Buck: Welcome back to the show everyone. I’m glad to have back on the show Christian Allen and Rod Zabriskie. As you know they are our insurance specialists basically for permanent life insurance specifically these products that we call Wealth Formula Banking and Velocity Plus. I wanted to have them on because I feel like this is almost a little bit of an emergency type situation where like listen a lot of you are wondering well gosh what do I do right now what do I invest in what do I you know you know do I wait for volatility and wait till there’s you know distressed assets. Well there’s that but there’s also something that I think is really important and and probably right now is the best illustration of exactly why this product has the value that it has. So I want to start from the beginning here. Let’s take a step back and talk about, you know first of all guys welcome to the show. Sorry I forgot to even say that.
Christian: I’ve been here a couple of times thanks for having us back.
Buck: I’m all you know worked up in thinking about what’s going on here.
Christian: Pretty crazy time.
Buck: Yeah no kidding. So let’s take a step back. The first thing I want to just remind people who are sort of on may be unfamiliar with what we’re going to be talking about here is what we’re talking about is you know a type of life insurance you know most people think of life insurance as you know just that you know in case you die your loved ones are protected and and all that and I think a lot of people have no idea when we what we’re talking about when we refer to life insurance as a potential investment vehicle. So first do you want to just comment on that you know term term insurance what we’re used to life permanent life insurance what’s the difference and then you know feel free to use in whatever context, historical whatever you want but why don’t you start with that?
Christian: sure so I think I think the first challenge that ends up coming in people’s mind when they think of life insurance as a vehicle for accumulating rather than just as like term insurances is not understanding the difference between. So the first net there’s basically three types of life insurance you have your term insurance which is just simple simple and straightforward it’s like any other type of insurance you pay the premium if you die during that timeframe the beneficiaries are paid out whatever that death claim is right so really simple straightforward as long as the policies enforced it pays the claim with a few exceptions. And then in the nineteen about 1980s well I guess I should step back term insurance existed for a long time whole life insurance existed even longer whole life insurance is kind of like the dinosaur of life insurance policies right it’s the place that people go because they know what they want to get they know that it’s really super safe it’s predictable and it’s just gonna kind of plug along and do its thing now we’ll talk about how we use that in a minute. So we’ll talk about how we use that in just a second but just from a from a contextual standpoint term insurance is simple insurance in and of itself full life insurance is kind of the dinosaur it does build up cash value so a portion of the premium that we put into it goes toward what they call the cash value the other portion goes towards paying for the death benefit. So I can say we’ll get into that here in just a minute. And then in the 1980s a third type of policy was created and if you remember the 80s right it was booming an interest rate time and so you know being in a life insurance policy a whole life policy that was getting you know seven or eight percent interest in dividend in comparison with you know the CDs that suddenly started to creep up and go you know ten twelve percent basically the life insurance industry came in and said hey we’re going to create this new policy to kind of create that it kind of brings the combination of term insurance and whole life into one creates more flex allows it to be a death benefit for your entire.
Buck: Just for context what is that called?
Christian: Universal life. Full life term and and universal life that’s sticking inside that and we’ll get into the various forms in a minute but but the important thing on this is just to know that it’s basically a combination of term and whole life and the idea was to put as little money in in the life insurance policy as possible to get them a death benefit. Now that became a real problem when interest rates suddenly declined right. So if I went into one of these policies and said hey I want to pay as little as I can I know I’m gonna get 10% at least that’s what people thought then putting as little as they could was was a great idea at the time or it seemed and the life insurance industry didn’t help much. But they learned over time that his interest rates came into play that could be a challenge and so for that reason I think that there was the life insurance industry specifically around universal life kind of got a black mark from a historical standpoint because there probably needed to be more regulation. Anyway that’s kind of a back you know getting to the very basics of what those three types of products do and hopefully that’s kind of a helpful context for your listeners.
Buck: Yeah so let’s put all of this now basically we’re gonna leave term behind because term is like paying rent right instead of owning an asset you’re renting an asset. You’re basically saying I’m gonna borrow I’m gonna I’m gonna pay it for a certain period of time and you know this thing will protect me until I’m 60 some years old and if I don’t die by then it’s gonna go away and all that money I spent it isn’t going to go towards building an asset at all. Permanent life insurance is the other side which you basically have talked about in the context of whole life insurance there was this back in the 80s you talk about this Universal which we’re not going to talk about because basically we’re not going to go into much of it but it wasn’t a good idea for all the reasons that Christian said. So now we’re gonna stick with you two concepts one well we’re gonna stick with one main concept and that is permanent life insurance. So specifically when we talk about Whole what exactly is whole life insurance, you know how does it work you know what I have learned and I’m asking questions that you know I kind of know the answer to in part just to make this educational but what I have come down to realize and understand is that the way things work with whole life insurance it could arguably again in my opinion from what I’ve seen be called the safest possible investment especially when you consider the risk adjustment with potentially the exception of the US Treasuries although you know the the return on that is terrible whereas here you’re talking about quite a bit more return do you agree with that and you know tell us how whole life works and and all that.
Rod: Yeah so I mean I would say that what you’re saying is true and really comes back to the strength of the company so specifically when we’re looking at a whole life policy we’re not just just taking any company off the street. We’re gonna vet them and only go with those companies that are around for a long long time more than 150 years have great ratings in terms of these independent rating companies like movies or SP and and have a great track record of paying a dividend and so to begin with when we narrow down to those companies I agree they are among the strongest companies in the world because of a few things number one is they carry large amounts of reserves part of that’s regulated a part of that’s just because the nature of what they do like a 40 year old who gets a policy chances are they’re going to live another 40 50 60 years and so the company has to be in the way they manage their finances because they’re gonna pay out this a death benefit decades down the road so the type of investments that they get involved with are very safe fixed type of stuff in bonds right not just corporate but government but notes and long-term 30 40 50 year types of places where they’re invested so you know we’ll talk about this but like with whole life comes with a four percent guaranteed interest rate and people say well how can they do that well the way they can do that is because of these long-term the long-term nature of it right if banks are offering next to nothing and continually dropping as we speak how can an insurance company like that offer guarantee four percent and that’s the reason why it’s because they have these you know large large reserves that are invested in just receiving consistent.
Buck: So as you mentioned bonds you know they’ve they and they also in some of the you know the highest and you know real estate assets in the country they barely use any leverage so they’re extremely conservative but because they’ve had these assets many of these assets for so long their cash flowing like crazy. The other thing I wanted to point out here was that you said 4% but that’s the contractual agreement that doesn’t even include dividends right? And what is dividends usually like another you know one point five percent?
Rod: Good question so right now depending on the company then it could be another one point five to two maybe a little more than two with a few companies and so but that’s right now with you know its interest rates as low as they have been it’s actually historically low so if if we ever get back to normal interest rates you know if you know on mortgage bring back up to six seven percent then they’d you’d expect a dividend rate to go up and it might put you a total of what the guarantee four plus the dividend more around seven or eight.
Buck: And the other question I have for you is when we say the dividends themselves we know that that contractual number that you said was 4% contractual they have to pay that the the number on the dividends is variable although even an extremely low rate environment you know maybe 11.5 maybe even two percent on top of that so we’re talking about five and a half six percent. Has there been for the companies that you’re that we deal with here Penn mutual mass mutual how often do they not pay dividends?
Rod: Well they don’t miss a year so I’ll use time mutual as an example they were created in 1847 they paid their first dividend dividend in 1849 and they have not missed a year since then so remarkable right you think about in the backyard they had the civil war going you know fifteen years later after they formed and they just kept plugging along and paying dividend right so impression world wars.
Buck: And that’s exactly right and that’s what I’m trying to get at four percent is the four percent is the contractual then people say we have at the rest of it’s not guaranteed well how much more guarantee do you want then we paid through the Civil War we paid through you know the Great Depression multiple world wars hyperinflation and now coronavirus yeah right? So the point I’m trying to make is that you know this is one of those truly in my mind and this is the way I use it I use it as the safe as possible investment I can happen now of course you know people are looking at those numbers and saying you know there’s low interest environment and five and a half six percent you know those are obviously tax-free growth right and in its exponential growth right it’s compounded growth in other words not not exponential. And so that makes a huge difference over in a period of time. Now one of the questions that a lot of people have though is they say well I’ve heard that this you know this kind of permanent insurance is you know not really a good kind of investment I mean that’s what Dave Ramsey tells me that’s what Suze Orman tells me so why do they say that?
Christian: So my take on this is there’s probably three things right, so first is is they’re just talking to the masses and I think there is a difference right so when you’re giving general advice almost to nobody then you know for certain people buying term insurance to protect their family as a death benefit play is critical and important right so we don’t want to pull all away from the value of term insurance but ultimately when you’re speaking to the masses you’re not necessarily hitting on the people that can use it in a in different ways. So what we’re going to talk about as we get into this conversation is using this vehicle in ways to actually significantly optimize or enhance the way that we grow wealth. So anyway the first thing the first reason I think is is probably cuz they’re talking masses the second one is probably just a general lack of understanding right so when we do this we have some specific parameters that we’re working around. We’re going to make sure that in every single every single policy that we create is going to be maximum funded for cash value and low cost that makes a massive difference so a lot of people don’t realize that there is significant flexibility within the advisors hands and how they want to create the policy and strategically for the purposes that we use it every single situation is like that what ends up happening is they’re talking and they’re just saying like okay in general if I buy a whole life and it gets me two or three percent over a long time that might be okay but you might be able to do better somewhere else. The way we’re doing it is different and I think that’s really an important factor.
Buck: Yeah and I wanted to just add to that that a big part of what I’m trying to get at here is that here so here’s let me tell you a little anecdote which is when I finished residency and I started looking around and I didn’t know anything about investing the there were people who told me actually was sort of the you know sort of the people who were sort of the know-it-all younger docs they said don’t buy permanently don’t buy permanent life I was thinking okay fine just you know why they say well you know because your your returns are not high enough and they say what they would say is you know by term and invest the difference is what they would say in other words don’t spend the extra money on whole life or permanent life of any kind. But what was curious though is that as I continued to move up in I guess socio-economic circles the next thing I knew the ultra high-net-worth folks that I knew almost uniformly we’re using permanent insurance products and I couldn’t figure it out I was like wait a second why is it that the doctors back then told me to stay away from this stuff and all the sudden these guys who were worth millions of dollars a lot more than the doctors they’re all using some kind of insurance product and the answer goes to the answer ultimately was that you can’t just say permanent life is good or permanent life is bad it’s like saying real estate is good or real estate is bad right yeah if you’re gonna buy you know D class apartment building somewhere with no you know with trouble keeping people in the apartment building and you know poor property management that’s not a good property right whereas if you have you know a top level operator who is focusing on a you know value-add business plan is gonna create growth there’s a tremendous opportunity to make money right so that’s the difference. Insurance is like anything else it’s how it’s a tool.
Christian: Can I just say this like this might be a good time in life insurance is an awful lot like real estate right your listeners love real estate let me just mention a couple of ways that life insurance is very similar to real estate. So life insurance is like real estate in basically three primary ways right one of them is that we build equity in it just like we do in real estate number two is that if there’s significant tax advantages right and and we’ll get into some of those even more in detail but a lot of our high income high net worth clients are using things strategically in conjunction with life insurance to maximize tax advantages and then number three is leverage right and we’re going to get into this concept of Velocity Plus and premium finance and and a lot of people that we talk to you start to look at it like real estate in the sense that well if I could buy life insurance with leverage why wouldn’t I do it? Most investors wouldn’t even consider buying an investment property with cash right similarly there’s some really cool things that we can do with leverage and life insurance so those three ways I think are strong similarity between the two and we all know you know we love we love real estate it can do a lot of the same things.
Buck: So effectively the the bottom line is that the reason that you’ve got some people like the Suze Ormans and the Dave Ramseys etc saying that you know permanent insurance is not a good investment is because they are not talking about the kinds of structured insurance products that wealthy use and so what we do is basically borrow from the concepts of the ultra-wealthy. We’re talking about the Rothschild family we’re talking about the Romney’s you know we’re talking about you know people who have a lot of money and so that’s the myth that is broken and we’re going to talk about you know two of the main products and then we’ll touch on you know some of the higher net worth stuff and it’s next because I think it’ll give you an idea.
Rod: So structure is one of them and then purpose is another one so just the whole reason why the Rothschilds have that policy the way that they’re using it is very different than the audience that Dave Ramsey is talking to right it’s when when someone moves from that scenario of focusing on 401ks and market investing and those kinds of things and they shift over to this world of cash flow investing and alternative investing and you’ve seen this right you’ve seen a lot of people who make that shift there’s a fundamental difference in the way that they even just think about investing and this becomes a tool that can be used in the course of doing that that they just wasn’t even on their radar before they made that shift.
Buck: Well that’s right and ultimately this is you know where is normally term insurance is insurance for the purpose of insurance and that’s it this is really an investment with the side benefit of insurance.
Christian: So yeah you know Buck I heard when I was listening to one of your podcasts earlier today with a guest maybe just a few weeks ago and one of the things that they said that I liked was that they like to deploy their dollars to do more than one thing at a time and real estate does that right life insurance does that so the idea is again the wealthy people are generally becoming more sophisticated because they’ve had to come up with ways they had to they had to learn how to solve problems and so because of that we’ve created and not just us but the industry has created opportunities to do things especially for people like your high income listeners and your high net-worth listeners that have tax needs there’s just all sorts of things we can do with it.
Buck: So now we’ve established ok so this is a product obviously wealthier looking at this is a product that has been potentially possibly the most robust and safest investment in my opinion over the last you know hundred and forty years. It is a product that you know people who lived through the depression basically they had two things they had life insurance they had cash they trusted nothing else. So let’s talk a bit about now some more of the details here the first type we’re going to talk about basically two of the main types that we really discuss in one we call is the whole life product which we call Wealth Formula Banking. So can you give us an example basically of how a Wealth Formula Banking policy is structured and let’s just say we’re using it you know just for pure growth we’re not even gonna use it for our creative stuff that we do then we can touch on that next but how does it work how do you create how do you create you know an account that’s growing money and what does it look like over time?
Rod: Yeah so really when when we build a whole life policy there are different pieces we can put together to make it do what we want it to do and that’s at the discretion of the advisor so in other words you may not get the same even if you were asking for it you may not get the same policy from you know the guy down the street as what we can do because we just we have that expertise and we know how to put them together essentially what we’re doing like Christian mentioned earlier we’re going to maximize the cash growing capability of the policy we do that by minimizing costs which ironically reduces the amount of insurance as low as we can get it while still keeping all of the benefits that we’re looking for and over time even in an environment like now with the dividend rate is is 6% we can still generate a long term return on that policy of about 5% tax-free and so again you know the listeners may say I you know 5% even tax-free that’s not what I’m looking for but if you could it’s in what they traditionally called a bond portion of your portfolio if you could consistently and again even in an environment like right now where interest rates been low for a long period of time and going lower recently.
Christian: Nobody would feel bad about that 5% again tax rate so the tax equivalent of that you’d have to get you know depending on tax seven eight nine percent to match that in a taxable place so it wasn’t one been predictable. I was just thinking it wasn’t that long ago we ran into a client before I guess it was a prospective client at the time who who was just bragging about how their whole life policy was the best investment they’d ever made now again you know we’re not expecting to go get 20% returns in here but the fact is that ultra safe it’s super consistent we have the tax advantages that’s asset protected like just a lot of really cool things to go with it.
Buck: The other thing that I want to point out here is that that I that to me here’s how I see it and I think Rod hit on this, if you look at this purely from an over funding standpoint you’re growing at five five-and-a-half percent compounding right now even in a low interest environment you have to look at that your comparison for there for me this is my quote unquote bond portfolio right bonds of this kind of bonds of this kind of I think safety level are probably about one or two percent maybe right now at best right and so so basically you’re gotten a much higher return on it from the beginning the other part is that you are creating an environment where the death benefit is something that is you know guaranteed right over a period of time if you just pay this for a period of time and you stop paying on it you effectively have free life insurance. So in effect you have guaranteed you know that you’re leaving a legacy for your kids which i think is really important especially in times like now I mean think about you know I don’t know if some people might be thinking gosh I mean look at what just happened to my stock portfolio. Well if you have whole life if you have permanent life you are guaranteed no matter how badly you screw up your portfolio to leave money for your kids. I don’t know about you but that is important to me so that’s another thing I think about. Now let’s talk up to now it’s not terribly sexy okay no admittedly and if it were just this I probably wouldn’t be as big a fan but let’s get into where we start using this Wealth Formula Banking concept in a lot more creative ways okay because the real value of banking is its ability to become a source of liquidity that you can borrow from but it’s not like borrowing from your home equity line of credit. There is in fact a way to essentially double-dip and essentially make money in two places at the same time. So guys how does that work and can you give us an example of using it you know in an example say you used as a down payment on a property instead of you know borrowed money put it down as a down payment on a property and what kind of you know compared to using money from a savings account what kind of difference that could make in terms of your returns. So basically here what we’re talking about is using it as a source of leverage right and this is really important okay so why don’t you talk about first what do we mean by double dipping why is that important and then give us an example if you can.
Rod: Yeah so as we as we fund this life insurance policy we build up a cash value and we can we can take loans against it so in other words what happens is we’re building up the policy or earning that earn that guaranteed interest in dividend that we talked about earlier and then as we built that we can actually loan against the cash value of the policy and go use that in this case we’re talking about using it to go and invest in cash flow investments so the fact is that that money in the policy and that cash value is going to grow and compound whether I loan against it or not okay going back to your point of it’s a great place for safe growth and that kind that’s going to happen even if I loan against it.
Buck: That’s important let me just say that once again what you just said if I’ve got a hundred thousand dollars of cash value and I borrow that cash value I’m not borrowing it from my account. My money is continuing to grow at a compounding rate is that correct?
Rod: That’s right.
Buck: Where am I borrowing it from then?
Rod: Yeah so the money that comes to you for the investing is actually coming from the general account of the insurance company. So we have two separate buckets of money you 100,000 stays there the investment money came from the general account and so now that money’s out and you’ve invested it in this property that becomes the down payment on the purchase of this property and and now it’s working for you right it’s generating some income it’s you’re going to get appreciation on the property it’s creating value for you and at the same time the money just that isn’t the policy stays there and continues to grow in compound
Buck: Now a critical critical point here rod and I don’t know if you mentioned it. The money that you have in your account is growing at a compounding rate the money when you borrow it from the general insurance account you’re borrowing at a simple interest rate and if you don’t know the difference between compounding rate and simple interest put it in Google you’ll see what I mean because you can literally theoretically you could borrow at a higher rate of simple interest than you’re getting as a compounding rate in your account and still come out ahead. In other words if you borrowed up five and a half percent simple interest and your account was only growing at five percent compounding in short order you’re still going to come out ahead. I know it’s a little tricky to think about it but this is a thing that people don’t understand and one of the reasons why people don’t utilize this but the reality is there’s arbitrage between simple and compounding interest you’re borrowing it simple your money’s growing and compounding okay. So sorry to interrupt you I just it’s so important that piece because that’s why we call it double dipping your money you borrowed it you’re deploying it somewhere else and you’re still growing in your original account that’s why you’re using the same money in two places at the same time okay right you give us an example of how a situation like like that might work.
Rod: Yeah specifically about how to compare that to using a savings account for the same kind of opportunity fund right. So we’ve been with a lot with a lot of people who are and have been investing in cash flow investments and and they’re just running the money through their the regular savings account which is great by the reason they’re doing that is because of the safety of keeping it there and then a liquidity they have access to it and ready for it. Well we can give you that same safety and access but add on top of that some growth some tax benefit some insurance that you don’t have to pay for any other way and and now we add this other element of the arbitrage that we captured between simple versus compound. So you take that $100,000 loan against policy and you go and invest that use it as a down payment against you on this piece of real estate about a hundred thousand dollars that’s in your cash value acting that’s collateral continues to grow. Now as you see cash flow coming off of that property you’re going to turn around and be funneling that back into the policy that’s paying in a form of interest right against a loan and let other than like you said that I’ve become simple interest that you’re paying and if we were to amortize the payback of that over say a ten-year period of time then the by the time we get to the end of the ten years where we’ve paid off that loan there’s a significant difference between the amount of interest that you would have paid versus the amount of interest each would have earned and so we just can’t under several can’t oversell the value of that arbitrage.
Buck: What does that end up I mean do you know you’ve done some diagrams before I mean can you give us some number advantages of what that might look like over a period of time?
Rod: Yeah I think the one that we yeah I think the one that we have for example in the webinar we’ve done an example with the hundred thousand and then a twenty year payback and by the end of the twenty years you would have paid about sixty five thousand dollars of interest but you would have earned about a hundred and sixty five thousand dollars interest so again I mean understanding the concept of the difference between simple and compound is one thing but then when you actually put numbers to it you played out over a period of time so you basically came out about her dollars ahead yeah in 20 years I’m just that print that part alone.
Buck: And that webinar by the way is on wealthformulabanking.com.
Christian: So the higher the larger is a policy and then of course there’s some some assumptions we’re making on the investments that the larger that is as an example we’ve shown out several different scenarios and over time for a lot of the investors that we work with it’ll literally be millions of dollars depending on the size of the policy and how they use it but it can be millions of dollars of difference and again you’re doing the same thing you haven’t even you haven’t done anything different other than put that money in the policy borrow from there is your opportunity fund.
Buck: Okay so that one is the double-dipping Wealth Formula Banking I love this product I have this product it is my bond portfolio and in times like these it becomes an opportunity fund right you have cash value there and you know you didn’t let it sit in the bank getting like less than 1% you’ve been growing it you know 500 in my case five and a half percent and at any point I can go in there and reach in there and deploy that capital and when I do I’m double dipping that’s the value you’re using you know you’re using leverage you’re using velocity all the things we normally talk about. Now I want to switch to something else maybe Morpher you know it’s a different kind of it’s not the whole life type of thing it is something that’s different from what you initially talked about universal life universal life is we know we highly do not recommend. First of all start off talking about the difference between this product that we do not recommend which was universal life versus Indexed Universal.
Christian: So one of the things that I think makes makes us unique as an organization as we’re not really biased toward a product right at the end of the day we want to create a strategy that wins for people so when we get into this life insurance conversation there is a big difference between traditional universal life that we’ve talked about and indexed universal life which we’re going to talk about in more detail the primary difference between the two is the the interest crediting rate so we’re going to talk about how to add leverage to the policy here in a sec but from just a pure growth standpoint the reason that we end up moving toward indexed universal life in conjunction with Velocity Plus and premium finance is because we have a we have opportunity for a greater arbitrage because of the way that they work so maybe I should step back and go into that really quickly. So basically an indexed universal life credit interest each year based on a view of the market. So in other words they’re gonna mirror the market it’s okay the market did ten percent and what they do is they create a cap and a floor and so the idea is and you’ve set this on your and on your show is that it’s investing within the market with guardrails right. So basically I don’t have to experience the losses but I can get up to a certain amount of gain and then what we’re gonna do is we’re gonna take that to another level when we leverage it.
Buck: So typically in these kinds of things when we’re looking at that you know in others so you put your money in the floor zero percent in other words you you know if the market loses money you’re not going to participate not a bad deal. The upside then in this is typically what twelve thirteen percent something like that?
Christian: Yeah and it just depends on the product we can go higher on the floor and lower on the cap or higher on the kaepa so yes somewhere in the twelve percent range if you have a zero percent floor and maybe it goes down if you decide to take a one percent floor.
Buck: Just for perspective if you had this policy right now you would you you know you wouldn’t have lost money in the market you would have just not gained it, right? And wouldn’t that be wonderful right about now for people who are listening man literally I mean we’re doing this on the Wednesday before this is airing the Dow is now dipped into the low 19,000 range in a matter of a week or two weeks from the high. Crazy.
Christian: Yeah it’s incredible so life insurance as a whole is a really date a really great non-correlated assets right got correlated the market even inside of indexed universal life there’s a strong non correlation from the standpoint of no law right oh yeah that is critical and and obviously we have clients that have money in the market and you know we’re not quite as anti market as some people and yet given the circumstances certainly I would rather be inside of an indexed universal life cause even if it wasn’t leveraged then then than being in the market.
Buck: So let’s talk about this leverage aspect because now we said okay zero was a floor twelve thirteen was was the highest right away I remember in a Tony Robbins book I read about this years ago before I even you know before I met you guys before I really learned about this concept and he just kind of kind of blazed over it he said there was a type of account where you could take twelve or thirteen percent of the upside and if the market went below zero you didn’t have to participate and I’m thinking tell me more well he never mentioned it again then I bet you I guarantee you people out there right now are saying yeah I remember that I remember that part I was totally interested in that and he didn’t mention again that’s what this is. Now what’s interesting about it is if you think about that idea all right zero and thirteen that’s not bad but hey what would we do in real estate if we knew that we had an upside and we didn’t have a downside well as real estate investors we like to leverage things right because we know if we have a cap rate of you know and our cap rate is our gain and in the context of the stock market twelve or thirteen percent gain would be our cap rate for the year if we can leverage that we know that we could take a simple seven percent in the market if it’s a three to one leverage that might turn out to 20% or so right. So tell us exactly how that product works because now what I’m talking about is Velocity Plus which is this indexed product cap for with leverage.
Christian: Yeah great question this is really an incredible strategy that we found a few years back and part of the reason it’s incredible is because it’s so streamlined. So basically the way this works is that if I’m a high income earner six-figure earner I can participate in this strategy which ultimately tries to help us retain more of our capital right in essence I want to buy life insurance I want to create retirement income but I want to use as little of my money as I possibly can right just like I would if I was purchasing a new property so in this specific strategy that we call Velocity Plus it’s going to be a three to one leverage ratio now we make this a soup a really safe version of premium finance in the sense that what we’re gonna do is in the early the first few years we’re going to break it up we’re gonna fund I’m gonna find half of it and the bank is gonna fund the other half let’s just use $100,000 to make things easy I put in my 50,000 they put in their 50,000 I do that for another four five years and then at that point the bank is going to take over and say the entirety of that hundred thousand for the next five years so now we have ten total years I put in 250 thousand the banks put in 750 thousand and now I have a chance to take advantage of this incredible leverage and again utilizing it with life insurance is critical because we’re building the policy really the same way that we do with Wealth Formula Banking right we’re gonna have maximum maximum cash minimum cost so that when we take that leverage we can create an arbitrage between the interest paid back to the bank and the interest earned. So the key to the success of the strategy is to earn a greater return than I have to pay and what’s happened is that we have this two no precedent of being able to do this really in a variety of different economic situations and we’ll talk a little bit about some of the testing.
Buck: Yeah why don’t we talk about that now because that goes into again now people are saying well gosh I mean now we’re talking about market exposure again and I’m sitting here and I just lost you know you know 25 30 percent of my portfolio in a matter of two weeks do I really want exposure and what is you know that kind of thing. Well I mean first of all you look you we have this thing where you know you there is a floor to this kind of thing right but then you do have a little bit of leverage you had it a little bit of risk on top of that because I mean listen if you had 10 negative years in a row you you know you were not gonna make any money here right but the the likelihood of that is extremely small historically and tell us about the stress tests that you’ve done that have included some of the worst financial times in America and how those came out yeah.
Rod: So yeah the stress tests are critical and what we found is that they’re surprisingly there are a few advisors out there who are you know involved in bringing finance type of policies that even do it and and that’s it just feels like that’s we have to know right it would be great if we could just get you know what’s been happening the last 10 years well prior to the last week right where interest rates are low and the markets going great the fact is that we do have times as bad so what we want to do is pick the worst economic time frames in in two ways number one is the market so going back to the Great Depression and number two interest rates because now we have a loan involved in the process and if interest rates are going up we’re gonna pay higher interest and so we need to understand what what the impact is of that. So first let’s start with Great Depression so I the reason why the Great Depression is is the place to go is not just because of the the pure volume that a lost there was over an extended period of time so you know five straight years nine out of 12 old years where the market was flat or down and so in this particular case with you well we wouldn’t have earned any interest in those years and so what impact does that have on our on our strategy and so what we do and when we do this we’re like Christian said we’re kind of projecting out and saying this this ultimate is leading toward a certain amount of retirement income in the future we take our baseline retirement income and then we superimpose the Great Depression on that same scenario then we end up with about 65 percent of the income we otherwise would have gotten based on our you know baseline. So ultimately what that tells me is that the and really the it’s these types of stress tests that ultimately drove the design and the ratio of how much we’re putting a pocket or how much we’re loaning because it just needs to be a design that is successful so they’ve even integrate depression scenario.
Buck: So just to be clear 65 percent of what?
Rod: So if my if my baseline projected income let’s say it’s a hundred thousand let’s say the you know example Christian gave I put in fifty thousand a year finance the other so over the 10 years I would have put in 250 the bank would have put in 750 and then let’s project to age 65 and now we’re turning that into a stream bank and let’s say the income was a hundred thousand dollars a year for the rest of my life okay on the on the start baseline projections then in a Great depression scenario the income would be about sixty-five thousand years.
Buck: So not bad even in like you know arguably the worst right worst period in American history you still
Rod: Seven straight years yeah there’s seven straight years of negative and they were right at the beginning right so that’s why one of the reasons we feel so comfortable with the design is because you know we’ve never seen anything like that and even if we did for somebody who is willing and prepared to go in it for longer term it’ll recover over time right and it’ll do the trick and so from that standpoint we have a we have a lot of safety net and then of course there’s things that we can do to mitigate risks in other ways right. So we sometimes talk about it like it’s a you know you do it and then it’s done but in reality you know we meet with everybody and regularly and make adjustments where we need to but ultimately the strategy has been so successful over that timeframe if the policy design has done correctly.
Buck: Right and that’s and that’s critical by the way I should just point out that some of you may go out do your in transit broker and say I just heard this cool stuff tell me about it and I can tell you from personal experience that most of the time they’re just gonna look at you and say yeah I’m not sure what you’re talking about or yeah we have something kind of like that and neither one of those is actually a good thing. These products are not something that most most real insurance brokers have any clue about or have any access to do this is a really specialized product and you know Rod and Christian are the guys I trust with this so before we cut this talk up here for today I want to just touch on one more thing because we borrowed this Velocity Plus concept from the ultra high-net-worth and we have people in our you know group that really are it you know ultra high-net-worth I mean you know not worth of over 20 million bucks or maybe they’re making you know even like make it a million and a half two million dollars a year in those situations they may qualify for a more traditional premium finance IUL so tell us how that’s different from Velocity Plus and who qualifies.
Rod:Yeah so to begin with with the traditional kind of this model we were just talking about qualification is is really anyone has a strong 60 okay we can we can get them into one of those Velocity Plus policies so now when we’re taking that to that next level then more based on net worth and you know anyone who’s above say three to five million in net worth convinced start to look at this kind of next level where we’re we’re purely a custom building the the strategy and in this case when on the on this original Velocity Plus scenario we’re talking about to come up without with any kind of outside collateral the policy itself covers all the collateral on the loan that we need in this other design we can custom build it and and so ultimately by bringing in some additional outside collateral maybe something that’s invested in bonds or on the market or cash or you know some sort of liquid position then it stays where it is and then continues to do its thing but now we can use it as collateral by doing that then we can we can bring in additional leverage so three to one was our ratio on this design we talked about a minute ago then we can get we can go all the way up to a hundred percent leveraged right usually we’re doing it where there’s some out of pocket but but ultimately you know that the balancing factor on that is what the person can come up with without side collateral then then we can just go to town and and really match the amount of leverage to the individual in their situation.
Buck: Just to put that into context again now we’re talking about you know nine to one infinite potentially infinite leverage I don’t know if I would do myself an infinite leverage thing but would I do nine to one yeah I you know I think the the thing that you have to understand is right now and the reason I bring this up is because for both for Velocity Plus and for this premium finance thing it’s probably you’re not going to find probably a better time to start this kind of thing than right now because that is if you believe one year from now we won’t be better off and then we are today and personally I do think because of the nature of what we’re going through that it is a I’m not saying it to be short-lived but I think it’s a punch in the gut and we know where that punch is coming from it’s a virus. A year from now the markets we’re gonna figure out what to do about this probably vaccinations people will be back to work the market almost guaranteed we’ll be in a better place next year than it is in the next couple of months here so if you’re gonna start in a down year basically and say okay I want to index starting now to next year now is potentially the best time to do it. But yeah so in this scenario where you’re using that higher leverage do you have any sort of numbers like what kind of you know what kind of returns you know are on that kind of pro forma?
Christian: So you know that’s a great question but we in in that webinar that we did on specifically on Velocity Plus we use pretty conservative numbers and ended up that just over 18 percent as a return and that was in the 3 to 1 leverage version so we haven’t necessarily probably should do another example that creates that but what I can say is that it would certainly start moving into the 20 plus percent and again if you can do that on a relatively consistent basis while getting some of those other benefits like you know for the right people it’s a no-brainer I just tell people retained capital is the key right especially for investors like you know you’ve got people you’ve got a ton of really savvy investors listening who can go out and generate great returns well all we’re going to do here is we’re going to continue to generate great returns in just a different way but it’s consistent with the way the philosophy that people are using yeah and bottom line is.
Buck: I mean that’s a product that you know a lot of my ultra high-net-worth friends colleagues use if you fall into that category it’s definitely something look into and talk to Christian and Rod about. Now you know if you’re wondering why I you know if you’re if you’re sitting there listening to me thinking gosh he really likes these kinds of products I do I really do I’m a believer in them I’m a user of these products and right now I’m thinking to myself you know if you’re sitting at home and you’ve been thinking about this kind of stuff I want to remind you like if you had a bunch of money sitting in banking right now or you know you wouldn’t really be worried about anything and if you had an indexed product right now you’d be like okay well I zero it out at least I haven’t lost thirty percent of my money right and if I do anything throughout this period I want you to look at this stuff because these are products that help will help you sleep better at night. To that effect I want to point out a couple things first of all you can learn a lot more about everything we’re talking well specifically about Wealth Formula Banking and Velocity Plus by going to wealthformulabanking.com and watching the webinars with Christian and Rod and you can also reach out to them via that website against WealthFormulaBanking.com. The other thing is I am so dedicated right now to this concept of providing you this more information on this that what I’ve asked Christian and Rod to do is actually have a webinar we’ll go over some basic you know numbers examples but then the rest of the time we’re going to use it for Q&A. I want to use it for Q&A and I want you to come with your questions and they’re gonna do basically you know just just a few you know numbers that you can see on the screen in a webinar and the rest of the time we’re going to use for questions and get them answered because if you’re sitting at home now is it time to learn this stuff and if you’re interested put it into place I mean just imagine this kind of thing this sort of you know we got these Black Swan events it won’t be the last one you lived through I guarantee it the next one you want to feel better about you know than you do right now and that’s just the way it always works you just wish I had this done that and this is one of those things I think you can help you so again Thursday is going to be when we do that. I’ll send an email about it but the date of that is Thursday the 26th and that will be at 5:30 central time and if you have not gotten an email about it shoot me an email at [email protected] but you almost certainly should have an email if you’re already on my list for that Christian and Rod you guys have anything else to say before we get off?
Christian: I’m just gonna mention buck that we are going to put out some literature between now and then I think you were planning on releasing it before the before we actually got into the Q&A and that will be good for anybody that’s going to be there check it out come with your questions.
Buck: Great well great guys thanks again for your time and again hopefully people reach out wealthformulabanking.com and we’ll be right back.