Let me tell you about Jim.
Jim is 55, and Jim is pretty mad.
I just got done reading an email from him and, he was in a fury, a bit humorous, but the angry overtones were definitely there. He’s mad at himself and the world that he didn’t understand the concept of compound interest and how to make purchases years ago.
Warning: The concept I’m about to teach you may change your life (or make you angry).
You see, Jim, like everyone else, had to buy cars to live. He’s older, so he has been buying cars for the last 25 years. And he is just now realizing how much money he has lost because he didn’t put compounding interest on his side. He’s been paying cash because he was told “it was the best thing to do.”
But, the question is, what do the wealthy do differently?
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Life insurance offers us a place to store our money where it can grow and provide us with benefits. We have access to that money through policy loans.
However, often times I feel my greatest disconnect with people I meet with comes when we begin to talk about policy loans. People start to wonder, “if it’s my money, why would I ever want to take a ‘loan’ from the life insurance company?”
It’s a good question, and one that can be difficult to understand in a phone call.
But there is a reason, and a very strong reason, why letting your money compound, and taking a policy loan, is much better for you in the long run.
And especially better than paying cash.
I’m a numbers guy, so let me start with some numbers. I’m using a 35 year old who wants to save up $25,000 over a 5 year period to buy a car.
What he wants to do is this: buy 1 car every 5 years; starting at year 5 (after he has saved up the initial $25,000).
What are his options? He can save money into a savings account, and buy his car with cash, or, he can save up money in a cash value life insurance policy, and take a loan.
Now, the first scenario, the savings account scenario, he won’t pay any interest, but he won’t earn interest (maybe 1% taxable) on that money either. So, at the end of his life, he hasn’t paid any interest, but he has no money to show for it.
(It’s important to note that, even though he isn’t paying interest, he is still making a monthly payment of $416.66 a month to save up the $25,000 dollars to purchase each car.)
In our second example, it will cost him more money, of course. Today, life insurance policy loan rates are at 5%. His monthly payment will be $471.78 a month. Over the lifetime of the loan, he will pay $3,306.85 in interest payments.
I’ve run an actual illustration for today. The point of all this is, “am I going to make more money than I put in?”
The answer is, yes (or why would I post about it?).
Why are you going to have more money? Because you have compound interest working for you. As time goes on, interest compounds on interest.
Here are the illustration numbers. (We’ll start at year 10, after we have paid back the first car loan. Remember, it took us 5 years to save the money initially. And obviously, this needs to be a properly structured high cash value whole life insurance policy to make sense.)
|_Car #_||_Year_||_Cash Value_||_Interest Paid_|
I just want to make it clear that this is all based on only $25,000 dollars going into this life insurance policy one time, and compounding from there. There is no new money going into this policy after the initial contributions.
The real difference is the fact that your money is compounding, uninterrupted, inside your life insurance policy. Sure, it takes some time to build. But during this entire time it’s also providing you a death benefit.
When this guy from our example is 70, and time to retire, he now has $131,803 in his cash value.
Compare that to the guy who paid cash. He has 0 dollars, because he saved and spent it all 5 times.
It’s a huge difference. Yes, it costs you a little more. But can $16,500 really be viewed as a cost if, when it’s all over, you have $106,803 extra for retirement?
But in reality, it all boils down to human nature. Parkinson’s law says, “expenditures rise to meet income.” The opposite is also true. If your car payment goes up another 50 dollars a month, your expenses will adjust to match. The reality is, sure, if you are going to force yourself to put 50 extra dollars into a savings account every month, you will be better off. But the fact is, no one does.
But the other stark difference is the whole life insurance itself as a vehicle. It has been proven time and time again that whole life insurance, compared to any other safe savings vehicle, has much better benefits and a much higher rate of return.
The wealthy do things differently, that’s what makes them wealthy. This one smart, and simple, change can help you put a lot more money in your pocket for your future. This is exactly why I will always choose taking a life insurance policy loan over paying cash.