In today’s episode, we go over three Infinite Banking comparisons for a 68 y/o male, using Guardian’s L95 product. We look at 7 & 10 year funding scenarios, guaranteed and non-guaranteed values.
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Welcome to Oregon Cash Flow Pro. My name is James Barber and I am here to help you maximize your cash flow!
As you know, one of the ways we do that is with Infinite Banking. We use that to help grow our wealth, and in today’s episode we are going to go over a couple of illustrations.
This is for a 68 year old male, who is interested in doing 7 to 10 years of premium payments and then shut those off (we call that reduced paid-up), and I am going to go over the spreadsheet that I am sending him, with a few different options on how we can design that in order to maximize his cash flow. So stick around.
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.
Here’s what we’re looking at today. We’ve got a 68 year old male and you can see our columns here. We’ve got the year of the policy. We’ve got his age. We have our first illustration, which is Guardian L95. We’re going to do a reduced paid-up after 7 years. Our base premium is going to be $2,775 and we are going to pay 10 times that for 7 years before we turn it into a reduced paid up. Actually, I can squeeze a little bit more out of it, we’re going to be doing $30,000 a year.
What he was wanting to do — the two scenarios that he gave me was 7 years and 10 years paying $30,000 each year and then turning it into a reduced paid-up after that. The third scenario is my suggestion on: so let’s look and see how this looks as well and see what you think.
So, like I said, his goal was $30,000 a year annual premium. I can squeeze that base premium in this first illustration down to $2,775. Second illustration is going to be Guardian… another L95 policy, with a $3,600 base premium. This is to allow for 10 years of premium payments at $30,000.
And then, our third illustration is going to be an L95, this is with a $3,910 base premium. This is 10 times that premium over 7 years, and then a reduced paid up. But, instead of putting in $30,000 a year, we’re going to put in $43,000 a year. And this is essentially the same amount of money as what he would have put in over 10 years in scenario number 2. It’s $1,000 extra dollars over all, but we’re just condensing it. Instead of spreading out that insurance cost over 10 years, we’re going to do it over 7 and we’re just going to increase the amount of premiums that we’re going to pay for those first 7 years.
I will go into more on that in a few minutes.
A few more columns that I created for this spreadsheet. We’ve got the comparisons between the 3 different illustrations. You can see percentage wise our cash value compared to how much we’ve put out, and I did this again in two different types. One is a percentage and one is a straight dollar amount.
Now, if you watched my last video, you’ll recognize these columns and I told you I’d probably fix this because I had these numbers as positives and these numbers as negatives, and it was kind of confusing because I was talking about the positive numbers being not good and the negative numbers being good, so I flipped it around. Now we have instead, our outlay compared to our cash value and we’re going to be looking at it how we should be looking at it, with the negative numbers meaning bad and the positive numbers meaning good. So you can see our break even periods here where it goes from red to green. From negative to positive.
And also, coming up in this scenario, we’ve got our guaranteed value. So that first set was non-guaranteed values. He was also interested in “what’s the worst case scenario here”. So, that’s where we go to our guaranteed values and I will share those with you. This is for our first illustration; our second illustration; our third illustration. And then I put in the comparison again, where we can see percentage wise how they compare with cash value to cash that we’ve put into the policy — premiums paid.
So I am going to go over a quick overview on what all of these numbers mean; the highlighted squares that I’ve put into them; and I am going to try to keep this video not as long as they’ve been when we get into these number details. Because really, this spreadsheet is for the client but I want to give you an idea of what’s possible out there and how little tweaks can make a difference on how we design these things.
Not all of you are going to be 68 year old males out there looking to do this type of policy, but these numbers — the last one I did which was similar to this was a 35 year old male — and the percentages work out very similarly. The death benefit is what changes quite a bit. So let’s look into this.
With the first scenario, we’ve got a $350,000 death benefit. He’s going to put in $30,000 a year for 7 years. That gives us $210,000 cash outlay overall. We have a break even period in year 6, where we just pass, our cash value, over what we’ve paid in in premiums. Then we turn it into a reduced paid-up.
You’ll notice right here where our death benefit goes from $350,000 down to $331,000. So we get that small drop because what we’re doing is, we’re turning off premiums on this policy and we’re telling the company we are no longer going to put in additional premiums that would buy more death benefit. So, we’re going to reduce the death benefit to the amount that we’ve already paid up. So, whatever the cash value is in the policy at the time, that’s what the death benefit buys. In this case, it’s going to buy us $331,000.
Now from there, you can still continue to use the policy as your infinite bank. You’ll still be able to borrow against the cash value and pay it back just like you did when you were paying premiums. The only difference is you’re not able to add new premiums into the policy. So, this is not a decision that you have to make now as for when you turn it into a reduced paid-up policy. It’s not something that happens automatically, but it is something that you will have to decide after year 7. We can reassess this on a regular basis to see how it’s performing and if you want to continue putting in more premiums, because this death benefit could continue to increase after $350,000 and continue to go up if you wanted to keep paying more premiums into the policy.
The reason we look at turning it into a reduced paid-up, is because it streamlines the policy. If I hop over here really quick to these results, when I say it streamlines the policy, what happens is, these numbers compared to a policy that was not a reduced paid-up, these numbers go down a lot quicker with the reduced paid-up. This is a measure of efficiency of our policy.
In this case, we have our 7 year of payments and we have our 10 years of payments. You can see we got to our break even period a lot quicker. We got to it in year 6 as compared to year 9. So that’s kind of a big difference and you can see the numbers just get better. We’ve got 83% compared to 90 compared to 83. And remember these are our two 7 year paid-up policies. So that’s what turning off the premiums does, as soon as we’re done paying in ten times the base premium. We want to maximize the efficiency of the policy and that’s how we do that.
Looking at the next illustration. Now we’ve got $30,000 a year in for 10 years which means we’re going to pay a total of $300,000. Our break even period, however, goes to year 9. Now, if we’ve been paying in 10 times the base premium, why does our break even period get extended from year 6 to 9, wouldn’t it be the same? Well, no.
Take a look here. In order for me to be able to design this to absorb $300,000 in premiums for 10 years, we had to increase the death benefit. In order to increase the death benefit, I had to increase the base premium. So, you’ll see here we had a $2,775 base premium, now we have a $3,600 base premium, but we’re still paying in the same amount each year. So when our base premium goes up, what does that mean? It means our insurance costs go up. When our overall death benefit goes up, what does that mean? It means our insurance costs also go up.
Remember, we blend term insurance with whole life insurance. Whole life being the base premium and our term insurance being the paid-up additions, the remaining amount that gets us up to that full death benefit.
Normally, that extra cost of insurance is really inexpensive because term insurance is really inexpensive. In this case, it’s still less expensive than whole life, but because he is 68 years old, the cost of annual renewable term insurance is not so cheap these days. As you start to get older, that cost of annual renewable term starts to go up, especially when you get over age 65 or so. It really starts to go up at age 75.
So, it’s a good idea in this case that we cut this off as soon as we can. The goal being we burn off that term insurance as soon as possible because those costs are going up on that term insurance every year. So, when we extend it from 7 years to 10 years, and we have to raise that base premium, and we have to raise the overall death benefit, it hurts our break even; it hurts our overall cash value, even though the policy is still not a bad looking policy.
If I was to only show you this policy and the results, you might think, “oh, that’s okay, I’d like that,” but when we put it in comparison to an optimally designed policy, now it doesn’t quite look as well. One thing you’ll notice is because we put more money into the policy, we have a lot more cash value growth. We’re at now — let’s look at age 85 — we have $297,000 into the policy compared to $393,000 into the policy. Now, growth wise, it’s not because it grew a whole bunch, but it ‘s because you were able to put a bunch more money into the policy. You put an extra $90,000 into the policy. Cash growth wise, it hasn’t helped you out much and if we look at the overall results and get down here to age 100, you can see we’ve got $445,000 in cash value when we put in $210,000 and in this case we put the $300,000 in and we have $589,000. So we ended up with an extra $140,000, almost $145,000, but we had to put in an extra $90,000 to get there. And we can definitely do better than that.
How can we do that? How can we do better? By getting in all this money, but the client only has the ability to put in $30,000 a year. Let me show you.
Our third option. We’ve got an increased base premium. I’ve increased the base premium a bit and I had to increase the death benefit a bit, so now we’re at $3,910 base premium, our death benefit is now up to $502,450. What this allows me to do is it allows me to put a lot more money in over those first 7 years. So I am able to put in the same amount that I could have put in over 10 years, but I am going to do it over 7 years. That brings my break even period back to year 6. And, if we look at how this ends up, even though we put in almost the same amount (we put in $1,000 extra dollars in this scenario), we end up with an extra $50,000 in cash value by age 100. That’s the difference when we optimize for this 7 year pay period. We’re not paying 3 extra years for additional term insurance. In this case we’re burning it off each year. We’re burning it off faster.
Now, if the client only has the ability to pay $30,000 a year, then why show him $43,000 a year? It’s not going to do him any good. Here’s what I’m thinking. He has the ability to put this money in quickly. More quickly than $30,000 and end up with a lot more money at the end.
So, what can we do to make that happen? This person makes $110,000 a year. So, in my mind, I think the $30,000 that he was planning on putting in is basically extra money.
In the first year I know he has access to a home equity line of credit. If he borrows 13 extra thousand from that home equity line of credit to make that extra $13,000, from $30,000 to $43,000, and then works on paying that back — so ideally, let me backup just a little bit — talking to the client, he was planning on borrowing against this policy in the first couple years in order to make some home improvements and then he was going to be paying it back. From then on he was planning on just growing the cash value, using it here and there as needed. So I am using that when I make this suggestion. I’m taking this into account when I make this suggestion.
If, instead of just that $30,000, if he borrows an additional $13,000 in the first year from that home equity line of credit and then in the next few years if he only has that $13,000 extra, he could borrow from the policy — he could borrow this $13,000 from the policy. Now, if you borrow from the policy, if he puts in $30,000, borrows $13,000 out, he is only going to pay a 6% interest rate on that $13,000. Let’s assume he’s paying 6% interest on the home equity line of credit as well, just so I can make these numbers easy for each year.
So, if we have $13,000 in the first year, that’s $780 per year in interest at 6% interest. So in the first year that would add an extra $780 in year one. In year two, we are going to have another $13,000 that we’re going to borrow. We’re going to have $780 for the $13,000 that we’re going to borrow in the second year. $780 — year two — plus another $780 on the first one. This is assuming he hasn’t paid this loan back. We’re going to assume he has not paid any of this loan back. So this would be “worst case scenario.”
Year 3 — now he has an extra $780 on 3 amounts of $13,000, so we’re going to say, plus $780 x3 Yr 3 interest. Then we’re going to do year 4 and just go all 7 years. Let’s say he had to borrow it for all 7 years and then he starts to pay it back. Plus $780 x 4 Yr4; plus $780 x5 Yr 5, and plus $780 x6 Yr 6, plus $780 x 7 Yr 7. So that equals $21,840 in interest over the course of 7 years if he doesn’t pay any of it back.
How does this compare? When we look at year 7 he’s got $308,000 in the policy compared to $205,000 in the policy in this other scenario. So he’s got well more – well greater than – the $21,000 in interest that it could cost. Now realistically he should be able to start paying some of these loans back or maybe some of the interest earlier than year 7, but if he starts paying them back — if he puts this $30,000 in and he pays back these loans, $13,000 over 7 years is $91,000.
So he can pay back all of those loans in these 3 years instead of putting in these premiums. By age 100 he’s got an extra $50,000 in the policy in cash value and death benefit. He also ends up with a higher death benefit throughout every point during the life of this policy.
So, that was just an option that I wanted to throw out there, because I think it makes more sense to consider how can you put the money into it early as opposed to spreading it out over ten years. How can you get it all squeezed in in 7 years instead of spreading it out over 10 years.
Now, let’s look at the percentages on this thing because what you are going to see is they are very similar. You’ll see these percentages are very similar for our 7 year policies. Our payback, our break even periods happen in the same year. The difference is .05%. I mean it is very minor in the amount of growth. The best growth is in this policy design by squeezing that ten years into it. And that mostly has to do with how I’m limited in how much insurance I can make available in this first policy because that base premium is so low. So that’s that minor discrepancy between the two. Theoretically they should be almost the same as far as percentages go. But it is slightly more efficient with the way I am able to design them because of those reasons.
Now you can see the difference here. We’ve got 6% more efficiency in year one between the 10 year and the 7 years. I mean this 7% efficiency difference persists year after year. We’re getting down to 6% here eventually and if we go down to age 100 we’re down to 3% difference. For the most part you’re never going to be able to overcome that inefficiency that’s built in from the very beginning. And you can see straight dollar amounts in this column in year one. It is going to take a little bit more to get started but you can see it makes up ground pretty quick. Come year 5, we have a $4,000 difference in this direction and nearly 6 — over $6,000 by our break even period. Come down to our break even year on the 10 year reduced paid-up and now we’re at $20,000 extra dollars in the reduced paid-up policy by year 7.
I mean, when we get to actual cash dollar amounts, these are pretty big. Over $30,000 down here in year 19. So I thought that was interesting. Let’s see how the guaranteed values work because he is interested in knowing worse case scenario, what are we looking at?
Remember, these are our guaranteed values — or these were our non-guaranteed values – so now let’s look at our guaranteed values which assumes that Guardian does not make any dividend payments. Not likely to happen, but it’s always good to know what is the worst case and when we look here, you can see our break even period. Worst case scenario our break even period on our 7 year paid up is year 10. We still have a $305,000 death benefit.
On our ten year – if we design it for the 10 year, now we’re down to year 15. Suddenly it’s not looking quite so good. But we do have a substantial death benefit, and these persist. If we go all the way down again to age 100, we still have a much higher death benefit, but remember we put in an extra $90,000 into this policy. $300,000 as compared to $210,000. So yeah, we have a higher death benefit but it’s because we put in a lot more cash into this policy to begin with.
And how does that compare to our third scenario? You can see again we’re back to year 10 for a break even period and our death benefit in cash value compared to premiums we’ve paid in – we have $137,000 extra dollars compared to what we put in. In the 10 year scenario we had $90,000 extra than we put into it. And in the first scenario we had $105,000 more than we put into it. And here’s our final chart for that. You can see again I illustrated the red and green for our break even periods. Red is the year before the break even. The green is the year after. And then we’ve got it in straight dollar amounts as well.
So those are our three scenarios — those are our three guaranteed cash values. If you have any questions about this, put them in the comment section below.
You’re welcome to reach out to me if you would like to see how these scenarios play out for you in a policy for you, I am happy to put that together for you. It does take a bit of work though, so don’t expect it in a half a day or a day. Sometimes it takes me a couple of days. Depends on how much we have going on, but I am happy to put these things together for you or to talk you through any questions that you might have around these types of policies.
If you’re interested in more videos on infinite banking, check out these videos over here and we’ll see you next time.
Now, go maximize your cash flow!