In today’s episode, we go through a CLIENT ROADMAP, designed to show how an actual client can use Dynamic Banking With a HELOC to Fund an Infinite Banking Plan in Eugene.
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Hi, I’m James Barber, your Oregon Cash Flow Pro.
Today we’re going to be going over a case study for a specific client of mine. We’re going to look at her infinite banking policy and how she’s going to fund the infinite banking policy through a dynamic banking plan.
Oregon Cash Flow Pro offers free money management advice to help you take control of your finances. And now here is your host, personal finance enthusiast and licensed insurance broker, James Barber.
I’m making this video for her, but we’re sharing it with you in case you can find value in it and utilizing the concepts that we’re talking about here, in order to help maximize your cash flow.
Now, she’ll be able to use this video to be able to watch it over and over and get a good grasp of the plan that we have in place. And she’ll also be able to share it with her loved ones so that they can see what she’s doing.
So, we have a 67 year old female and her current assets, she has about $381,000 in assets. That’s with two houses.
She’s got current life insurance, which is $250,000 worth of term insurance and that’s going to expire in 5 years. Now, her health is at a situation where she anticipates living at least 5 years and likely well beyond those 5 years. So, when we sat down to talk about this, we had to look at replacing this term insurance with permanent insurance. This was one of the main reasons we got together to talk about this, along with infinite banking. She really liked the idea, when we had talked about it, of having a better place to store the equity in her assets.
So, one of the things that we’re talking about doing here is transferring the equity that she has in her assets here, into, or at least part of them, into an infinite banking policy, which gives her a substantial bump in death benefit that will be available tax-free to her heirs.
Now, the appeal to this is, it’s (her equity is) currently locked up in two houses that she owns. But if she were to pass away, her son, who is the likely heir, won’t necessarily want to live in or own those houses. So, what can we do about that?
We can transfer the equity from those houses into a life insurance policy, where it multiplies into a larger death benefit, so the heir ends up getting the death benefit very quickly after her passing, and tax-free. He will then have time to deal with the houses if he wants to.
So, if we transferred some of the equity from the house, that means there is going to be a loan on that house. He will either be able to sell the house to pay off the loan and have the excess funds, in addition to the death benefit that he got, or, if the house isn’t worth it and they’ve pulled out all the equity, maybe the market dropped, whatever the case may be, he can just let it go back to the bank. If that’s what they want to do, they can just auction it off to cover the funds. There’s a lot of different possibilities of what they can do other than having a house that they can move into or sell, and not knowing how long that might take.
So, what we were looking at was an infinite banking policy with a $381,000 death benefit, ok? The amount of the premiums to get us there would be a base premium, base premium, of $2,900 per year. With the ability to put in extra, by paid up additions (PUA), of $26,000 per year. So, approximately $29,000 would be the most that she could put into the policy each year. Now, remember, these infinite banking policies are specially designed, high cash value, whole life insurance policies. So, this death benefit is going to be there when she passes away… eventually. Not like the term insurance, which is going to be gone in five years. Because she’s 67 years old, it limits what we can do with an infinite banking policy. It’s not going to be as efficient as if she was younger. Mainly because at age 67, she’s limited to a standard, non-tobacco health rating. While our normal infinite banking policies we can break even in year 4 or 5, for her it’s going to be year 6 or 7.
We’re looking at a break even year 6-7. Now, break even, that means there’s more cash value in the policy than you’ve paid in premiums. This was the whole idea behind transferring the equity into this. So, as she starts to transfer $29,000 per year into this policy, she’s going to immediately have a $381,000 death benefit. After she breaks even, that death benefit is going to continue to grow.
So, she’s going to have about $180,000 into the policy at that point, but the death benefit is going to start climbing above $381k. Eventually, her heir is going to get higher than $381k, and in the meantime she has access to that cash value to do whatever she wants to do. Now, if she accesses that cash value, it’s going to reduce the amount of the death benefit.
Remember we access cash value, within an infinite banking policy, by taking a policy loan from the insurance company. That policy loan goes against the death benefit. So, it reduces the death benefit. If she has $180k in cash value and she wants to pull out $100k, her death benefit is $381k, if she gets a loan for $100k out of the policy, her death benefit will now be $281k. Because that death benefit will pay off the loan, in the event of her passing.
Now, how do we make this work? She has an income of about $36k per year. And her cash flow, the excess cash that she ends up with each month after she pays her bills, is about $750. So, her cash flow is about $750 per month.
So, how is she going to get, in a normal situation, she would have about $9k per year just in cash flow with which to purchase life insurance, to put into her policy. But we want to put in about $29k a year. How are we going to do that?
We’re going to do that with our dynamic banking plan. Now, utilizing this HELOC, she’s going to be able to transfer some of her equity in her homes into the life insurance policy. So, she currently has a HELOC that has the available credit of about $100k and it’s at 5% interest.
She currently has about a $20k balance. So, we can transfer $80k into another product, assuming she can make the payments on $100k loan. Now, we’re not actually looking to do that. We’re going to take it a little bit slower. We’re not going to do this all at once, but we know that dynamic banking, we end up putting all of our income into the home equity line of credit each month to bring our balance down. So, each month she’s going to put about $3k into the HELOC. She’s going to pay her bills from the HELOC. This will leave $750 extra into the HELOC each month, assuming she doesn’t have any extra expenses in any particular month.
So, at each anniversary of her infinite banking policy, she’s going to pay $29,000 into her infinite banking policy. Her extra cash flow is about $9k a year. That means her HELOC is going to go up by about $20k each year.
Let me show you the plan on how we anticipate this working. Currently her HELOC is 5%. Now, this is a variable rate, but we expect for rates to stay low for awhile. As long as they stay low, she’s going to keep growing this balance in the HELOC. As she pays her premiums into the infinite banking policy, her equity in that, her cash value, is going to be going up.
So, let’s skip ahead to year 4. Year 4, she’s going to have put into the policy almost $120k, right at $116k. Year 4, paid in premiums. Her home equity line of credit goes up by $20k each year, so she’s going to be right at her limit. She’s going to be at $100k. So, she’s got $100k balance in her HELOC. She’s got $116k that she paid in premiums. She’s got cash value in the policy of about $110k.
Now, she has the opportunity to take loans out of the life insurance policy if she wants to, but currently the rates to take a loan out of the life insurance policy is 6%. It’s cheaper to leave the money in the HELOC at 5%. So, we’ve been leaving the cash value in the life insurance policy knowing that she always has access to this cash if it’s needed.
Now that her balance is maxed out in the HELOC, she still has 3 more years of premium payments that she wants to pay. So, one of the ways that we can do that is we can start by using the cash value in the policy to pay the premiums.
Or, we can use the cash value to pay down the HELOC and use the HELOC to pay the premiums. It works out the same either way we look at it. But, ultimately, what she ends up with is either cash available in the life insurance policy, cash available in the HELOC, and a substantial death benefit that’s going to go to her heirs, that she would not have otherwise had, because she only had term insurance.
Now, in four years she would have still had the term insurance. We’re not anticipating her passing away. If we were, we would probably just keep the term insurance. But, since this is one of those things that you just don’t know when it’s going to happen, we’ve gotta play the long game. We have to anticipate that she’s going to out live that term insurance.
Now, if she passes away, her heir gets $381k death benefit. He inherits a couple of houses that are worth about $381k, maybe a bit more by then. With a $100k loan on the houses. Ultimately, if he has to sell the houses, he could end up with $280k instead of $381k, but he’ll also have a $381k death benefit. So, he’s going to end up with nearly $700k at the end of this. And the cost to do that is not much. She can easily make it happen by utilizing her dynamic banking plan and building the cash value in her infinite banking policy.
Now, of course, if she needs to use the cash value in this, it reduces the death benefit, but at the end of the day the heir ends up in a much better position, when he has the house and the increased death benefit. And in the meantime, she has a growing asset. And by utilizing dynamic banking, when we do paycheck parking, when she flows all of her income through the HELOC, we don’t have to worry about that minimum payment on the HELOC effecting her finances.
Now, this $750 a month cash flow, that’s with her currently paying a minimum payment on that HELOC. So her cash flow will actually be a little bit higher when we don’t have to worry about that payment.
So, this was the ideal situation with what we were going to set up in order to offset the equity in her assets, transfer that equity to a death benefit and really maximize her cash flow. Unfortunately, we found out this morning that the life insurance company is not going to offer her $381k death benefit. The underwriter, they look at net worth. They look at income and they look at age, among other things and they make a determination on how much life insurance you can qualify for. In this case, they decided $155,000 is all that they were willing to put forth, because of her age.
Now we’ve got a more complicated decision to make. So, while it does throw a wrench in the plan, it also makes things a little bit easier, as far as accomplishing funding the premiums for a number of years. The only down side is the heir does not get the benefit of a larger death benefit like we were hoping.
So, we have an offer of $155k death benefit. We still have a break even year between year 6-7. The base premium is now $1,400. Paid up additions we can put in up to $11,300, for a total of about $12,700 each year. So, we went from putting in $29k a year, which was our hopeful plan, to $12,700 is the reality of what we’re going to do.
She still has the same income. Still has the same cash flow. Still has the same assets. She still has the $250k term insurance. So we talked about this and because she still sees the need for having insurance after this term insurance expires, she still wants to go forward with the plan of getting $155k death benefit.
Now, we were hoping to replace at least all of the $250k in term. That was not possible at this point in time. So, we will revisit it down the road. We’ll see if she can get more life insurance from some other carrier if that’s possible, but first we’re going to secure this one and we’ll deal with the rest after that.
She still has the HELOC. Her income is still going to flow through the HELOC. But in this case, we’re going to pay $12,700 into the infinite banking policy. She’s still going to have about $9k cash flow each year. Which means her HELOC is actually only going to go up by about $4,000 each year.
So, by year 4, she’s only going to have about $36k into the HELOC. Year 4 in the infinite banking policy, she will have put in about $50k and her cash value is going to be about $47k. Haven’t quite hit the break even period. It’s going to get real close. Over the next couple of years she’s going to hit the break even period.
Now, clearly, with not maxing out this HELOC, it makes it a lot easier to keep putting in right up to the MEC on this infinite banking policy as many years as possible.
So, that’s the plan. She’s going to put $12,700 into her infinite banking policy each anniversary.She’s going to pay down the HELOC with all of her extra cash flow, as she flows all of her income through the HELOC. Her cash value is going to grow in her infinite banking policy and ultimately, when she does pass away, she’s going to have at least $155k death benefit.
After we hit our break even period, this death benefit is going to start to go up as she continues putting in more and more premiums. Now, this was just a brief overview on how we’re going to fund our infinite banking policy with the dynamic banking plan.
If you want more information on those, we’ve got our dynamic banking videos here, our infinite banking videos here. Make sure to check those out! And if you have any questions, put them in the comment section below. I’m happy to answer them.
And if you found value in today’s video, be sure to hit the like button and subscribe, if you want to follow along as we continue to discuss infinite banking and dynamic banking.