.

John beat Jane to answer, “$32,500.”

“So the car company will give you a rebate of $2,500 if you pay cash and drive off with the car.  Let me show you what the car company is actually doing by using my rate calculator. “I input the numbers, using the rebate cost of the car with the SAME car payment.  I then asked, “What interest rate are they charging?”

“3.68%?”  Jane asked, confused.

“Yes, that is correct.  By just raising the price they can call it 0% financing.”  So here is the next question: should you purchase the car from the manufacturer, using your policy as collateral or should you finance it at the credit union?” I smiled as I asked them.

Thinking out loud, John said.  “Well, at the manufacturer’s dealership our payment will be the same as at our credit union if they charge us 3.68%.  But they have offered us a rate of 2.99%.  So the better interest rate is at the credit union.  I know using our policy is a great way to minimize opportunity costs.”  Looking at me he then asked, “How much does it cost to get a loan from the insurance company?”

I wanted to jump up with excitement.  At our first meeting, this 24-year man wanted to get rid of his wife’s policy, but now he wanted to use that policy to finance a car.  “John,”  I started “you are beginning to understand the real value of a whole life policy.  But as I have said, a number of times, the whole truth is important.  If you use your policy as collateral for a loan from the insurance company, the interest rate will be 5%.”  I then waited to see what they would say next.

Again thinking out loud, but also looking at Jane, John said, “It seems to me that the credit union is the best way to go, unless I am not understanding something.”

“You are right.  You have to remember that just because you have cash values doesn’t mean you have to finance everything possible using those cash values.  You only use them when it is to YOUR advantage.  This time, it appears the credit union is the best way to go,”  I said like a proud teacher.

“Ok then, it is settled.  This has been a great meeting.  We will fill out an application for a $1,000,000 term policy for each of us right now.  We will buy the car using the credit union as the financing tool and set up a time for our next meeting.  Sound good?”

“Sounds great,” I said.

 

-Jason Henderson for Truth Concepts 

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The Power of Liquidity: Capitalizing with Cash

(Adapted from an article originally published on Partners4Prosperity.com. Please feel free to share this page at TruthConcepts.com/power-of-liquidity with clients, or see the Content4Clients program for content marketing resources you can use for your own website.)

“Success is where preparation and opportunity meet.”
– Bobby Unser, Indianapolis 500 Champion

Liquid AssetsAre you locking up your assets, or keeping them liquid? Do you have access to cash on demand? The answer may be influencing your prosperity more than you realize.

Most investors focus on the ROI of an investment or a savings vehicle. However, locking up your money can actually severely limit the possibilities for lucrative returns! This is because some of the best opportunities cannot be capitalized on (literally!) without access to cash.

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Truth Concepts on YouTube.com

Visit Truth Concepts on YouTube.com Today!New Truth Concepts Client Presentations!

We’ve been busy loading up our Truth Concepts YouTube channel  with videos for you! Now there are 15 videos featuring Todd Langford and/or Truth Concepts software.

The YouTube channel houses our Truth Concepts, Truth Concepts Academy, and Summit videos, as well as several presentation videos and  Banking for Life excerpts and outtakes with Todd Langford.

Eight of the newer videos are from a client event at a local insurance brokerage. We recorded and “screen captured” Todd’s presentations and divided it up by topic. (FYI, Todd’s presentations followed a presentation by Nelson Nash, you’ll hear him refer to Nelson who is in the audience.)

Truth Concepts: How Banks Make Money (1 of 8)

Even most bankers don’t understand this. (If a bank has a 6% spread between the savings rate and lending rate for customers, they are NOT making 6% on their money!) The reality of bank profits – especially when interest rates are low – is frankly shocking. Approximately 15 minutes.

Truth Concepts: Maximum Potential (2 of 8)

As we mentioned in an earlier email, many advisors like to use this calculator in their first meeting with a client. It outlines what a client’s full financial capability and demonstrates that if you’re saving too little, a chasing higher rate of return isn’t necessarily the answer. Approximately 10 minutes.

Truth Concepts: The True Cost of Paying Cash (3 of 8)

Todd explains opportunity costs and why they matter so much. (Not suitable viewing for Dave Ramsey fans!) Approximately 7 minutes. 

Truth Concepts: Qualified Plan (4 of 8)

Todd examines the real rate of return in a typical qualified plan. What impact does a company match, a typical fee, and taxes have on the dollars in a 401(k) or other tax-deferred retirement plan? It’s not a pleasant surprise to see how much of “our” money ends up in someone else’s pocket!  Approximately 14 minutes.

Truth Concepts: Funding Calculator (5 of 8)

Todd Langford discusses whole life cash value in the context of other savings vehicles (with some interesting commentary on the “safety” of FDIC-insured accounts) and busts the “buy term and invest the difference” myth with hard numbers and compelling logic.  Approximately 16 minutes.

Truth Concepts: Car Financing and Borrowing (6 of 8)

Todd shows the reality of “0%” vehicle financing, then compares the results of making major purchases through bank loans, cash purchases, certificates of deposit or whole life cash value. Emphasizes the advantages of having and using your own capital.  Approximately 23 minutes.

Truth Concepts: Real Estate (7 of 8)

Todd explains the advantage of participating mutual company dividends and analyzes the powerful potential of using cash value to finance other assets and sound, cash-flowing investments. See how leveraging your cash value can produce exponential benefits when combined with other strategies and investments.  Approximately 11 minutes.

Truth Concepts: Laffer Curve on Cash Flow (8 of 8)

Todd gives a contextual history of income taxes and how lower taxes can actually translates into more money for BOTH taxpayers and the government.  Approximately 5 minutes. 

Visit Truth Concepts on YouTube.com Today!

Click on links for individual videos above or view all available videos on the Truth Concepts YouTube channel at: http://www.youtube.com/user/TruthConcepts.

Can you see the potential of using Truth Concepts software to analyze various financial strategies and communicate with clients about essential financial concepts?

Join Todd in Houston for our next LIVE 3-day training for hands-on training with Truth Concepts calculators. At this writing, our next event is October 22-24, 2014 in Houston, TX. See our Truth Training page for current dates, details and registration.

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