341: Why Now Is The Perfect Time For High Cash Value Life Insurance Strategies
Buck: Welcome back to the show, everyone. Today my guest and Wealth Formula podcast. Well, they’re going to be well known to you, I believe, at this point. Their names are Christian Allen and Rod Zabriskie, and they are my colleagues in the business of life insurance strategies. You know, I like to see strategies there because you don’t you know, we think about life insurance and the way traditionally you may have been taught is to think about life insurance is just that insurance. But we like to think about it as an investment strategy. So. Well, first of all, welcome to the show, guys.
Christian: Thanks Buck. Always good to be here. Excited to be back with you.
Buck: Yeah. So what I thought we’d do is we chat a little bit in broader terms and then I’m going to kind of turn it over to you and you can kind of focus in on what what you think might actually be the best strategy given where we are at. So first of all, obviously, the elephant in the room is the accelerating interest rates, right?
So let’s talk about how that’s affecting some of our permanent life insurance strategies. Let’s start with Wealth Formula Banking. And, you know, effectively, this is well, maybe you can describe it for us. Give is you you describe it several times a day Rod. So why don’t you give us a high end and tell us, you know what the interest rate you’re doing there?
Rod: Sure. So Wealth Formula Banking, the strategy basically is a way to have your money flowing into your investments. So this is specifically for people who are investing in real estate and their businesses and crypto and all kinds of different alternative investment types of directions. But instead of just flowing all of your money through a regular savings account, instead we’re building a max overfunded, very efficient life insurance policy where we can generate consistently a 5% plus tax free return and instead flowing the money through there. And what happens is when you get when it comes time to actually do the investment, your money is in the account, but you’re not actually taking it out. We’re going to create a loan against those dollars. That money is what you’re going to go out and use to invest. Your money actually stays and continues to grow. Earn that 5% tax free return. Even while now you have this other money out invested and creating, you know, hopefully ten, 20, 30% in investments.
Buck: Right. And this is, of course, you know, the first thing that got me interested in the permanent life space. Tell me what’s going on now, because like obviously as economic conditions change, in particular interest rates, you know, that strategy changes. So like or does it change or is it better or is it worse? Give me some of that take.
Christian: So maybe I’ll hit on a first and then I’ll let you get into more detailed stuff. Wealth Formula Banking we traditionally use whole life insurance, right? It’s like Rod said, it’s minimum cost, maximum cash. The idea is to invest through that. Is your opportunity fund really simple but creates a whole bunch of efficiency. It’s important to realize life insurance is designed especially, particularly over the long term, to outperform fixed interest rates.
So whole life insurance grows in two ways. First is the guaranteed interest rate, and the second is the dividend. And right now we’re still generating a five plus percent return after all costs. So like, it’s still working for us. But again, the question is, well, if interest rates are 7%. Right. I just I got an email this morning that said, just for the first time in 20 years, you know, mortgage rates are up to 37%.
So the question then becomes, does it still make sense to do something like that if interest rates are so high outside of it? Well, so here’s basically how it works. Dividend rates are the variable component of full life insurance and very end the dividends while they have dropped, they had to drop right as a result of low interest rates. We’re now going to see them move up with I well it’s a little bit different those they it’s based on mirroring the market in an index and through caps. And so what we’re seeing now is the market the life insurance market responding to the higher interest rates. Because if you think about it just logically, bank, why would anybody use cash value life insurance if they thought that they could get a CD that was paying more? Yeah, nobody would do it. It would make no logical sense.
Buck: How long does it usually take for that adjustment to tag?
Christian: Good question. So on the ideal side, it’s going to be quicker. We’re already seeing rates and caps moving up on the whole life side where we’re talking about dividends they’re going to be forced to start raising. And because it’s been happening so fast, but normally there’s going to be a probably a year or two gap. It’s going to be behind a lag.
And so we have to know that going into it. But again, if we’re looking at it over a long period of time, there’s still no question in my mind that especially the way that we design these policies, they will outperform general interest rates. So they still end up being a really powerful place to keep liquid money to to invest through. Rod, what do you think?
Rod: Yeah, I agree with everything you said and maybe just to add to that, one thing that we’ve been using recently is what’s called the cash value line of credit, in other words, using a bank for the loan mechanism, because we can get lower interest rates. There wasn’t rates are going up. The rates with that is going up as well.
One of the cool things with the primary company that we use is they have what’s called direct recognition. Now, we’re going to do too many details here. But the the reason I bring it up is because there’s a direct relationship between the interest rate that I’m paying on my loan and the interest that I’m earning inside of my cash value that that portion of the cash value is collateralized in my loan. So if interest rates continue to go up, all of a sudden it’s seven, eight, nine, 10% on the loan side, there’s that directly means that I’m earning more on my cash value side as well. And so the cool thing is we can switch to the cash value line of credit with the bank when interest rates are lower, take advantage of that benefit, but then we can switch it back to the insurance company and take advantage of that direct recognition and get higher interest earned immediately when we’re at as the interest rates are going higher on the loan.
Christian: And if you remember, when we do like the the Wealth Formula Banking webinars, we show the difference between simple interest and compound interest. So what’s unique about it is even when interest rates are the same, so let’s just say interest rate, interest rates have gone up. Let’s say that the policy interest rates have gone up. They could have gone up to seven, 8%. It doesn’t matter because on the loan side, it’s just going to mirror or match that point. And of course, when we use when we use the power of compound interest and leverage that against simple interest, even at the exact same interest rate, we’re generating more cash in the growth side than we’re paying in interest.
Buck: Let’s talk a little bit we you know, you’ve been you mentioned I you are maybe Rod you can step back and just re identify what that is and then we can maybe talk about Wealth Accelerator. Why don’t you start by describing IULs in general and then and then we can kind of go from there.
Rod: Sure. So IULs stands for Indexed Universal Life and it’s kind of like the sister of whole life, right? In a lot of ways they work the same. In other words, we have a cash value account inside of the policy that grows tax free. It’s liquid. We have access to it. It creates a death benefit. We pay for any other way. And that way both types of products are the same. So the difference on the IUL is the way that it grows. The cash value Christian mentioned the guaranteed interest and the dividend, which is what creates growth in the whole life. On the other side, that growth is created by driven by what’s happening in a market index or S&P 500 is an easy example to use.
We’re not actually invested in the S&P, but we’re using it as a market, as a measuring stick to determine how much interest we earn each year. So in years where it goes up, we participate in a portion of those gains up to a cap in years where it loses value. We don’t participate in the losses. We just don’t earn any interest in that year. So we have downside protection and we participate in a portion of the upside. On average, we’re going to capture 70 to 80% of the gains in that index.
Buck: And then and so then you have the IUL. So basically you’re reflecting, you’ve got caps, you’ve got floors. So and then you add leverage to that, right? And that’s where I think really where the strategy becomes compelling because, you know, certainly you talk about the ideal strategy. It’s essentially investing in the stock market with a high, low insurance kind of.
But now what you if you add leverage, you’re taking those highs and then you’re multiplying them by the leverage that that you get. And then when you do that, you can actually beat the market on a fairly regular basis. So right now, I believe it. Tell me if I’m wrong, but I believe that the IUL leveraged IUL of choice that you guys are talking about is this concept that we call the Wealth Accelerator.
Rod: That’s right.
Buck: So what I wanted to do is we had we previously had a webinar on this, and I feel like it was maybe a little bit confusing. So what I want to do is like, just have you guys, you know, really kind of go a little bit more into the details and how this works. And in particular, you know, talk a little bit about the effects of interest rates and so on.
Now, obviously, there there’s an additional benefit in potentially investing in that these types of things now because if they are based on the stock market, the S&P 500 is down. Right, right. So so why don’t you why don’t you guys take it from from here? Christian?
Christian: Yes. Perfect. Okay, so we have just kind of like a little webinar presentation we’re going to go through to try to clarify some of the things that we maybe didn’t go into as much detail in in our first run. And anyway, so maybe just to start off, I’ll kind of go through what our agenda is going to look like.
So we’re going to talk through first a high level overview of what it is we we don’t want to take for granted that people know exactly what it is, but we also want to get into a little bit of a deep dove, specifically as it relates to interest rates. But we’re going to take a high level overview. We’re going to talk through briefly again the vehicles we’ve hit on those a little bit here, but we’ll talk about them briefly.
Again, we’re going to talk about the value and importance of of leverage and how it’s utilized inside the the Wealth Accelerator. And then we’re going to talk about the maybe the most important thing with good reason, I think fairly is what’s on most people’s minds. So but we’ve had a lot of people a lot of your listeners who’ve been extremely interested in using the Wealth Accelerator, working with a lot of people by by far the biggest concern is just these rise in interest rates.
And what does it mean? What does it mean in the short term? What does it mean in the long term? Rod’s going to get into more detail on specifically why interest rates don’t matter, particularly over the long term. We’ll again will back that up and then we’re going to do a quick sample case. Okay. So that’s kind of our agenda to kick things off.
The key benefits to the Wealth Accelerator are basically five or six things. The first one is that it’s a great way to produce predictable and consistent double digit returns. We’re doing it a lot more safely than we than we have done in other premium finance designs. We’ll get into that. We’re talking talk about how to create the maximum tax free income.
It’s putting it inactive money to work. Liquidity is critical. So we’re going to make sure that there’s checkbook access. Now for clarity in the Wealth Accelerator, it’s a little different than with Wealth Formula Banking, right? Wealth Formula Banking, the idea is to put that money in and purposefully go out and invest it. Here we’re creating liquidity, but it’s more liquidity that’s based on as needed situation. It’s not something that I put in and expect to be moving in and out of investments regularly. We want it to be there and liquid, but we don’t want it to be constantly being used. And then we’re going to talk about provides valuable liquidity for your state. And this is probably my favorite part about the Wealth Accelerator and it’s one of the reasons that we started we’ve moved not completely away from traditional premium finance, but one of the things that we really love is that we can create this leverage without outside collateral.
And I’ve talked about this before, but historically that’s been a difficult thing because, you know, who wants to sit $1,000,000 in a, you know, a cash account that’s going against the policy? Now, in this version, we’re going to create a way where we can have it all be completely self-contained. And by doing that, it’s not only safer, but you’d be surprised the income it’s creating is more powerful.
Rod, why don’t you take over and hit on the vehicles that we’re using and maybe we’ll do a shortened version since we already hit on them.
Rod: Yeah, that’s great. So we’re using we mentioned earlier kind of compared whole life and indigenous life in this with the wealth, etc.. We’re actually using both. We use a combination. Our default is to go half whole life, half indexed to the life. And as we talked about with the whole life side, we can project about a 5% plus return.
Even in the recent really low interest rate environments we’ve been there. It’s more predictable and consistent in the way it grows. Are you well based off of that market index? And it gives us more upside potential. And when we put those two together, the consistency of the whole life and the upside potential dial, that combination is really what we’re looking for because in times where the market is struggling, we’re not earning interest on the on our upside.
Well, we know we’re getting it on the whole life side and then the things that they have in common are tax free growth. We’re building them so that their maximum growth with minimizing the cost, it creates a level of creditor protection. The money that you have inside these policies are protected against lawsuits, etc.. And then finally, the death benefit that’s associated with it. We’re minimizing that because we’re minimizing costs. But the point is it’s creating amount of insurance. You don’t have to pay for any other way.
Buck: For anybody who wants a little summary on some of these topics, again, there are other webinars of WealthFormulaBanking.com where you can look at Wealth Formula Banking is the option and there’s there’s velocity plus which deals with eyeballs. And then of course, now we have this Wealth Accelerator. So hopefully this will just be a little bit of a review for most of you. Otherwise go to WealthFormulaBanking.com and really dig in.
Christian: Perfect. Okay. So Rod, keep going. Let’s talk through kind of the structure and the flow of how the Wealth Accelerator works and then we’ll dove into some of the details.
Rod: Yeah, Buck used a keyword earlier. This is a form of premium finance. In other words, we have the money that we’re putting into the policy. So in this case, in year one, we put our contribution to the policy. And it’s not that you couldn’t continue putting in for future years, but even if you only did put in that first year, essentially what we’re doing next is we’re creating this link between the policy and the bank.
So that’s number one. We can create that checkbook access to whatever equity we have in the account, but more importantly, because we’re going to use loans from the bank to now fund future years inside of the policy. So we continue to flow money into it. You’re not you’re no longer doing that out of your pocket. We’re doing that all through loans from the bank.
And over time, we can build and do additional policies. But to what end person mentioned in letting you go? The number one is to create a stream of tax free income in retirement. And then secondly, we have this death benefit. To the extent that you don’t tap into the income, you can have more that’s going to your heirs.
Creating an estate planning benefit tax free. We actually will be putting some numbers out here in a minute to clarify what’s happening here. Probably that gives people a good concept for how the flow works.
Christian: Let’s talk about the the comparison of the Wealth Accelerator versus the 7% return. Just to give people some context first and a starting point.
Rod: Yeah, that’s especially as it relates to creating this feature retirement income. A lot of people are most familiar with using traditional retirement accounts or using, at the very least, the stock market to do that. And so that’s a common question. Well, how does this compare against that? So here we’re using wealth, etc., against a 7% return and this is going to be 7% net net of costs, net of taxes, all of that done you get getting the 7% net return. And for this example, we’re going to have a 46 year old business owner who has 500,000 that they’re setting aside into the Wealth Accelerator or on the other hand, into investment portfolio that produces the 7% return. And fast forward, how does that turn out in terms of that income? So what the accelerator generates from the age 60 to age 90, $17 million of income, and when they pass away, there’s an additional 15 and a half million dollars of death benefit that passes on to their heirs again, income tax free. Whereas on the 7% return side, what we want to do is say, okay, we take start taking income at age 60 and and kind of matching what we’re trying to take out of the Wealth Accelerator problem as we run out of money at age 67. So we ended up taking out about 1.24 million from the traditional portfolio of investment. And again, because we ran out of money, there’s no death benefit to add to it.
Christian: So the question I think people are going to have is because these numbers are a little ridiculous, right? Like we probably should have gone and done it against like a ten or 15% return because the difference is just like ridiculous, an eye popping like book said. So the question then, and this is what we need to get into is how the heck do we do that right.
Yeah, so let’s talk about it. Really, the difference isn’t any it’s not any different than what we’re doing with real estate. It’s exactly the same concept, right? We’re just using leverage to accentuate or amplify what we’re doing. So all we need to do in this in this strategy is create a really simple what we call spread an arbitrage, a spread between the interest that we’re earning in the policy and the interest that we’re paying on the loan.
So again, the the part the premiums are coming from the bank. We need to, but we’re paying them an interest rate. We need to make sure that over the long run, that interest rate doesn’t swallow us up. And we are getting an interest, a better straight the policy. Here’s the good news. We have a ton of historical data to suggest that there’s never been a 15 year time frame where we haven’t been able to get at least that 2% spread. So normally we’re doing much better than that. But again, from an economic standpoint, think back on what I mentioned earlier. Life insurance is designed to perform to outperform general interest rates. And over the long term, it won’t have a place if it doesn’t. So just kind of remember that that’s an easy way to think through why? And then Rod’s going to get into more details of how we do it.
Rod: Yes. So let’s hit on more about the leverage. I think this will really help people see how we’re taking in this case, policies that are generating a 5% plus return, but turning it into double digits. Right. How do we do that? Well, again, it’s leverage that does that and pushes toward this future where we produce these tax free income distributions during retirement and ultimately this death benefit.
Well, let’s use just a really simple example the people are very familiar with. Right? You have 500 grand. You want to invest in real estate. You could take that and go buy a piece of real estate, turn it into rental income that starts producing some income for you. Is that what most of people most people we work with do? No. They actually go and take that and leverage it. Go get a loan from the bank. So instead of taking the 500 or buying a single property, they’re buying four properties. So they have their down payment. The 500 represents the down payment, but they went and got a loan for an additional 1.5 million. So you have $2 million worth of real estate out there.
Your portion of that was 25% of it. The other 75% came through the loans. You legit have $2 million worth of real estate out there doing the work for you? Yes. You have to pay the loan on the bank. Absolutely. But the net income that you were able to receive from it is much higher than the income that you would have been able to produce off off of that single $500,000 property. And it’s the same principle that Christian just mentioned. It’s this arbitrage. In other words, we have an asset that is growing over time. We have a loan that we’ve taken to produce that asset. And we have interest that we’re accruing on that loan. But the difference between the two is the spread. Historically, we can very conservatively use a 2% spread in the projections that we use and be very confident that what we’re able to do is, is that we’re better. So over time, the asset is growing, so the interest on the loan is accumulating, but we’re able to out produce the the loan on the interest with what we’re growing in the asset.
Buck: I feel like there’s one other component of this that’s really important. And it’s not just the spread, it’s not just the leverage, but the leverage is actually increased over time. I mean, do you want to talk about that? Because I think that’s a really important element of why this thing ends up, you know, becoming a monster over a period of time because, you know, your first year, your leverage is not very high right? But as you continue down, you know, by year seven, eight, nine, ten, now you’ve essentially taken more leverage every year. Can you explain a little bit how that works?
Christian: So I’ll take this one. So one of the cool things Buck is it’s actually better than that, like traditional premium financing almost always does a ten year funding schedule and then it stops right? Then you exit the loan. In this strategy, because we’re creating a self-contained strategy, there’s every bit as much leverage. So think of it this way. Let’s just say theoretically that I have a let’s just say it’s $1,000,000 a year. I put the first million dollars in Toms that down first time. But what’s unique and different about it is that we’re going to have the bank fund it indefinitely. So each and every year your percentage of leverage increases, but it stays safe and self-contained.
So what we do is we create a net equity account inside the policy that always has a buffer so that it can take if, for example, if the ideal has a down year, we have a significant buffer in there. But again, the concept becomes really powerful and more powerful than traditional premium financing models, primarily because the leverage becomes exponentially larger. But we’re doing it in a unique way. By initially putting that funding in, it creates a safety mechanism that we haven’t been able to get in traditional financing.
Buck: So you have more leverage, but you’re not required to have collateral because in premium finance, some of the higher value leverage in premium finance, you end up having to collateralize some of that. And so you don’t have to do that here. And so, you know, so you can kind of have your cake and eat it, too.
Christian: Yeah, exactly. And that’s really why we like it, right, where we are creating more leverage over time. But by putting in the initial premium or again creating an additional safety mechanism. So like you said, it’s kind of a way to get the best of both worlds with it. So I think the big question that people have been having, as we’ve been talking to them, is the interest rate, the rise of interest in interest rates, and how does that affect the strategy as a whole? How does that affect our policies? And the question then is, does it make sense to implement a strategy like this when the market’s down and interest rates are high?
Rod: The cool thing about this is the with higher interest rates, it affects both sides of the spread. In other words, the kind of return that we can generate inside of these life insurance policies goes higher as interest rates rise. Obviously, the part that people are concerned about is what’s happening on the loan side. But I think it’s critical to understand that that a change in interest rates in this case, the rise in interest rates affects both sides.
The second thing is with these kind of the types of policies we’re using and the insurance companies generally, I think of this as an interest rate reset. If you go back to when interest rates went high previously in the 1980s, that actually created an environment where insurance companies were able to produce large, higher returns for a long period of time.
In other words, they invest in long term types of bonds and notes and things like that that are sensitive to interest rates, but they lock in those kinds of returns. So quite literally, 30, 40, 50 year types of vehicles, they’re still generating higher returns today because of what happened back in the eighties. So as the interest rates are going up now, they’re going to be able to generate a similar type of thing where when the interest rates were low, they didn’t invest in the long term stuff. They would get shorter term stuff. In other words, if they’re going off of a 15% bond, say, in 2017 and they’re going to replace it with a 2% bond, then they’re going to go get a very short term type bond for when for people times like now, when interest rates are now up again and now they’re going to go back and get into some of the longer term stuff.
So it’s going to carry a higher return on these policies, not just in the immediate future, but for a long period of time. Because of that, any time we do a projection, we’ll do a baseline projection based on the 2% spread we talked about a minute ago, but we also do it against a 1980s stress test. We want to know specifically with this person, with them putting this much money in. We’re showing this as the baseline. But in addition to that, what does it look like when we do a stress test?
Buck: Just to be clear that what you’re referring to in 1980 stress tests is a period of essentially very high inflation. Right? That’s what we’re talking about.
Rod: Yeah, very high inflation that pushed interest rates very high as well. And so that’s what people are. They want to know. Right. Okay. So historically in this, the worst case, high interest rate scenario, how did this perform? And what’s interesting is it actually produces long term a better return than our baseline projection. Now, initially, our biggest concern is initially what’s going to happen with that net equity. Do I have enough buffer to take on these these initial years where interest rates are higher and I have a smaller spread or sometimes even a negative spread? In other words, I’m accruing more interest for a time than what I’m able to produce in the growth in my policies and the stress test plays that out. So you can see not only, yes, do we have enough buffer, but but secondly, the higher interest rate just end up long term producing higher returns overall.
Buck: Can you explain why?
Rod: Yeah. So going back to the kind of the way the insurance companies, the return that they’re getting is what translates into number one on the whole life side, the dividend. In other words, it’s a dividend from the insurance companies. They’re producing higher returns in their investments. They’re able to pass that along in the form of higher dividends to to the policyholders. And so if you went back to, you know, late eighties, early nineties, their dividend rates were actually double digits, right? Ten, 11% because of those high interest rates. And it did trail off. But if you go to 2000, they were still producing an eight and a half percent dividend. And then on the other side, the return that the insurance company is getting is what dictates the kind of caps that they can get when they go and buy options on the S&P or whatever index we’re using. And the higher interest rates translating into a higher return for the insurance company translates into a higher budget so they can buy higher caps on the on the market.
Christian: One of the other issues that people talk about with us a lot is the market. Right? And this is kind of a funny one because when the market’s up and we obviously saw that for for a couple of years recently or longer than that, we saw it for a decade. But when the markets are, people say, gosh, I don’t want to got to wait till the market’s low to invest. And ironically, now that the market’s low, people are like, oh, the market’s struggling. Is it is it really a good time to do something? So here’s our philosophy around that. First off, it’s probably not a good idea, especially over a long term strategy to try to time the market. This strategy is meant to produce a spread of about 2%, and if it does that, it’s going to produce the returns that we that we are going to show here.
And again, we have this historical data to suggest that there’s a very, very good chance that it will. So over the long term, don’t try to time the market. But what’s really interesting is if we’re buying the market today, we’re still buying low. So if I could have a choice as to when I when I decided to move into the Wealth Accelerator, certainly it would be at a time when the market’s low so that I have the opportunity to take and capture the upside of it.
The final thing I’ll hit on is just that in addition to the 1980 stress test that Rod talked about, we’re also doing a Great Depression stress test. Now, the Great Depression looks a little bit different, right? So and that’s in that situation, the market was down for many years in a row. I think it was like six or seven. And so what we’re doing is we’re saying market’s a disaster doesn’t perform. It’s it’s not just you know, producing low returns, but negative returns for six, seven years. How does the strategy handle something as intense as that time frame? And so in all of the designs that we put out there, we make sure that it can overcome withstand both the 1980s interest rates, high interest rates, we trust us that.
And then in addition to that, we come and make sure that we can handle if the market has an extended time downturn. Now for clarity, in an ideal market, going up and down is actually pretty advantageous, right? Because I don’t take the the downside, but I do take a good portion of the upside. So market being down and up is great for for IUL, but we do need to be aware if we’re going to have potentially six seven, eight years of down market, we need to make sure that we have enough net equity that the stress tests can be run and it can perform well. Even in those difficult situations. So, Rod, why don’t you take it from here and talk through some of our examples to kind of show the returns that the Wealth Accelerator’s been getting here.
Rod: So on 500,000 a year going into the plan in the first year, it comes from the individual. And then obviously for future years from year two onward, we’re continuing to put 500,000 a year into it, but that’s coming through loans from the bank. And as we do that, then we’re building this cash value inside of the policies and this cash value column represents how that grows over time. So again, the first 500,000 goes in. We get $404,000 worth of cash value in that first year. In year two, another 500,000 goes in. This came coming from the loan from the bank, but 864,000 of cash value, etc. As time goes on, we continue to build the cash value through those contributions. The next thing I want to look at is this net equity, because this represents the the net amount that we have over and above what the loan balance is.
Because in other words, if in year two, we’re going to start using loans to continue to fund the policy, the cash value is going to keep growing, but now we’re going to have this loan balance. So the net equity column represents what our well, what an equity is, what the cash value is above, what the loan balance is that we’re carrying interest in the first few years that that net equity steps down a little bit.
We have those initial costs of the policy. We have the interest that’s accumulating from the loan because we’re not making any payments on that. So the net equity kind of gets to this low point here of of 276,000 in year five, but then you’ll notice it starts increasing from that forward. And what this net equity represents is, well, that’s the liquidity. We can access this on a short term basis like we talked about before. We would basically treat it like an emergency fund. I take the money, but I want to replenish it as quickly as possible. More importantly, though, what it represents is the buffer. In other words, we know there will be times when interest rates are rising. We know there will be times when the market struggles.
Therefore, when we have a smaller spread or even a negative spread. And what this buffer represents is our ability to take those things on, absorb them, and then get to a place where we’re past them and things actually get much better. In other words, markets down. Then what happens? It recovers, right? We participate in that recovery. Interest rates go up. It produces a lot better returns inside of the policies long term. We participate in those those better returns. And so what this equity does is it helps us get past those kind of weather, the storm, so to speak, so we can get past those and then we get to the place where we start taking the income. So in year 14, we’re showing here income coming out starting at about 170,000 year to 100 or the second year, 181,000, etc. It’s an ever increasing amount of income that we’re able to take off of this, partly because of the leverage just as a whole. But but we’re continually taking that. Like I said earlier, we’re continuing to fund the policy for using the financing through the bank, which means that the income just continues to get bigger and bigger by year 20.
We’re at 250. By year 38, we’re a 500,000 of income. So that that income just keeps increasing. Well, let me hit on a couple of really key moments in time on this. First thing I want to focus in on this year ten is where we have this break even point. In other words, we now have in our net equity more than the 500,000 we originally put in.
What’s interesting, though, is, is by the time we get to that point and we’re really building that net equity in bunches every year, if we fast forward and look at year 20 than we have in our net equity 1.4 million. But we’ve also taken almost a million and a half of income. So what’s interesting is that original $500,000 by year 20 turned into basically 3 million. So we’ve six extra that those dollars break even in year ten, six ACST in year 20. And that that just continues to become more and more dramatic as time goes on. The second thing to point out is that our buffer keeps getting bigger even while we’re taking income. So I’m taking income in year 14, I take the hundred 70,000 of income. My net equity is 960,000. But even while I’m continuing to take that income, I we’re basically making that net equity get bigger and bigger every year. Why? Because as our loan balance gets bigger, we’re continuing to fund the policy. We need more cushion, more safety net built into it. And that’s what this does for us. That cushion, that buffer gets bigger every year as a necessity.
Could I have taken more income? Yes, but we choose not to choose to allow that buffer to keep getting bigger so that when hard economic times come that we’re good, right? We can weather that storm and then get past it to where things are going to be really good beyond that.
Christian: Okay. So next, we’re just going to talk about we’re going to take like a snapshot in time to show how we create the return in a singular given year.
Rod: What we did here is we took year 15 of the example we just looked at. What were the values at that point in time? Our total cash value was about 10 million. Our loan balance is about 9 million. Therefore, our net cash value, that net equity column was right around 2 million. So taking that point in time, what we want to do is say, okay, how is the leverage really helping us to do what we’re suggesting it’s doing?
So in this case, we’re going to say, well, what if we saw a 7% increase in our cash value in the growth of our policies for that year, again, in combination with the whole life and our view, oh, very realistic in any given year to produce a 7%. But we’re also saying it’s a 2% spread. Let’s say we have the 5% interest on the loan.
So after 10 million, our 7% growth created 700,000 of growth from our loan. The 5% accrual was a $450,000 in interest on that. So then the question is, can what was the net difference between those two? They produced 708, but I also trade for 50 of of interest. My net growth was 250,000. Well, here’s the deal. If you measure that off of the net cash value, my starting point was a million, but I produced 250,000 of net growth.
With that 2% spread, there is represents a 25% growth in the year with where the policies produced 7%. And we’re not suggesting that’s going to happen every year. We know it’s not. But as a snapshot in time, hopefully that helps people see the real power of, the engine that we’re creating. Once we get that leverage up and going that we can produce pretty significant returns even a year where the where the market was not all that great.
Buck: Yeah. I mean and then 25% of that, you’re projecting that on a 7% growth. We’ve seen markets that will completely rebound into the double digits. Obviously, you’re capped, but you’re seeing the caps potential move up as well. So, you know, if you have like a nine, ten, nine, 10% growth in the S&P, that leverage is going to be even more significant in terms of what it ends up being for the final return.
Christian: Yeah. And I think for me, what makes this really interesting is that and you guys have kind of emphasized this, but even with that small spread, that small arbitrage, which is again just using basic economics, if you can get on board with this idea that life insurance will outperform general interest rates, then it becomes really easy to buy into this idea that if I can create a 2% spread on average, then there’s going to be years when I have a 25, 30 plus percent return.
There’s going to be years when I have a zero, but usually historically what we’ve seen is about seven or eight out of ten or up year and you know, two or three are down. But when we’re when we’re adding that leverage component and the ability to fund it long term, like those combination of things, creates this really predictable way to create long term double digit returns. So that’s kind of the the primary stuff that we had prepared. But is there anything else you want us to hit on?
Buck: No, that’s it. I think if you want to just summarize for us, I mean, net net, what does this mean for the 46 year old guy? Puts in 500 grand once and boom, what happens?
Christian: Well, I would go back to I would go back to the one that we talked about where we’re showing on it 13 and a quarter percent return. And by doing that, as Rod said, you go to we show the 46 year old putting the 500,000 in year 14. We’re starting with we’re getting 170,000 of tax free income. And, you know, as this continues to grow at a rapid pace, five years later, it’s 254,000.
Five years from there, 334. So it’s just a massive tax free income producing, producing machine that also will very highly likely out throughout produce inflation. So I think those are things the couple of things that are important. Let me just do a quick kind of recap of what we talked about and then we’ll close things up if that works for you. But yep. Okay. So some of the key takeaways to think about. First off, as we talked about, it’s a great way to produce a predictable double digit return. And again, the reason we don’t use that word lightly like we’ve had to do a significant amount of due diligence to feel comfortable saying that we can actually create this on a predictable, ongoing basis.
Obviously, one of the real huge benefits is that when we’re bringing this money out, it’s tax free, which is powerful from the from in terms of the income I’m taking right then. But it’s also powerful because it negates or potentially helps me plan for other potential tax situations. So having that money come out of tax free is really significant.
One of the things we love about it is that it doesn’t have to be a one time thing. You could stack it with multiple policies. We didn’t talk a lot about that, but I could go in and say, Hey, I don’t have $1,000,000 today, but I do have 100,000 and I want to get a million in this over the next ten years. You could stick in 100,000 and do the same use the same concept year after year and buy stacking those policies. It’s a really great way to produce massive tax free income because each one of those policies stands alone and will create that ongoing leverage that we’ve talked about.
Buck: That’s kind of nice because in some other policies with premium finance, you do have, you know, you do you are committing to a certain amount per year. And in this I mean, if you don’t want to do it, you have a bad year, you don’t have to do anything.
Christian: Yes, that’s a really great point. Right. I can just leave it alone. If I don’t have the if I don’t have the cash or whatever’s happening, I can just decide I’m not going to make a contribution. They’re not going to start a new policy, even if that was my original intention. I think that’s a really good point right now where there’s a little bit less opportunities for investments, especially, you know, we’ve we’ve had these incredible years the last ten years and especially in real estate And while we hope that those kind of returns continue, there’s not as many places to just easily go and find them. I know, Bulk, you do a good job of getting people opportunities to produce big returns, but right now it’s a good place to put money because if you have enacted money on the sideline, this ends up being a really great way to do something similar.
Now, obviously it’s very different than real estate in some ways, but in terms of the long term value and some of the returns, there’s some significant similarities between the two. And then finally, I talk about this all the time. I love the fact that the Wealth Accelerator does not require outside collateral. You don’t have to be worried about, you know, having $1,000,000 to turn into 2 million that needs to be held against the policy. Everything is completely self-contained. And again, what we found is not only does that make it safer, but it actually is creating more power, more because of the combination of that and taking loans indefinitely so that we can just continue to ramp up the leverage while still doing it safely. Okay. But that’s kind of a recap of, I think, the things we’ve talked about.
Buck: Yeah. I mean, I think this is a if people want to learn more, obviously go to wealth formula bank income and you can reach out to rating Christian from there. Also obviously, you know, watch this webinar over it is somewhat complicated and perhaps the best way to really understand it is to make an appointment with Ron and Christian.
But I do think to your point there, there isn’t a lot right now in terms of certainly in real estate, we have not had an acquisition since May, which is, as you know, still a long time for us when you’re doing probably one acquisition per month for a few years and there’s a reason for that. So I think, you know, there is this concern. You just leave cash in one place, you know, in the bank without doing anything to it. Then then, you know, you’re you’re going to lose buying power. That’s a way of guaranteeing loss of of capital. Of course, I’m, you know, generally not like a huge stock market guy. But what I do like about this is there’s some guardrails around it, caps, floors, and then the leverage component.
So for somebody who’s not necessarily into, you know, the whole stock market thing, but you want exposure to it and you want to magnify those gains. And this is a potentially, you know, good way of doing that. So that’s that’s pretty much all I have. But Ron and Christian, thank you very much for your time as usual. And we’re excited to see what you guys do next.
Christian: Thanks, Buck.
Buck: We’ll be right back.