A fail-proof way to creating wealth over time is by accumulating assets. To make clear, an asset can be many different things. For the purposes of this blog post, I’m going to focus on financial assets (versus intellectual assets like patents and professional skills that can be turned into various financial assets.) Specifically, I’m going to focus on Real Estate as an asset class and how it relates to Whole Life insurance policies as another asset class.
Understanding Assets versus Liabilities
This one financial concept is so simple, yet so powerful that doing this alone will build wealth over your lifetime.
Assets are things that maintain their value or increase in value. Liabilities are things that go down in value and many times disappears altogether.
This begs the question: What are the best assets to accumulate?
Owning real estate property has been one of the most popular and successful asset classes for thousands of years. In fact, most of the wealth created in the United States is in the form of real estate owned.
Let’s look at what makes owning real estate property so appealing and effective in creating wealth.
9 Benefits of Owning Real Estate
Control: real estate is property secured by a legal and binding contract between two parties. Once ownership is established, ownership rights are exclusive and protected by contract law.
Income: rental property can provide a steady source of income while you build equity and the property (ideally) appreciates.
Appreciation: Real estate historically has appreciated over time proving to be a great asset to hedge against inflation but owning real estate is subject to the ups and down of the business cycle and economic uncertainties. (Please note inflation is the creation of additional money which reduces the value of existing money in circulation-see book recommendation below to better understand the root cause of inflation).
Scarcity: Mark Twain said it best, “Buy land, there not making anymore.”
Leverage: real estate property can be used as collateral for loans. Loan proceeds can be used to purchase other appreciating assets like more real estate. Qualifying for a mortgage these days might literally require an arm and a leg though… acquiring a loan these days is incredibly challenging.
Use: Every person and business entity require a place to eat, sleep, and/or work. Just remember: location, location, location!
Financing: Real estate property is most commonly purchased with a down payment with the remainder bank financed making it possible to control valuable real estate with small amounts of capital.
Liquidity: Real estate is generally an illiquid asset unless you sell or refinance. See comment above about acquiring a loan. Home Equity Lines of Credit are recommended for liquidity purposes.
Tax Advantages:
a. Primary residences can be sold without having to pay taxes on the first $250,000/$500,000 (single/married couple) of capital gains when the property has been lived in by the owner for 2 out of the past 5 years.
b. 1031 exchanges are allowed between like properties (for example, investment property to investment property). Exchanging like properties avoids capital gains.
c. Subsidized debt: mortgage debt can be deductible or written off as an expense.
d. Depreciation: “The ability to depreciate a rental property is one of the many attractive benefits of owning rental real estate. The depreciation deduction reduces the rental income subject to taxation which increases the after-tax rate of return on the rental property. Think of the depreciation deduction as an annual allowance for the wear, tear and deterioration of a rental property. The IRS provides a uniform way to deduct that wear, tear, and deterioration from the rental income received each year.”
Read more: How Depreciation Works on a Rental Property | Investopedia https://www.investopedia.com/advisor-network/articles/how-depreciation-works-rental-property/#ixzz5C6MDg56s
Now let’s look at Whole Life insurance policies as an asset class to see how well the “Real Estate is like Whole Life” analogy holds.
9 Benefits of Owning Infinite Banking designed Whole Life
Control: Whole Life contracts are secured by a legal and binding contract between two parties. Once ownership is established, ownership rights are exclusive and protected by contract law.
Income: Whole Life contracts can create income in 2 ways:
a. via tax-free policy loans if policies are classified as a Non-Modified Endowment Contract (Non-MEC). An authorized Infinite Banking advisor can properly design a non-MEC Whole Life contract. Note: policy loans are subtracted from the death benefit at the insured’s death with the remainder transferring income tax-free to beneficiaries.
b. via annuitization where the insurance companies provide an income for life in exchange for the cash values. The gains from the contract are taxed as ordinary income.
Appreciation: Whole Life policies are considered a non-correlated asset class. They provide contractually guaranteed cash value growth every year regardless of stock market, real estate, or economic downturns. Whole Life contracts also can earn dividends if the contracts are with mutually participating life insurance companies. For this reason, Whole Life contracts have no down years and the cash values and death benefit in an Infinite Banking designed Whole Life policy maintain their value over time.
Scarcity: Not every individual is insurable due to health reasons. Furthermore, every person has a Human Live Value meaning each person has a limit to how much life insurance can be owned on their life. Advice: buy it when you are as young and healthy possible and make sure you own the right type of Whole Life policies designed to maximize the cash values of the policies. Learn more about Infinite Banking designed Whole Life policies by visiting: http://www.CashValueBanking.com.
Leverage: Whole Life contracts build equity called Cash Values. Cash values are the collateral used for policy loans. Policy loan proceeds can be leveraged to purchase other appreciating assets like real estate. This gives Whole Life a multiplier effect like Real Estate but without the short-term ups and downs when the economy experiences a boom or collapse. (Austrian economists refer to this boom/collapse cycle as the business cycle. Learn about Austrian economics at http://www.mises.org).
Use: Most people buy term life insurance to protect against loss of income in the event of premature death. For Infinite Banking purposes, the objective is to build tax-favored cash values in order to have liquidity, use, and control of our money.
To simplify: how many times does a person die? Once. How many times does a person need access to capital? All the time.
That’s why we practice Infinite Banking to grow wealth safely and without unnecessary risks. Infinite Banking designed Whole Life policies give policyholders the ability to multiply their wealth in two places at the same time and do so safely. Refer back to the previous point on Leverage.Financing: Whole Life contracts can be purchased with financing. This is referred to as Premium Financing and is limited to individuals that generally have a 7 figure income and a net worth of $10 million or more. Financed real estate is by far a more accessible option for the average American.
Liquidity: Whole Life contracts are ultra-liquid and act as a personal line of credit using the Cash Values as collateral. Loan repayment schedule is entirely determined by the policyholder and loans require no application or credit check. Funds can be received typically in 3-5 business days.
Tax Advantages: According to the IRS tax code section 7702, cash values grow tax-deferred. Withdrawals of contributions are non-taxable since contributions are all after-tax. Policy loans are tax-free. The death benefit is income tax-free as well.
1035 exchanges in life insurance are like 1031 exchanges in real estate. With a 1035 exchange, cash values can be moved to another permanent life insurance policy without tax ramifications.
Additional notes: a life insurance death benefit automatically bypasses probate and depending on current estate tax laws, can be estate tax-free for estates with less than $14.5/$29 million for individual/married couples.
In summary, Whole Life as an asset class bears a very similar likeness to owning Real Estate. This is a very good thing because owning a Whole Life policy helps to diversify a portfolio of assets while reducing volatility and increasing liquidity. Both asset classes are great for using leverage to multiply wealth and also have tax advantages that make it unique compared to more traditional assets like mutual funds, stocks, and 401k/IRAs.
Utilizing both real estate and whole life assets together strategically is also a phenomenal way to build wealth because as an individual acquires more properties, it becomes increasingly more difficult to qualify for loans. Having Whole Life policies with large cash values allows investors to be the source of their financing and eliminates the need of having to work with a bank. That’s a win-win!
To learn more about Infinite Banking so you can start financing your own real estate purchases, visit http://www.CashValueBanking.com or request a time to connect with me here: wwwvcita.com/v/john.montoya.
Additional Notes
(Due to the quirks of formatting I had to move these paragrapsh here in order to make this blog post more visually pleasing on Steemit. I'm still learning how to use Steemit.)
Dividends from Whole Life contracts are not guaranteed though have been paid every year going back 100+ years from all the companies I represent as an Infinite Banking authorized advisor. Also, stock-based life insurance companies pay dividends to shareholders of the company stock which is why you should have a Whole Life contract from a mutual life insurance company.
Since policy loans have no market volatility and act as a personal line of credit, availability to cash values via policy loans can never be turned down or “frozen” like with a Home Equity Line of Credit (HELOC). Real estate owners felt the full impact between 2007-2009 when banks froze home equity lines of credit and made qualifying for them incredibly burdensome. There are no such liquidity issues when requesting a policy loan from a Whole Life contract.