#84 - Tax-Free Growth & Infinite Loans: Whole Life Insurance Strategies for High-Earners

[00:00:09] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll.

[00:00:29] Hello everyone. Welcome back to another episode of Passive Income Pilots. Tait Duryea here hosting Rod Zabriskie and Brennan McConnell today from Money Insights. How you guys doing?

[00:00:39] Hey, doing great.

[00:00:41] Excellent. Well, Ryan Gibson is caught up today. So it's just the three of us, but we're chatting again about this amazing strategy about the life insurance policies. It's really an interesting adjunct that as Ryan and I have both been jumping more into this, we've just been more and more

[00:00:59] intrigued by it. And so we wanted to come in here and once again, look at the strategy and explore some different angles. We've been getting some questions that we wanted to field. In the meantime, this is being recorded on November 7th. The Fed just dropped interest rates another 25 basis points, meaning a quarter point. This is shaping up to be some great tailwinds for the economy and for real estate.

[00:01:22] Rod, what are your thoughts on this?

[00:01:23] Yeah. I mean, any downward movement on that is going to help, especially for those properties syndications that are in rate caps or things like that and are hoping to renew at more favorable rates. Any movement's going to help there. But I think the fact that it was a quarter point is encouraging in a couple of different directions. So again, lower rates, great. But it also indicates that things are still really strong.

[00:01:49] So you may recall two years ago as the Fed was raising rates and people were concerned about, oh man, are they going to just drive us into a recession? And they were like, no, we're going to get soft landing. And everybody was doubtful.

[00:02:00] And it looks like they, I'm going to say they did it. There are obviously a lot of different factors involved, a lot more than what the Fed's doing. But all things considered, the, I mean, Americans just kept working hard, I think is the biggest thing. We didn't give up.

[00:02:14] And so the market shows that the jobs, even though they're weaker than, and if they had been even weaker than what they showed last week, then they might've dropped a half point. But anyway, just, I feel really good about the combination of strong economy and, but also lower rate helps.

[00:02:36] Yeah, I completely agree. I think that, you know, we've gone from no one really thinking that a soft landing would be achievable to, wow, I think we've got this to now maybe even no landing to a, to a go around, right? It's a, it really is astonishing. And like you said, yeah, the fact they're only cutting 25 bips, I think speaks to how strong the economy is and how strong consumer spending is.

[00:03:00] Household debt service payments are still very low. So meaning, you know, if someone's making $10,000 a month, the amount that's going out the door for housing, their debt service payments on, on cars, houses, everything like that is still super manageable. So anyway, it looks like we're in a good position, but let's get into the life insurance piece of this, because a lot of people are, are wondering if this is something they want to add to their investment strategy.

[00:03:27] Can we just take five minutes to bring everyone up to speed in case they didn't listen to the previous episodes? And if you didn't go back, listen to Christian and Rod and then Rod and Blake on the previous two episodes, very insightful, but let's bring everybody up to speed in a quick recap.

[00:03:44] Yeah. Brennan, I'll let you do that. Since these are kind of our fresh blood on, on this one, we'll hear a little, little bit of a fresh tape.

[00:03:50] Yeah. So basically, you know, when you have somebody who's investing in any alternative asset or cash flowing asset, they typically have a place where they store capital and usually they want it to be safe, predictable. They want it to be liquid, obviously. And it usually ends up being a checkings or a savings account and they'll store capital in there.

[00:04:08] And then when they find a deal that they'd like to invest in, they'll deploy the capital from the checking savings account. And then as that cash flow kicks off of that deal, they funnel it back into the bank account. Right.

[00:04:17] What we're talking about is the investment optimizer. And all we're doing is we're replacing that bank account, that opportunity fund, which is what we call it, with a much more efficient account.

[00:04:25] And what we're utilizing is a whole life insurance policy. But it's not just any, you know, run of the mill policy that you've probably seen before. It's a very specific policy. It's specialized. It's built to reduce the cost of the policy, reduce the cost of the insurance and then overfund the cash value portion of the policy.

[00:04:44] What that does is it creates a super efficient policy. And the benefits are we get a guaranteed five to six percent return that also comes to us tax free. We also get the death benefit, which most of our, you know, most of the people that we're talking about or that we talk to don't necessarily care too much about the death benefit, but it is kind of an extra benefit to it that we don't pay for in any other way.

[00:05:07] And the thing that people love about it the most is the ability to take a loan against the policy. And the reason why that's important is we can take a loan against the policy, use those dollars and invest it into a piece of real estate or self-storage.

[00:05:21] And all the while, while we have those dollars outside of the policy working for us, we're still earning compounding interest in the policy. So our dollars start working for us in two places at the same time.

[00:05:32] Right. I like to think of it like a Roth in that you're taking after-tax dollars and you're stuffing it into this account and it's growing tax free and you're able to loan against it, borrow against it, just like you would take a 401k loan.

[00:05:45] But the problem with the 401k loan, not the problem, but just one of the characteristics of a 401k loan is that you have to liquidate the assets in order to take that cash out.

[00:05:55] So that cash is not earning money in two places. You are literally removing it from the account and then slowly paying it back in, where in this case you're borrowing against that.

[00:06:05] So you're generating fresh proceeds through a loan against that policy while that cash sits in the core account, continuing to make that guaranteed growth. Am I saying that correctly?

[00:06:18] Yeah, absolutely. It's exactly how it works.

[00:06:20] So something else that I think is important to look at here is you called it an opportunity, what'd you call it? An opportunity fund?

[00:06:28] Yeah, opportunity fund.

[00:06:29] Not to be confused with an opportunity zone, or we've got an episode coming up on those. What Brennan is referring to here is a, I call it a bulletin chamber.

[00:06:38] So when you have a stock account, you can invest $1, $2, $50. But when you're investing in a piece of real estate or a private placement, you need a minimum critical mass of cash in order to pull that off.

[00:06:53] So if you're waiting to buy a short-term rental property and you're saving up the down payment, or if you're waiting to invest in a syndication deal and you're saving up that $50,000, you're waiting for that cash to amass until the point that you can deploy it.

[00:07:07] That's what Brennan is just talking about here when he calls it the opportunity fund.

[00:07:12] And I'm excited because I just pulled out my first policy loan. I've been doing this since the beginning of the year, and I just pulled it out. I'm putting it into our Sunrise Infinity Fund, and I'm getting some great tax benefits on that deal.

[00:07:26] So I'm earning money in the life insurance policy. I get to take the policy loan out. I'm investing it in one of our own opportunities, a turbine, and I get to write off some great tax benefits.

[00:07:37] So it's just, again, it's a layer. It's a vehicle that you can use to hold cash that you intend to invest.

[00:07:44] And can I launch on that just one real quick thing?

[00:07:48] Please.

[00:07:48] Because sometimes when we talk about, because you compared it to a Roth, right? After tax money going in.

[00:07:55] And sometimes when I say that, I confuse people from the sense that they say, well, it's after tax, then how do I capture those tax benefits like what you're talking about, right?

[00:08:04] You took the loan, you invested it, created some tax deductions coming off of your taxable income.

[00:08:09] And at the end of the day, when we say after tax, what we mean is there's no tax benefit to the money going in.

[00:08:18] Yeah, it's not pre-tax going in.

[00:08:20] Right. You can't write off the 10, 20, 50, 100 grand that you're putting into the account.

[00:08:27] Right. But then, with yours as a really good example, when you turn around and use that money and you go out and invest it in something that creates tax benefits, well, in your case, it's going to reach back to those dollars you've been putting in all year that were, quote unquote, after tax.

[00:08:40] But you're reducing the tax on those by the way that you're investing it, using the money.

[00:08:46] And I hope I'm not confusing people by trying to clarify here.

[00:08:50] Yeah. When you make the investment with the loan proceeds, it's just as if it's cash.

[00:08:55] It's literally coming to my personal checking account.

[00:08:57] Yeah.

[00:08:57] And that's the account that I'm using to invest in this deal in cash.

[00:09:02] So I'm not investing in the deal through my life insurance policy whatsoever.

[00:09:07] I'm borrowing against policy to generate cash in my personal checking account and then investing that cash.

[00:09:12] So there's a tax-free growth component within the policy where the interest that the policy is generating is tax-free.

[00:09:20] Is that correct?

[00:09:22] Yeah. And that's true.

[00:09:23] That's going to be true whether you loan against it or not.

[00:09:26] So the cool thing is, and again, going back to this whole idea of value in two places at the same time,

[00:09:31] someone puts money into a policy and it grows and generates that 5% plus tax-free return.

[00:09:37] That's all you want out of it.

[00:09:38] Then great. You got what you wanted in a very predictable, consistent way.

[00:09:42] There you go.

[00:09:42] However, if then you loan against it and because your money is staying there, you're going to continue getting that 5% tax-free.

[00:09:49] But now you've used the money and leveraged against that money and you're using that over to do something else.

[00:09:54] Can you talk more about how, you know, we've talked in the past about this, but I think it's fascinating about how banks use these, business partners can use these.

[00:10:05] Yeah.

[00:10:05] What are some other strategies and some of the more institutional players that use these policies?

[00:10:09] Yeah. Well, the fact is, is that money in the cash value of your policy is liquid.

[00:10:14] Like if we're talking about using it for investing and we have a very specific strategy that we're using, but large corporations, construction companies, title companies, banks, they have to have large amounts of reserves that are liquid.

[00:10:27] But they want them doing something for them in the meantime, right?

[00:10:30] And they could go out and, you know, get a bond fund or they could put it in a money market account or kind of the same options that you have.

[00:10:37] You know, when you're, when that bull in the chamber money is waiting to go, but they choose to use this type of a policy because it provides that very consistent long-term return with the tax benefits.

[00:10:49] And so more recently, some people will say, well, man, you're saying 5%, but I can go get a money market, you know, high yield savings account for 5%.

[00:10:59] Well, actually that was true for a little bit.

[00:11:01] There was a sliver of time there where that was working and now with interest rates going down, not so much, but guess what?

[00:11:08] The policies in, you know, between 2009 and 2022 when interest rates were basically zero, it was producing that 5% and it's continuing to do that 5%.

[00:11:20] So it's, it's just so consistent.

[00:11:23] So one of the strategies that I really like, and I forget where I heard it, but business partners can use this as well.

[00:11:30] I was just talking to one of our investors, who's a pilot and he's probably listening to this and he had a business partner pass away, unfortunately.

[00:11:39] And it created a, an incredible headache for him because he had to buy out his deceased partner's family because they wanted to sell and he wanted to keep the assets.

[00:11:51] And so what it can be used for is, is say you go into business with someone, you can take out a life insurance policy so that if one of the partners passes away, you can use the death benefit will kick in to essentially buy out the other partner, which I think is genius.

[00:12:04] Yeah. And critical.

[00:12:05] Yeah. And I think when people are starting out, a lot of times it's common for them to use, it's called a convertible term life insurance policy.

[00:12:12] And the reason being is, you know, that's a really cheap way of doing it so that if anything catastrophic like that happens, you know, you might be paying a thousand dollars a year, $1,500 a year, and there's a $1.5, $2 million benefit.

[00:12:25] Well, what happens is as that business grows, as the cashflow grows, that's usually when people will either take the convertible term and transition it into an investment optimizer style policy.

[00:12:35] And instead of using a term policy for their buy-sell agreement, which is kind of what we're talking about here, they're going to use an investment optimizer whole life policy.

[00:12:44] And the reason is because they can get all of those same benefits that we've been talking about.

[00:12:48] You can get five to 6% guaranteed, you know, returns coming in through the policy.

[00:12:53] It's liquid.

[00:12:54] So if the business needs that capital, they can take that out and use it for the business to grow the business.

[00:12:59] And then they just funnel the cashflow right back in.

[00:13:01] So interesting.

[00:13:02] Can I maybe add to that a little bit?

[00:13:04] Please.

[00:13:04] So you were stating it as that the family wanted them to be bought out.

[00:13:08] And what I've seen in most incorporating agreements when you're setting up the business, it actually sets up terms that requires you to do that.

[00:13:18] Right.

[00:13:18] And you would want to anyway, right?

[00:13:20] So, you know, my business partner, do I want to be in business with his wife?

[00:13:25] If he passes away and nothing against her, she's a great person, but she's not in the business every day, right?

[00:13:31] And so, and she doesn't want to be in the business every day either, right?

[00:13:36] She wants to just to be able to have the value and walk away with that and carry on and kind of rebuild her life and not have to worry about that burden.

[00:13:46] Right.

[00:13:46] And so that's why it's built into those contracts.

[00:13:49] But a lot of people don't realize that the partner passes away.

[00:13:53] The spouse comes and says, Hey, look at the contract.

[00:13:55] You're supposed to buy me out.

[00:13:56] And they're like, Oh, how am I going to do that?

[00:13:58] I don't have the cash to do that.

[00:13:59] So what do we do?

[00:14:00] Sell the business.

[00:14:01] You know?

[00:14:02] Yeah.

[00:14:02] It creates a really stressful situation.

[00:14:04] So I think that's just a really cool use case that I hadn't seen before.

[00:14:09] Okay.

[00:14:09] We're going to go from 101 to 202.

[00:14:12] So if you haven't listened to the previous episodes, probably time to rewind and go listen to one of those because we lay out how these things work, what the life insurance companies look like that are behind these policies, all that sort of stuff.

[00:14:25] So go back and listen to that.

[00:14:26] But if you're ready for the next phase of knowledge, the next level of knowledge here, let's get into it.

[00:14:31] So what I want to talk about now is what's the difference between putting a lump sum into a policy versus putting a set monthly amount?

[00:14:42] When I set up my policy for context, I think everybody listening to this probably has already heard me say this, but I've been putting in 5,000 a month since March.

[00:14:51] And now I get to borrow against that cash balance.

[00:14:54] What's the difference between that and putting in 100,000, 200,000, half a million in one fell swoop?

[00:15:02] And how does the policy differ based on what that strategy is?

[00:15:06] We're coming up towards the end of the year.

[00:15:07] The reason we're talking about this is because we always are encouraging people to look at their financial situation as we approach the end of the year and start deciding, hey, how do I want to deploy this money?

[00:15:15] If you have a deal you want to buy, but you want to get the money into a life insurance policy and working first, we've had a lot of people ask us, hey, should I dump a big lump sum into a policy and then feed it with a small monthly amount?

[00:15:28] How does that work?

[00:15:29] What are the policies?

[00:15:30] How do those policies differ?

[00:15:33] Yeah, I'll take a crack at it.

[00:15:34] And then I'd like to hear what Brent has to say on this.

[00:15:36] But essentially, when we set up policies, we have what we call a funding range.

[00:15:40] And what that means is like even in the example like yours, if you're putting in 60,000 a year, but you're not required to put in 60,000 a year, right?

[00:15:48] Your funding range is probably somewhere between about 15,000 as a minimum up to 60,000 a year as a max, right?

[00:15:54] That's pretty typical ratio.

[00:15:56] I think it's even less.

[00:15:57] I think it's about 11,000 is the minimum.

[00:16:01] Young and healthy right there.

[00:16:02] Okay.

[00:16:03] Perfect.

[00:16:03] Yeah, so that gives you that flexibility so that in a situation like what you're describing, if I put in a whole bunch extra in the first year and I'm not planning on coming back and putting in as much every year after that, well, that's okay.

[00:16:17] Because contractually, it's kind of built out that way.

[00:16:19] So that's natural and built into just about any policy.

[00:16:23] And then if you take it another level and you say, well, I had some sort of liquidity event.

[00:16:28] I sold a portion of my business.

[00:16:30] Something happened.

[00:16:31] I have 500,000 today, but moving forward, I'm only going to be able to put in the 50 or 60, right?

[00:16:37] Then we can look at the array of different companies because the product that we choose is dictated a lot by these factors.

[00:16:45] The conversations we have with people, the specifics about what they're looking for and what they're going to be able to bring to the table.

[00:16:53] And so we'll build the right policy to match up with what you're doing.

[00:16:57] Now, one of the things we might choose to do in that case, which is pretty common, is we take the 500,000 plus the 50, right?

[00:17:04] So let's say 550 for the first year and we split the 500 in half.

[00:17:08] So we say we're going to put 250 of that in immediately plus the 50.

[00:17:13] So it's going to be 300,000.

[00:17:15] And then in year two, do the same thing.

[00:17:18] Okay.

[00:17:18] 250 plus the 50.

[00:17:20] So 300,000 in year one, 300,000 in year two.

[00:17:23] And then we can drop off and do as little as 50 after that.

[00:17:26] And what you've done is you've cut the costs in half.

[00:17:31] That's ultimately why I'm splitting that 500 in half is so I can build a policy.

[00:17:36] So instead of a total of 500 going in right up front, we've split the costs down so that it's not carrying as much of a burden.

[00:17:45] We can both grow the cash value better.

[00:17:46] That's ultimately our goal, right?

[00:17:47] When we talk about building these in the right way, the way Brendan talked about a minute ago, we want to minimize costs.

[00:17:52] Right.

[00:17:52] And yet still match up with what someone's putting in and therefore having access to to start using GoInvest with.

[00:18:00] So that's an example of a way that we can do that while balancing higher up front money with lesser ongoing money.

[00:18:09] Yeah.

[00:18:09] I think that, you know, one important note to make here with what Rod's talking about is, you know, he keeps talking about the design and how we're structuring it and how we're balancing it.

[00:18:19] But where that all comes from is the IRS has a very specific definition for what a life insurance policy looks like.

[00:18:25] And we have to create a policy that falls within those guidelines.

[00:18:29] And if we do that, we keep everything that comes out of the policy tax free, any loans, any income, the death benefit, all of that is tax free, which is ideal for most people.

[00:18:39] That's what we want to do.

[00:18:40] If you go over those limits, you create what's called a modified endowment contract, which now you have a taxable event.

[00:18:46] And it's basically differentiating a tax free or a taxable policy.

[00:18:52] And so that's, you know, when we're looking at different companies, we're paying attention to that MET guideline and we're deciding the best way to structure the policy.

[00:19:00] And there are policies.

[00:19:02] This doesn't happen very often.

[00:19:04] Maybe once every year, once every two years, we'll have somebody that comes in with a really large lump sum, let's say $2 million.

[00:19:11] And they just say, hey, I don't want to fund anything after the first year.

[00:19:14] I just want to dump it all in and I'm done.

[00:19:17] Right.

[00:19:18] And in that case, we can create what's called an intentional MEC or we're intentionally creating a modified endowment contract.

[00:19:24] And you can dump in $2 million.

[00:19:26] And there are some benefits to that.

[00:19:28] Mainly, you know, we might be able to get 95% of that $2 million to show up in the cash value right away.

[00:19:33] The downside is you can't take a policy loan without being taxed.

[00:19:38] You could use a bank and get a cash value line of credit against the policy and get tax free loans from it.

[00:19:45] So the only downside to doing that intentional MEC, well, one of the main downsides to it is you have to use a bank loan instead of a policy loan when you're accessing that capital.

[00:19:57] Understood.

[00:19:58] And what sort of loan to value ratio would the bank go to versus a policy loan where you could take out 95%?

[00:20:03] I mean, it depends on the banks.

[00:20:05] Some banks will give you because it's still a cash asset, right?

[00:20:08] The cash value is available.

[00:20:10] So usually we can get 90% to 95% with the bank as well.

[00:20:14] Gotcha.

[00:20:14] Okay.

[00:20:15] So what are the downsides?

[00:20:16] If someone was to come to you, and obviously everybody's situation is different.

[00:20:20] So if you're curious about this stuff, call Money Insights and they do a free consultation for our listeners.

[00:20:26] So click the link in the show notes and see if it works for you.

[00:20:29] But in any case, just to give people a sense, what are the pros and cons of dumping a bunch of money in there right away?

[00:20:36] If I'm sitting on, say, $350,000 and I'm thinking, okay, I want to invest this money into real estate.

[00:20:43] Let's say I have an investment property identified and I want to buy the investment property.

[00:20:48] But I'm thinking, okay, should I dump this into a life insurance policy first and then be able to pull $300,000, $320,000-ish right back out?

[00:20:58] Or should I just buy the rental property and get on a $50,000 a year, $60,000 a year policy and just grow it slowly?

[00:21:05] What are the pros and cons of each one of those strategies?

[00:21:08] Yeah, great question.

[00:21:09] So the kind of higher dumping up front, long-term, you're probably going, if you don't ever get to a place where you kind of build back up to that and you're putting a lot of money into it,

[00:21:19] similar to what you'd put in the dump in, then your long-term IRR is going to be lower than it would be if it was just the, hey, methodical every year I'm hitting that max funding number.

[00:21:30] Now, when I say difference, I'm not talking about a huge difference.

[00:21:33] It might be the difference between, say, a 5% IRR on the slow, steady funneling into it versus 4.5, 4.6 on the other.

[00:21:41] But then on the flip side, you have access to more money right off the bat that you've already put in and are flowing through the system, right?

[00:21:48] So lower opportunity cost, et cetera, by doing it that way.

[00:21:53] And so it's just weighing those differences.

[00:21:57] And I'll say this too, you wouldn't necessarily have to put all of it in anyway, right?

[00:22:02] Like if it's a 350 and you say, well, it's a 350 now and I can do 100 a year on an ongoing basis, then you say, well, I'll put 100 of it in to the policy.

[00:22:14] Within 30 days, I can start loaning against it.

[00:22:16] And then the other 250, I'm just immediately putting it into the property.

[00:22:22] But I guess what I'm saying is not all or nothing.

[00:22:24] We can go somewhere in between that helps you get as close to your goals and whatever you're prioritizing in terms of those two competing kind of benefits.

[00:22:35] Got it.

[00:22:36] Brennan, do you have any thoughts on that?

[00:22:37] Yeah. I mean, I think the other thing that we were talking about here too was the difference between an annual lump sum every year and a monthly payment every year.

[00:22:46] And the main benefit to doing a lump sum every year is that you have access to that capital right away.

[00:22:52] So, you know, you put in 100 grand, 30 days later, you're going to be able to pull out a huge chunk of that and get that invested.

[00:22:59] Whereas if you're putting in, you know, $8,000 a month, then it's just going to take a couple of months to get that cash value built up to a place where it's meaningful dollars.

[00:23:07] You know, we talked about needing a threshold of dollars to be able to invest in these kind of syndications and these kind of investments.

[00:23:13] So it's just going to take a few months to get there.

[00:23:16] You know, both ways work.

[00:23:17] And by the way, you can switch between the two.

[00:23:19] So if one year you want to do a lump sum and get it all in right away, you can do that.

[00:23:23] And then the next year, if you want to switch over to monthly or quarterly, you can do that.

[00:23:27] There's a lot of flexibility within the policy when you're funding it.

[00:23:30] That was actually going to be my question is, you know, in January, if I have a deal go full cycle and I get a bunch of cash, can I just put 60,000 into my policy in January?

[00:23:39] And it sounds like the answer is yes.

[00:23:40] Yes, absolutely.

[00:23:41] Dump it in and then pull it back out and reinvest it.

[00:23:44] Yeah.

[00:23:44] And you match it up with just kind of where you are.

[00:23:47] So I have multiple policies that I'm using on different levels.

[00:23:50] And some of them I am funding monthly, like the ones that are my own, my personal ones, just because my cash flow, my money comes to me more in that way.

[00:24:00] Whereas the business policies that I have, we tend to do lump sums because we're usually sitting on reserves in the business.

[00:24:08] And so doing it as lump sums makes more sense.

[00:24:11] So you match it up with wherever you are.

[00:24:13] I guess we should touch on the downside as well.

[00:24:16] So let's say you, you know, have some financial obligations where you need to divert money elsewhere.

[00:24:23] We just said my policy is about $11,500 a year.

[00:24:27] So $900 and something dollars a month is the minimum that I can put in.

[00:24:30] And it's important, I think, when people are setting up these policies to make sure that they can keep up with that.

[00:24:36] Because that's, I think, and I'd love to see if you agree with me on this, the most common way that these policies blow up is someone takes too big of a swing when they're setting it up and then they can't keep up with it and they let the policy lapse.

[00:24:51] Agreed.

[00:24:51] Agreed.

[00:24:51] Agreed.

[00:24:52] So when, when we're looking at, I talked, I use that term funding range, right?

[00:24:55] When we're setting this up for somebody and we're trying to settle in on what's the right funding range.

[00:25:00] Well, if someone comes to me and says, well, my goal is putting $100,000 a year into this.

[00:25:05] Okay, great.

[00:25:06] Let's start there.

[00:25:07] And then if, if I say, okay, $100,000 a year, that means your minimum is whatever, $25,000.

[00:25:12] Are you comfortable with that?

[00:25:14] Even in a, you know, down year, like things aren't going well from you, maybe from an income standpoint and or from your investment standpoint, do you feel comfortable you'd be able to come up with at least $25,000?

[00:25:24] And if the answer is no, it's like, okay, well then, then that's, that's too much.

[00:25:28] Right.

[00:25:28] Where would you be comfortable?

[00:25:30] And they say, okay, well, what, $15,000 or $10,000, whatever that number is, then we'll kind of reverse engine.

[00:25:35] And so, okay, great.

[00:25:36] If it's 15, then we can get up to whatever, 60 as a max or something like that.

[00:25:40] And that's why I think it's important to know that you can layer policies on.

[00:25:44] You can have as many of these as you want.

[00:25:46] If someone already has one, take myself, for example, I've, I've got one and I want to layer on another one.

[00:25:53] What are the pros, cons of putting, taking out another policy on myself versus putting one on my wife?

[00:26:01] Or if I had a child I wanted to, to open a policy for.

[00:26:04] Or, um, what would you recommend and why?

[00:26:07] I can jump in on that and then we'll let Rod give his thoughts.

[00:26:10] But I like having the policies on myself and my wife.

[00:26:14] Uh, we're having, we're expecting a baby in January.

[00:26:17] I'll take out a policy as soon as I can on that baby.

[00:26:21] And the main reason I'll talk about my wife and I first.

[00:26:24] The main reason I like having policies on both of us, specifically the investment optimizer kind of policies is the death benefits.

[00:26:31] Great.

[00:26:31] Right.

[00:26:31] We're both covered in case something happens.

[00:26:33] We also both have our own policies that are, you know, we're able to tap into and invest with.

[00:26:39] And so if something were to happen, a, I have a place that I can tap into and pull cash out to invest.

[00:26:45] And then I also have a death benefit that's going to cover for the family.

[00:26:48] The other major thing that I like about these policies is they typically have a long-term care writer attached to the death benefit.

[00:26:56] Um, and so later in life, right, when we're eighties, nineties, however, however old we are, if we ever need that long-term care, our life insurance policies are covering us for that.

[00:27:08] So I don't have to go out and buy those outrageously expensive long-term care policies, uh, because my life insurance is already going to cover it.

[00:27:16] And so that's just another benefit to having the policies on both of us.

[00:27:19] Right. We talked about that on the last episode, the fact that you can use the death benefit that you would usually be going to somebody else.

[00:27:24] You can draw on that later in life for yourself for long-term care, which I think is really cool.

[00:27:30] Exactly. And then on the kids, you know, for children, you, we can't put in a ton of money in terms of premium going into the policies, just because the insurance companies obviously are going to cap the amount of insurance you can have on a child.

[00:27:42] But you can still get, you know, if you're talking about funding at long-term, you could get five to $10,000 per year on a child.

[00:27:49] And the reason I like that is because I'm going to own that policy.

[00:27:52] So the policy is mine. It covers my child, right?

[00:27:56] So something happens to my child and the life insurance is for them.

[00:28:00] I get full control of that cash value.

[00:28:03] So I control if I'm investing out of it, I control when I take money out of it.

[00:28:07] At some point I can either transition it over to my daughter and say, Hey, here you go.

[00:28:13] You know, you're 25 years old.

[00:28:15] Here's a policy that I started for you.

[00:28:17] Do do with it what you want.

[00:28:19] You can keep funding it.

[00:28:20] You don't have to, right?

[00:28:21] There's a lot of reasons to do it there.

[00:28:23] The other reason I really like it is on my wife's side of the family, she's got a little brother that had a very rare form of cancer when he was young.

[00:28:33] And his father pulled out life insurance on him when he was really little.

[00:28:37] Now he's uninsurable.

[00:28:39] So insurance companies will not give him any life insurance.

[00:28:42] And so my father-in-law is super grateful that he pulled those policies out on his child because he's going to be able to give those over to him when he's 19, 20, 25, whenever he gets married and can control those policies.

[00:28:54] Whereas, you know, if he didn't have anything, he may not be able to get that life insurance.

[00:28:59] Speaking of disqualifications, let's say you are a pilot and you have some sort of an issue that doesn't, you know, prevent you from getting a class one medical, but it does prevent you from getting a life insurance policy.

[00:29:12] How big of a deal is that?

[00:29:14] And what does this look like now to put a policy on your wife or the kid in terms of it being an investment vehicle for yourself and for your family versus having it on yourself?

[00:29:27] Yeah.

[00:29:28] So that's common in a situation like that.

[00:29:32] And honestly, we don't run into that a lot.

[00:29:34] Like sometimes we'll be asked, well, man, I have whatever high cholesterol or I have, you know, allergies or I have whatever.

[00:29:39] And those kinds of things, it's not a big deal as long as you're taking something for the high cholesterol or high blood pressure or whatever might be like that.

[00:29:46] But in a situation where the company is just saying, yeah, we just ultimately can't offer any coverage for you.

[00:29:52] Then having the spouse be the insured instead is the next natural step to go.

[00:29:58] And typically it just works out just fine.

[00:30:00] So we're able to build the same policy, the same funding amount that we would have done for the original person.

[00:30:08] And we're just doing the same thing with the spouses, the insured and or, you know, like you're saying with children, you know, getting them involved.

[00:30:14] And we've talked about minor children so far, but it could even be adult children.

[00:30:18] Right.

[00:30:18] So there are a lot of people who will do that as well.

[00:30:21] Okay.

[00:30:21] So I got to ask because we're talking to airline pilots here and the free spot in the middle of the bingo board is divorced.

[00:30:27] What happens in a divorce?

[00:30:28] If you were to, you know, take out a policy on a spouse that say doesn't work and, you know, there's divorce 10 years down the road, that policy goes with the spouse, right?

[00:30:38] There's no saying like, hey, but I paid all that money in there or vice versa.

[00:30:42] Yeah.

[00:30:43] No, in my experience, what they do in the process of the divorce is they accumulate information on all of the assets.

[00:30:50] Well, that's what this is.

[00:30:51] When you're talking about a cash value policy like this, it's an asset.

[00:30:55] So they're looking at the cash value, they add that to this list of assets.

[00:31:01] And so then when they split everything up, in most cases, again, what I've seen is just splitting it down the middle.

[00:31:07] Then every once in a while, I'll see it where they say every asset has to be split down the middle.

[00:31:12] Right.

[00:31:13] And that's always weird to me.

[00:31:14] It's like, okay, I don't understand why, but, you know, it wasn't my choice.

[00:31:18] And in that case, then you actually could take half the cash value out, goes to one spouse and the other spouse walks away with the rest of the policy.

[00:31:26] Like that, that could be a thing.

[00:31:27] Very interesting.

[00:31:28] But in most cases, they're drawing a line down the middle, but they're not picky about who gets which asset.

[00:31:33] You just negotiate and decide, okay, who gets this one, who gets that one.

[00:31:37] And so in that case, one of the spouses would walk away with the full policy, with the full cash value.

[00:31:44] And if, you know, the one feels strongly about it, well, then they're going to try to get it on their side of the ledger.

[00:31:49] Understood.

[00:31:50] That's good to know.

[00:31:51] That's cool.

[00:31:52] I actually thought for some reason that it would just travel with the person who it was on.

[00:31:57] So that's cool to know that it's just looked at by the courts as just another financial asset that sits within the family.

[00:32:02] Okay, Rod, we were talking before the show about something that you call phase two and phase three.

[00:32:08] You want to talk us through those?

[00:32:09] And because this is kind of the more exciting part of the policies.

[00:32:12] Now you're 10, 15, 20 years down the road.

[00:32:15] Yeah, I'll hit on phase two and then Brennan, I'll let you do phase three.

[00:32:18] So just to clarify, phase one is what we've been talking about.

[00:32:21] Using the policy cash value to go out and invest, flowing money through your investments.

[00:32:26] But eventually you get to a place where you have, I'm always careful not to use the word retirement

[00:32:31] because with a lot of people we work with, they're like, I don't think I'm ever going to retire.

[00:32:34] I'll just change what I do.

[00:32:36] Right.

[00:32:36] I'm still active.

[00:32:37] I'm still investing.

[00:32:38] I'm still doing these things.

[00:32:39] It just may not look like what it is today because eventually I'm going to get to a place where

[00:32:43] time is on my terms.

[00:32:45] Right.

[00:32:45] I don't have to be beholden to a job or whatever.

[00:32:49] Right.

[00:32:49] And so, but when you get to that place and you're like, okay, well, I'm slowing down on my investing

[00:32:52] or now I'm turning around and using the cash flow for my investments to actually live off of

[00:32:57] instead of continually putting them into the next thing.

[00:32:59] And so in that case, now I'm moving into from the policy standpoint phase two, which is I built up

[00:33:06] a bunch of cash value in the policy and it's still liquid.

[00:33:09] It's still my money.

[00:33:10] I can still access it.

[00:33:11] In this case, now I'm accessing it to use as tax-free income in retirement.

[00:33:15] And this is important because it's easy to get caught thinking like I have to pass this on to

[00:33:20] someone.

[00:33:21] I'm going to build up this big cash balance.

[00:33:23] I'm borrowing against it, but I always have to pay it back.

[00:33:26] That's all the whole premise, right?

[00:33:28] I'm borrowing against my policy right now.

[00:33:30] But as that initial principle that I'm investing in this deal comes back, that needs to go back

[00:33:37] into the policy.

[00:33:38] I need to pay at least the interest, ideally the principle and interest that I borrowed

[00:33:42] from the policy.

[00:33:43] And I'm treating it like a bank loan, but I own the bank loan.

[00:33:47] And I know that people probably say, hey, that sounds like infinite banking.

[00:33:50] It's like, yeah, that is exactly what we're talking about.

[00:33:53] It's just that infinite banking has become a really kitschy term that, you know, Rod, we were

[00:33:57] talking about that offline as well, that you guys try to kind of stay away from the infinite

[00:34:00] banking term.

[00:34:02] Yeah.

[00:34:02] Some rabbit holes that you don't have to go down if you're just using it for investing.

[00:34:07] Yeah.

[00:34:07] So it doesn't have to be something that you pass on to the next generation, right?

[00:34:12] You can just take out policy loans and not pay them back way in the future, right?

[00:34:17] Because at that point you're saying, I don't care if it lapses anymore because I'm done

[00:34:22] paying into it and it's grown to be multi millions of dollars.

[00:34:26] So how does that, how does that work?

[00:34:27] What does that look like?

[00:34:28] Yeah.

[00:34:29] So I'll clarify because you do, you don't want it to lapse.

[00:34:31] Right.

[00:34:31] Okay.

[00:34:32] But the point is that it's kind of a similar concept where I have cash value there.

[00:34:37] I'm loaning against it.

[00:34:38] In this case, I'm using it for my expenses.

[00:34:40] So it's not something I'm ever planning to pay back.

[00:34:42] But in this case, it's okay because the cash value that's collateralizing that loan stays

[00:34:48] there and keeps growing.

[00:34:49] And now I'm just letting my loan balance grow as well.

[00:34:52] It's going to accrue interest, but the interest I'm earning is offsetting the interest that

[00:34:57] I'm accruing on the loan side.

[00:34:58] Say that again.

[00:35:00] So, so I'm earning on the cash value, right?

[00:35:05] The bucket that that's collateralizing the loan that, that I'm using to invest or that

[00:35:09] to, to live off of in retirement.

[00:35:11] Right.

[00:35:12] I'm building a loan because of that.

[00:35:14] And I don't want to pay it back.

[00:35:16] Right.

[00:35:17] I'm living the good years, the golden years.

[00:35:19] I I'm not planning on paying that back.

[00:35:20] So, and that's okay because interest earned on the collateral side offsets any interest

[00:35:27] accrued on the loan side.

[00:35:29] Right.

[00:35:29] So I can just let that loan carry on.

[00:35:31] And then when I pass away, that loan will get paid off with my tax-free death benefit.

[00:35:37] Yeah.

[00:35:38] So that's why we don't want it to lapse because if we, if we use all that money up,

[00:35:42] now there can be a big tax consequence.

[00:35:44] But if I let the income tax-free death benefit pay off that loan, then I'm good.

[00:35:49] I never had to pay that tax.

[00:35:51] My kids don't have to pay that tax.

[00:35:52] It just, it's all covered.

[00:35:54] Fantastic.

[00:35:54] So what's phase three?

[00:35:56] Phase three is, is that happening.

[00:35:59] So the death benefit that's paying out, right?

[00:36:01] We first use the policy to invest and create wealth.

[00:36:04] Then we used it as tax-free income.

[00:36:06] Phase three is either using the rider on it for long-term care.

[00:36:09] And then eventually when we pass, there's going to be a tax-free death benefit.

[00:36:13] And if we have outstanding loans against the policy, those loans get paid off first.

[00:36:18] And then whatever is remaining is going to go to beneficiaries.

[00:36:21] And a lot of people, when we're talking to them, you know, a lot of people are very legacy

[00:36:25] minded already.

[00:36:26] And they, you know, they want to be able to pass on some sort of wealth to their children

[00:36:30] or their nieces or nephews or whoever it is.

[00:36:33] But some people are like, no, I don't want to leave anything behind.

[00:36:36] I just want to spend it all.

[00:36:37] If I had it my way, I spend my last penny on my last day and then I'm gone.

[00:36:42] And in that case, that's totally fine, right?

[00:36:44] You can spend down that policy as aggressively as you want throughout your life.

[00:36:48] What I will say is there's a lot of people, there's something magic that happens right

[00:36:51] around 70, 71 years old, where a lot of people that were saying, no, I'm spending all my money.

[00:36:56] I'm not leaving anything behind.

[00:36:58] They all of a sudden come to us and say, well, wait a minute.

[00:37:01] I think I do want to leave something behind, right?

[00:37:03] And what's nice is they have the thing set up already to where if they don't want to do it,

[00:37:08] they don't have to.

[00:37:09] They just spend down the policy.

[00:37:10] But if they do want to leave something behind, well, they've got a great asset that's going

[00:37:14] to help them do that.

[00:37:15] That's great.

[00:37:16] It's the grandkids.

[00:37:17] They meet the grandkids and they just can't resist.

[00:37:19] There you go.

[00:37:20] The skip the generation trust.

[00:37:23] I like it.

[00:37:23] Yeah, yeah, yeah, exactly.

[00:37:25] Well, I think the big three hurdles for me or the big three potholes that you want to avoid

[00:37:31] with these are not buying off more than you can chew.

[00:37:34] Making sure that a policy is built correctly.

[00:37:37] Lastly, I've said on the show before, I walked away from $30,000 because I had one of these policies

[00:37:43] that was not set up for my goals, which were to very quickly borrow against it so that I can

[00:37:47] invest it.

[00:37:48] And number three, that you have to have a plan to invest this cash.

[00:37:53] We talked about this before, that it's not an investment vehicle on its own.

[00:37:57] You can do a lot better if you're just going to sit the money and let it park in this life

[00:38:01] insurance policy.

[00:38:02] You can do better outside of it.

[00:38:04] But if you're going to borrow against it, like the policy is designed to do and participate

[00:38:09] in other investments, then I think it's a complete no-brainer.

[00:38:13] So give these guys a call.

[00:38:15] See if it's right for you.

[00:38:16] Anyway, Rod, Brennan, thank you so much for coming on.

[00:38:18] Any final thoughts?

[00:38:19] I appreciate kind of your sentiment there.

[00:38:21] And so I would just say that if you're investing and you could invest in or see get an extra

[00:38:29] growth on that money, that's really what this is doing.

[00:38:33] And you said you'd give our link in the show notes, moneyinsightsgroup.com slash pilots

[00:38:37] is a page that we have dedicated specifically for this group.

[00:38:42] And there's a webinar that we did here a couple of months ago there as well.

[00:38:46] And in there, we show some examples of what it looks like as you're flowing money in and

[00:38:51] out and whatnot.

[00:38:52] And so go check that out if that would be helpful to get a little more clarity on, especially

[00:38:57] some of the buzzwords.

[00:38:58] I know we try to keep it as simple as possible.

[00:39:00] And sometimes we sneak in with these different things.

[00:39:04] Well, thanks for mentioning that.

[00:39:05] Yeah, the webinar was nice because you can actually see the math behind the stuff.

[00:39:10] And it takes a long time to wrap your head around this stuff.

[00:39:13] But when you do, it makes a lot of sense.

[00:39:15] So it's why we've had you on multiple times.

[00:39:18] We appreciate you being a resource for the group.

[00:39:20] So thank you for being on here again.

[00:39:22] And I think you guys are planning on being at our first conference that we're holding

[00:39:27] next year.

[00:39:28] We'll have more information on that forthcoming, but tentatively pencil your calendars for September.

[00:39:34] We're having our first passive income pilots conference and you'll get a chance to meet

[00:39:39] Rod and the team there.

[00:39:40] Sweet.

[00:39:41] Yeah, we're excited about that.

[00:39:42] Brennan, nice to meet you.

[00:39:43] Rod, thank you so much.

[00:39:44] We'll see you guys in the next one.

[00:39:45] Great to meet you, Tate.

[00:39:46] Thanks.

[00:39:47] Take care.