E135: Advanced Life Insurance Strategies of the Wealthy You Can Use Today

Nate: In this episode, we discussed the advanced life insurance strategies that the wealthy have been using for years. From executive level compensation packages, to transferring large estate, life insurance is one of the most commonly used assets for high net worth individuals. We wrap up by discussing how the infinite banking concept is the one strategy that can be utilized by anyone, regardless of their economic position. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right. Well, we’ve got an exciting episode to talk about today. I think we’re going to have fun with it. We’ve talked about a few of these items before. But we really wanted to stress today that if you’ve been around us for very long at all, you know that we’re big fans of the infinite banking concept, which is how to use specific life insurance policies designed in certain ways to achieve your goal of becoming your own banker, and financing everything that you can from these policies as opposed to bank accounts.

So we’ve talked about that many times, but I think it surprises people when you really uncover the world of corporate finance, and high net worth individuals, and how they use life insurance. A lot of them are doing things just like infinite bankings. A lot of them are even practicing it. But we actually wanted to expound on it and unveil a few things that the advanced high net worth, high income, people are using their life insurance policies to do, how they’re creating uses for it, to show that the tool is bigger than maybe we used to think.

Even though, some of these strategies, the majority of our listeners may not even be able to tap into just due to their income and net worth won’t even qualify them to take advantage of it, nonetheless I think it’s important to know. And there are some really cool strategies that you can put forth, that piggyback off of infinite banking. So infinite banking has to be the foundation. The ideas that are put forth in infinite banking need to be understood. But then there are some of these other offshoots that use similar concepts, but in new ways. And that’s really what we wanted to focus on today.

Holly: It doesn’t matter whether you have a lot of wealth, or you’re just starting out and you have a little wealth. You can start anywhere with that infinite banking concept. And I’m just going to throw it out there. For me, literally all we could start with was $300 a month. But it did transform and change our lives. So just put yourself in the position of this is an option, and it’s available to you. Whether you are low income, middle income, high income, it’s the product and the process that works the same, irregardless of where you’re at financially.

Nate: The rich people do infinite banking too. So we’re not saying that the rich people do all these other strategies without doing infinite banking. We know that the rich people have been doing the same process of infinite banking, whether it was called that term at the time. Nelson Nash was the one who created that term, and it became known really in the year 1999, the year 2000. But the rich had been using life insurance policies back … And we’ve told stories with JC Penney, Walt Disney, very wealthy people, having to take large loans out of their life insurance policies to fund their ventures.

That’s essentially what we’re talking about here today, too, but on the more you and me level. So essentially it’s been around for a long time, been used by wealthy people for a long time. Let’s go ahead and dive into one concept, one strategy that was really made very popular a few years ago when Jim Harbaugh was recruited to be the coach of the University of Michigan. And so he became the football coach at the University of Michigan. It was a splashy hire, but it was even more splashy the financial world because it was disclosed what his compensation package was going to look like.

And it was very interesting. He was going to get paid $5 million a year in salary to coach them, which that seemed like a decent amount of money. But that wasn’t the only piece of his contract. That’s a pretty normal contract. The other side of it was that they were going to do this thing called a split dollar deal with him, which uses the life insurance policy to fund additional compensation package. So essentially, what they’re going to do, is they were going to start a policy on him that he owned.

But the University of Michigan was loaning him money, as part of his compensation package, to purchase this policy. So they lent him $4 million year one. And then they were going to lend him $2 million a year for next five years. These loans were funding a life insurance policy. And by the way, this is actually not anything too crazy unique. It happens in the world of executive compensation packages. The really cool thing about this, Holly, is that because they were lending him money to start this policy, it means that he was able to get this money growing for him in the policy, but he doesn’t have to pay taxes on these loans. They’re legitimate loans.

So if they would’ve just written him a check for four million the first year and $2 million a year after that, then he’d have to give 40 to 50% of that away in various taxes to the government. But the fact that they were lending him money meant that he could receive this money, put into this life insurance policy, and not pay any taxes on it. And in fact, the way that these are typically set up, you’ll never have to pay taxes.

What is actually going to occur here, in these agreements, is that the university has decided, “Okay, we’re going to lend money to Jim to fund this policy. But they will typically have a collateral assignment on the policy, very often. So in other words, Jim, just can’t … He can’t actually just go blow all the money that’s being put into this policy. He’s actually got to sit there and be tied there.

But the thing is, he’s the actual owner of it. They just have a collateral assignment on it. So all of the growth above the principle loan balance is his to keep. So all that there needs to be … In other words, so if they lend him four million to start, and two million after that for five years, that’s a total of $14 million total going to be moved in to this life insurance policy.

So the 14 millions is the principal. All of that’s going to go into the cash values. But the cash values are going to continue to grow and compound for the rest of his life. So all of the compounded interest that is earned on that money is his to keep forever tax free inside the life insurance policy. The reason why it’s actually cool for the university of Michigan too, is that since this is a loan, Jim could pull $14 million out at some later time and pay them off. Or he could pass away, and they actually get the piece of the death benefit.

He can actually use the money with their approval, by the way. So they have a collateral assignment on it. If he wants to use the money, he can request them to allow him to pull money out, and so they can sign off on it. So actually, there is a way for him to use the money, even though they have a loan on it. But they have the right to say, “No, we’re not going to allow him to pull a policy loan out.”

But all that to say, all of the growth of the policy is his to keep, tax free, for the rest of his life. And all of the money that comes above the principle amount and death benefit will go to his family tax free. And to get a whole bunch of money compounding for you … So let’s say a $14 million principle, and let’s say it earns 4%. I hope we all can do some math and say that, “Well, 4% of 10 million is $400,000. 4% of 14 million is going to be close to $600,000. By the end of year five, the policy will be growing by about $600,000 a year, every year for the rest of his life, compounding. So getting larger and larger every year, that he could pull out of that policy tax free for the rest of his life.

So this is not a bad gig if you want to create a guaranteed passive incomes stream, completely tax free, and not even have to pay taxes on the money that was used to fund it. The IRS requires the University of Michigan to put an interest rate on this loan to make it a real loan. It can’t be an interest free loan. There’s some minimum interest rate, probably in the one and a half percent range. I haven’t checked to see what it is right now.

Either they would forgive the interest every year on that 14 million, or Jim Harbaugh could paid it if he wanted to. But most of the time it’s forgiven. In other words, what that means is, let’s say he’s got 14 million borrowed out. And let’s just say it’s 1% interest, is the IRS minimum. I actually don’t know what it is, but it’s pretty low. That would require him to have … 1% of 14 million is 140,000. They would essentially put $140,000 in forgivable interest, which in the IRS terms, that’s actually income. So he would have to pay $140,000 a year. Yet he’s going to be pulling out about $600,000 in profit.

So it’s not a 100% tax free arrangement with the forgiving of interest. But nonetheless, it’s getting a whole bunch of money, tax free, into his pocket. And it’s actually good for Michigan too because they’re going to get all their principal back when he dies. So it actually is one of these that’s a win-win for both parties. Jim gets a whole bunch of money, gets access to it, gets all the growth, tax-free, and didn’t have to even pay taxes on the money that was put in. And University of Michigan gets all the money back, upon his passing, through the death benefit. And his family gets the rest. So it’s a pretty powerful tool, when it’s all said and done.

Holly: Yeah. And we’re going to go through several different items or options you guys can use. But this is just one strategy in today’s world, that the negotiation that took place on the table involved life insurance. And most people didn’t even realize it, until it broke and was made public, “Oh, I negotiate a contract that involves life insurance?”

Nate: Yeah. And if you’re not accustomed to corporate finance and the world of executive compensation, you’re not going to get introduced to these types of ideas. But they actually happen, and they’re not even that rare. They’re fairly common, honestly, because they’re very cool, what you can do with a life insurance policy. We talked about this at the very beginning. The problem is most individuals are never getting to the high enough income and high enough net worth to even be introduced to some of these ideas.

And so they just think life insurance is a death benefit, and they have no idea that it can be used for other things. And that’s why we’re bringing this up, is to say that just like the infinite banking is a strategy that uses life insurance, just know that wealthy people have been using these types of strategies, using life insurance, for a long time. Infinite banking is the first one that really is getting sold to the masses. This is a concept we can all dive in for. It doesn’t matter how much.

Holly: Yeah. And just think about this. Warren Buffett said if poor people would do what rich people would do, they wouldn’t be poor anymore.

Nate: Yeah, that’s the truth.

Holly: The bottom line is, we all have the same products to work with, like life insurance. The higher your income, the more you doors are opened to expand your knowledge in regards to options you can use for life insurance. And it’s not just a death benefit. The death benefit is kind of the bonus, Nate. It’s the ability to be able to use this product to continue to grow money tax free and keep your money in motion. So the reality is that the wealthy have been doing this for a long time. It’s just come to the masses really, in the last, I’m going to say, 20 years really. A little bit before that, but maybe 30 years really. But really, in the grand scheme of things, this concept really hadn’t taken off or taken place until Nelson decided to write a book about.

Nate: Yeah. That’s the truth. Yeah.

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Nate: And another strategy that’s actually very similar to what Jim Harbaugh did, but doesn’t require an employer-employee arrangement or anything like that, is called premium financing. This has been a very popular well used tool for many, many years in the high income, high net worth environment. But it’s actually the ability for people who are not even technically high net worth high income to do this tragedy called premium finance, the doors are opening for that more so than ever, by the way. It used to be you’d have to be making over a million dollars a year, be worth like over 5 million a year, to even get your foot in the door to do premium financing. Now that income and net level are dropping, dropping, dropping as time goes on.

And what premium financing is, is there’s banks who will lend you money to start a brand new life insurance policy. So you say, “Okay, I want to go start a life insurance policy.” But let’s say I’ve got money tied up in real estate. I’ve got money tied up in assets and in a business that’s working. And I know I need life insurance. I want to use this tool. But I don’t want to sell anything to go do it.

That’s where the idea of premium finance came around, which is, “Okay, these wealthy business owners, who have got these big businesses, and they want to use life insurance, they just don’t want to have to pull money out of the business to do it, “Well, why don’t we lend them the money to start it?” But what’s crazy is, the interest rates on these premium finance deals are so small. You can get them for 2%, 2.5% a lot of the time. Things like that.

And so essentially, what this will create for most people, is this gigantic amount of arbitrage. The typical premium financing styled case is, a wealthy individual is going to borrow, let’s say, a million dollars a year for 10 years. Let’s just say that. That’s very common. So we’re going to take a million dollars in a loan from a financial institution, like a bank, to start a life insurance policy that’s going to be maxed out for cash value. So we’re going to borrow a million dollars a year for 10 years. And let’s say the interest rates are 2.5% percent.

But the policies will be grown by 4%, 4.5%, somewhere in that ballpark range. And so at the end of 10 years, you’ll have 10 million borrowed from the bank to fund your life insurance. So you haven’t actually put any money in. The only money you’ve been putting in is the interest due each year. So you have $10 million of premium paid. And you’ve probably put in 800,000 by year 10 or something like that, out of your own pocket to pay interest. Maybe not even that much, by the way. I didn’t do the numbers before I started.

But either way, here we are at year 10. You probably have a policy growing in cash value. The cash value increases on the $10 million of cash value that’s that’s created there. The growth is probably 400 to 500,000 at that point. And you might owe $200,000 to $250,000 of interest. So you get to keep the net amount. So essentially you’ve put in very little money to create this policy out of your own pocket, just the interest cost of 2.5% percent of the premium dollars for those 10 years. That’s what your outweigh is. But you’re probably pooling an actual real tax free income from the policy of $200,000 at that time, every single year for the rest of your life. So it’s very powerful. The reason it’s been only used for high net worth high income people is because they’re essentially looking for the people who are going to be practically zero risk to make these loans do.

Holly: Yeah.

Nate: I would say, by the way, that the loans are going to be almost risk free no matter what, because the bank has a collateral assignment on the life insurance policy. So the collateral that’s used to create this loan, to create this deal, is the life insurance policy itself.

Holly: Yeah.

Nate: So it’s not like it’s really that much risk to the bank anyway. But they just want to be pretty much a set done deal. They’re going to charge us really low interest rates and say, “We just don’t want to deal with having to try to go take somebody’s policy, or do anything else. We just want to make sure that we get paid our interest, and we’ll be happy.” So, but I bring that up to say this is actually a strategy that more and more people are being allowed to do. Banks are allowing people who can’t qualify for a million dollars a year for 10 years, to start policies at $200,000 a year for 10 years. And the pool of people that can do that is actually getting bigger and bigger.

Holly: It is. And Nate, they’ve really transitioned into not just the wealthy of … Like we said, it used to be you had to have a net worth maybe of over $10 million, or five million, or eight million. Or you had to make x-amount of money. And depending on that, you had to have so much available for the collateral, the interest, right? And nowadays the banks are wanting to get in on this. This is a good loan for them. It’s a low risk loan for them. And in most cases, the bank basically has the ability to loan you the money, and you get the policy, and all you have to do is pay the interest really.

Nate: We’ve had clients do it. Not a whole bunch, but a handful of clients who have done it. And it’s working out really, really well. We hope that more and more people will be able to do it as we build some more relationships. Ray’s been talking to some. Ray Poteet, our founder, to do for himself, potentially, some groups that will do so for individuals who aren’t multimillionaires at that time. So it’s such a huge opportunity, I think, for a whole bunch of people to make money.

Holly: Yes.

Nate: So the banks are sitting on a ton of right now, and they need to go put it to work. This is an awesome place to do it. The insurance companies like the deals instead of the customers. It’s a win for everybody, if we can get it done, get people approved. A lot of times, these premium financing arrangements are put inside of these things called … Not all of the time. I would not do it this way. But a lot of times they’re put in these things is called irrevocable life insurance trusts, or ILITs. I-L-I-T.

The reason for that is because they’ve very commonly and forever been used, as default, as a way to pass on a large amount of money outside of the estate tax rules. So this is really … It’s a perfect marriage with premium finance and ILITs. So people use these ILITs all the time. They’ll buy big policies and put them into irrevocable life insurance trusts that essentially removes the death benefit from your estate.

Holly: Yeah.

Nate: So life insurance policies pass down income tax free to your heirs, but they are counted as part of your estate. If you have an estate above the IRS limit at the time, you really are trying to figure out ways to get assets out of your own estate instead of giving them out. Because you don’t want to pay 50% of that to the government.

So they’ll put these big policies into these irrevocable life insurance trusts, which can be passed down to your heirs, aside from your estate. And those are very common. Life insurance has been used like this ever since the estate tax law came into existence. In these irrevocable life insurance trust, all the wealthy people who have estates above whatever the estate tax exemption is, they’re always being pitched, “Hey, you got to start taking assets out of your name, pour them into these irrevocable life insurance trusts, buy policies there so that you can pass death benefit down to your family without having to pay estate tax.”

So lots of advanced strategies, that are not even infinite banking, that people have been using for forever. So it’s not just IBC that people have been doing. But that is the only thing we know of that everybody should do. Whether you are worth $100 million dollars, or whether you’re worth $1000, it works the same for everybody. And it’s the same amount of power exists for the wealthy and the average Joe alike.

Holly: We can go two ways after ILITs. Really, the next strategy we want to really hit on, is the reason why infinite banking works so well too, is also because bank [inaudible 00:21:14] its own life insurance. And we’ve talked about this before, called BOLI, B-O-L-I, where banks actually are buying life insurance on their top employees, per se, and purchasing those policies. But the bank actually owns it. And they have a lot more money, Nate, in bank owned life insurance than they do sitting in their own bank.

Nate: Yeah, especially all the other hard assets that they own. And we’ve talked about this before. Suppose you’ve been around the infinite banking world for very long. In that case, you understand that banks purchase an incredible amount of life insurance on anybody that they can, pouring huge amounts of money, billions and billions of dollars, into life insurance. They obviously must know something. So in the corporate world as well, Walmart was famous for this. Walmart would buy life insurance policies on people that didn’t even know they were getting life policies bought on them.

Holly: And that was really just any employee they hired.

Nate: Yeah, and just buy a policy on them.

Holly: Yeah. They’d buy a policy on them.

Nate: Yeah, then Congress said you actually have to notify your employees if want to buy a policy on them. So that’s what we’re trying to say, by the way, is that the owner of the policy is always most important. So if we take that back to the infinite banking world, some people are uninsurable. They can’t buy policy on themselves. They can’t be insured due to health problems. They get a little confused when we say, “Buy a policy on an employee.”

Remember, when an employer buys a policy on an employee, the employee may have absolutely no say or rights in that policy at all. In other words, it’s an asset that the company owns, the employer owns, that the employer has all the rights to borrow, owns the cash value, is the beneficiary on the death benefit. And the employee is just the body that the policy is on. So that’s what BOLI is. Corporate owned life insurance, COLI, is the same way. Many of these, the business itself owns it, uses the cash value, and receives the death benefit. And the insured, the employee, is just the body.

And by the way, that will work for you too. So if you’re listening to this, and you struggle with some health issues, and you don’t think you’ll be insurable, well, you can do the same thing. You just need to find another body that you can insure that allows you to practice the infinite banking concept, just like banks buy policies on their employees so they can essentially practice the infinite banking concept. Now, whether they call it that or not, that’s what they’re actually doing with billions and billions of dollars funneling through these life insurance policies.

Holly: The key here is that banks are doing this. Corporations are doing this. Executives put this in their package all the time, Nate. Maybe it’s not split dollar, but they’re doing some type of compensation that involves life insurance, just like Jim Harbaugh did. So the reality is, is what other people are doing, you can do it. It’s just on a smaller level. It’s where you’re at. And that’s what’s most important, is that you get started somewhere. It’s starting to ask the question, “How does this work for me? How can I use this for me, my business, my family, my legacy? What do I want to create?

Nate: Yes, absolutely. And that’s the main thing we wanted to bring this up for, is just to understand that you can get creative with this thing. You don’t just sit there twiddling your thumbs, hoping that some sort of idea sparks. Be thinking, “Hey, there’s creative ways for me to negotiate with my employer, for me … And maybe you are an employer, to operate within your business. There’s a lot of cool ways to funnel money into life insurance policies, and to use them, that we have just been ignorant of for a long time, that the higher income, the higher net worth you get, the more likely you’re introduced to these advanced strategies.

Holly: I think the key here, Nate, is that you just have to realize you have to find what works for you. It might be premium financing. It might be purchasing a policy on a employee. It might just be starting a personal policy. It doesn’t matter where you’re at. The only way to get ahead is to implement this system. Life insurance is the only product that works this way. Infinite banking is the system you need in order to control your own money, and your destiny, and be able to leave a legacy. So it’s where you got to start, and you got to ask questions. And Nate and I, and even the team at Living Wealth, we’re here to help you and answer your questions. So I hope that this piques your interest and you start asking questions of, “How does this work for me? How can I use this? And what’s my best options?”

Nate: That’s exactly right. And honestly, there’s a lot of things we didn’t even bring up here with employee bonuses, deferred compensation, pension programs, and just all sorts of things that we do, even raised doing with some of his employees and that we’ve helped the clients do. We didn’t bring them all up. All we’re saying is there’s a lot to be done with this tool. The number one thing to do is infinite banking. You have to do that. That is at the core. Because that really bleeds into everything you do financially. But just understand that you’re not alone in this. Big players in the game have been playing it for a long time. So go ahead and get on. Get started where you’re at, and build it from there.

Holly: Absolutely.

Nate: Well, this has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e135.

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