“Success is where preparation and opportunity meet.”
– Bobby Unser, Indianapolis 500 Champion
Are your clients locking up their assets, or keeping them liquid? Do they have access to cash on demand? The answer may be influencing your clients' prosperity more than they realize.
Most investors focus on the ROI of an investment or a savings vehicle. However, locking up your money can severely limit the possibilities for lucrative returns! This is because some of the best opportunities cannot be capitalized on (literally!) without access to cash.
1) To provide with capital.
2) To gain advantage from.
Be In a Position of Cash
“If you have cash, opportunity will seek you out.”
– Nelson Nash, financial author and speaker
Most accumulation vehicles restrict your access to cash. If your client puts money into a retirement plan, their money stays there, sometimes for decades. Similarly, by saving into an educational savings plan, your client is tucking away money until it's needed for tuition, and no sooner. If they invest in a business or real estate deal, their cash is locked up for the term of the investment, or until it is liquidated. If your clients purchase a car with their dollars, their money is now on 4 wheels in a depreciating vehicle.
Todd Langford of Truth Concepts financial software is fond of saying, “Most assets are either/or assets, but whole life insurance is a both/and asset.” This is a perfect way to describe the advantage of having an asset that can be easily used as collateral. You can have cash for emergencies AND opportunities, and in the meantime, it's there accumulating for you.
Usually, you have to liquidate assets or divest yourself to get access to use your dollars. You can save, invest, OR spend, but you've got to make a choice. There's no “both worlds” in this scenario. Cash value life insurance, however, is a “both/and” asset because you're not limited to just one option over your lifetime. You can use it for any reason, at any time, making it a flexible way to save, AND you get permanent insurance out of it. As your clients keep funding their life insurance policy, the cash value grows, and before you know it; you have options.
Does your client need money for an emergency? They've got it. A lucrative opportunity? Yes, they can access their cash! What about a honeymoon, a business start-up, or a down payment on a rental property? Go right ahead.
While your client can simply withdraw the cash from their policy (using it as an “either/or” asset), we highly recommend that you leave the cash value IN your policy and borrow against it. The way that your clients access the cash–in this case via policy loans–is what makes life insurance a “both/and” asset in the first place.
Your clients' savings will continue to grow and earn dividends while they gain access to the cash desired for an emergency, an investment, or a major purchase. Then your client can repay the loan on their own schedule. Extra payments? Of course! Want to skip a couple of payments? No problem. (Though we do recommend that you be a good steward of your accounts and pay your loan back diligently!)
Current policy loan interest rates are between about 5% and 8%, annually, depending on which company your policy is with and whether it is a fixed or adjustable rate. Yet the specific terms of your policy aren't as important as your ability to access cash when you need it!
How Opportunity Finds You
Here are 5 examples of how opportunities can find you when you have access to capital:
1. Cash in on an Opportunity
Perhaps a client's friend wants to sell a classic car for much less than what it's worth to generate some quick cash. The car can fetch $30k for a patient seller in the right market, but he'll take $20k if your client can get him the cash next week. Let's say your client buys the car at $20k and resells it for only $27k. Your client chooses to borrow the $20k against his cash value, pay 6 months (half a year) of interest at an 8% annual interest rate (an additional $785), and then sell it for $27k.
2. Finance Your Own Equipment
Perhaps your client wants some new equipment for their business, and they discover that the lease on the new machines will cost them the equivalent of a three-year loan at a 21% annual interest rate! Even worse, if they prepay the lease, they'll STILL pay the steep financing fee!
Your client might save thousands by being able to provide their own financing in such a situation… all because they had access to cash. In the example below, a $20,000 loan (or lease equivalent) at 21% interest will cost a cumulative $27,126, while an 8% interest loan over the same time frame would only cost your client $22,562. Not to mention, financing via life insurance loan gives your client some wiggle room they wouldn't otherwise have. If there's a bad year in the business, they could get by making interest-only payments, or even irregular payments.
Let's say the business equipment scenario above isn't your client's business after all, but the business of a friend or family member. Could your client offer to finance the equipment at a rate of 12%? It would be a fantastic savings for their friend, and the client would earn a little percentage too, if they're able to borrow from the insurance company at 8%.
Your client would be making 50% on his money, while saving their friend thousands!
Don't mistake this strategy as a mere 4% gain, with 4% being the “spread” between the cost of money at 8% and the 12% rate at which you can lend the money. If you bought a widget at $8 and sold it for $12, it would be a 50% profit. It is the same when buying and selling cash.
4. Create an Income
When your client has access to cash, they can keep their eyes and ears open for exceptional business or real estate deals that could set their family up with long-term income.
One client used his cash value to invest in cash-flowing commercial real estate that generated an extra income for him after he was forced into an early “retirement” with a disability. By taking advantage of policy loans and the leverage of a mortgage, he was able to turn an excellent real estate deal into an even better one!
Learn the details of how borrowing against a life insurance policy turned an excellent investment deal from 0.96% gains to a whopping 165.28% rate of return in our article, “Finding the Best Deal in Real Estate Analysis.”
5. Take the Opportunity of a Lifetime
Sometimes, the “return on investment” isn't financial at all, it's personal. Perhaps, to your client, the best return is taking the trip of a lifetime, or checking something off his or her bucket list.
Entrepreneur Jordan Adler, one of the speakers at the 2015 Summit for Prosperity Economics Advisors, had always had a dream to “go to space.” Sounds pretty far-fetched, doesn't it? For most, it would have been an impossible dream. But when Jordan got an opportunity to book a spot on a commercial space flight (with a six-figure price tag), he said “Yes!” He knew he could access the money with a policy loan, no questions asked, and repay it at his own timing, without disrupting his other investments.
The Cost of Cashing Out
Many people consider their 401(k) or IRA to be their “savings.” Yet qualified retirement plans aren't liquid and make poor piggy banks. You'll pay penalties and income tax, which can gobble up nearly half of any withdrawals! It's estimated that collectively, Americans lose $5.7 billion each year in early withdrawal fees.
Borrowing 401(k) monies for allowable reasons (such as a home down payment) is also deceptively expensive due to the tax treatment. Your clients will have to replace those before-tax contributions with after-tax dollars, which means they can add their tax bracket rate onto the cost of the loan!
If your dollars are locked up in typical assets, you have no liquidity.
Life Insurance: The Both/And Asset
When your clients have a solid, liquid asset such as life insurance cash value, they can leave that asset intact, and easily borrow against it. This leaves clients with their original savings plus access to cash for their neighbor's car, their child's tuition, or the investment that will pay healthy returns. Best yet, their savings will keep growing, off-setting some of the interest costs. (Your clients may even be able to use their policy cash value to obtain a bank loan at an even lower interest rate!)
You can argue that a certificate of deposit could give clients the same advantage of liquidity—after all, what bank won't lend against their own certificate of deposit? However, here again, we discover that whole life insurance is a “both/and” asset” in the way that other savings vehicles are not.
Typically, people must choose between investments, savings, or insurance vehicles. With whole life insurance, your clients are saving and insuring at the same time. Not only will they eventually have access to every dollar put into the policy as their cash value grows, but they'll also have protection over and above the cash value the moment they pay their first premium.
In this way, life insurance is a self-completing savings strategy. Should something happen to your client, the policy can still pay for their child's tuition or supplement their spouse's future income.
Can You Capitalize on Opportunities?
Whole life insurance is the best place we know to store long-term cash (with a permanent self-completing savings mechanism) and the best way to build liquidity for future investments, emergencies, and opportunities.
If you could benefit from a greater understanding of whole life insurance, how to talk about it with clients, and how you can prove its value on a calculator, we encourage you to attend a Truth Training. You'll learn straight from the source how to use Truth Concepts calculators.