Meet Peter, Michael, and Jack
Peter, Michael, and Jack (not pictured below) all began life in different decades of the 20th century.
Peter, an architect, was born in 1962 and is just starting to see his children leave the nest. Michael, a cartoonist, was born in 1971, and is attempting to launch his dream business. Jack, an actor, is the youngest of the three, but still an old Millennial, born in 1984. Jack is creative and energetic when it comes to his finances. And he’s always looking for the hidden gem that has escaped notice.
Peter, Michael, and Jack are men that all happen to have whole life insurance policies. But each man is in a different place in life, and is using whole life for very different reasons. For Peter, Michael, and Jack, their whole life policies have provided unique advantages that perfectly suit their needs. Let’s take a look at how each is using their whole life policy to make their dreams a reality.
Funding a College Education
Peter has two children in college. His daughter is currently enjoying a full ride at a state school because of her incredible musical talents. She worked really hard as a young child in the home. But she is truly gifted with an amazing voice, and that has made all the difference.
Peter’s son is also in college, and is following in his father’s footsteps as a student of architecture. But Peter’s son never received a scholarship offer for his architectural talent. And the private school he wanted to attend isn’t cheap. As a result, Peter needed a source of funding for his son’s education.
What about a 529 plan?
Fortunately for Peter, he didn’t wait until his children were applying to college to start preparing for the additional costs that would come his way. He remembered a friend telling him about a 529 plan, which was similar to a 401k but was completely focused on college funding.
He quickly dismissed the plan because he didn’t know for sure if his children were going to need college funding. Peter assumed they would, but knew that life is full of surprises. The 529 plan didn’t allow the flexibility he wanted, and once his daughter got a full-scholarship, he knew he had made the right decision by avoiding the 529.
Whole Life Policy Loans
Instead of a 529, Peter chose to use whole life insurance to save for college. The cash value within the whole life policy enabled him to take out policy loans for annual college expenses. The loans were called “wash loans” because the loan interest rate and the policy crediting rate were roughly equal – essentially making the loan a 0% loan.
Another benefit of borrowing against the cash value life insurance policy is that the loans were invisible to the IRS. And they are also invisible to the college his son was attending.
This meant that Peter’s son was able to apply for financial aid that would otherwise have been unavailable. Not to mention the fact that the money can be used for anything and everything, even if it isn’t directly related to the cost of college. With a 529 plan, Peter would not have had the freedom he has with his whole life policy.
With two kids in college and a decent living coming from architecture, Peter is feeling pretty good about his financial status these days. But Peter knows that he can’t sit back on his laurels and let things fall apart. He is a planner, like any good architect, and as such he has planned for retirement after architecture. Peter and his wife don’t expect to travel the world in a private jet upon retirement, but they do plan on living comfortably once the drafting table stops paying the bills.
Due to the fact that Peter decided to use a whole life insurance policy to fund the college education for his children, he now has a decent cash value saved up. Originally he had planned on using an extra $150,000 to fund the college education for his daughter. But thanks to the scholarship, the money that was planned for her college has continued to grow in his whole life policy. The cash value didn’t grow by double digits each year, but in his 22 years of ownership he’s never made less than 6% annually – something his colleagues envy during each and every market correction.
Because Peter is ahead of the game when it comes to his retirement plan, he and his wife are considering a rather lengthy cruise this year. In order to fund the cruise they are going to take the money out of their whole life policy. Even though Peter is only 55, he is able to pull money out of his policy anytime he wants without penalty.
Had his money been in a 401k, like many of his colleagues, he would have paid a rather stiff penalty for early withdrawal. Truth be told, he and his wife would not have considered a cruise because of the penalties associated with the early 401k withdrawals. Thankfully it wasn’t an issue for Peter.
As it stands, Peter is feeling really good about his retirement plan using his whole life policy. Peter is funding his cruise, taking care of the college education for his son, and when he does choose to put up his architectural talents he will be able to pull from his whole life policy tax free for the duration of his life.
In addition, when he and his wife die, their children will receive a large benefit tax free. For Peter, all his planning and methodical preparation has paid off, and it looks like it’ll continue to pay off long after he is gone.
Starting a New Business
Michael is a bit younger than Peter, and his goals and aspirations are also different. Michael started drawing when he learned to breath, or so he tells his friends.
As an adult, he has long dreamed of opening his own business. It involves working with a small co-op of other creative types and producing a platform for launching new intellectual properties. Michael has his head wrapped around the entire endeavor and is very excited about seeing his baby take those highly anticipated first steps.
New businesses require start-up capital, they don’t just launch themselves. Michael is more creative than he is analytical, but fortunately he knew early on that he would want to start something of his own someday.
So shortly after college he decided to get a whole life policy. Michael chose to maximize the cash value of his policy by using the paid-up additions rider feature of a whole life policy. This meant that when he was dating his fiancé, he didn’t have to maintain a large policy. But the cash value still accelerated quickly.
Give Me the Money!
Now that Michael is married he has increased his monthly premiums, but it’s still very affordable and within his monthly budget. But the main thing is that his cash value has increased rapidly enough to allow him the opportunity to fund his dream business.
All he did was call his insurance company and ask for the money. The company looked at his current cash value and made sure he had the money available, in addition his agent worked with Michael to create a payback plan that worked for him and his wife.
Just to be thorough, Michael contacted a bank to see if he could get financing for his business another way. But due to the risky and entrepreneurial nature of his business, he was declined. Banks don’t like taking risks, and small business loans in new business sectors are always a red flag. Fortunately for Michael, he had another option.
Another benefit to Michael is that he doesn’t have to make every payment on time. During tough times, he can pay back the loan at a slower rate, or choose to skip a payment altogether. The policy loan feature in his whole life policy is flexible. He is still paying his whole life premium, along with any paid up additions he chooses to pay, but if he wants to pay more or less on his policy loan that is up to him – the loan payback is flexible.
Michael will never get a call from a bill collector, and that gives this budding entrepreneur peace of mind.
Replacing an Income
Michael loves his wife, and the two of them also have a baby on the way. Michael is the primary bread winner in the family. His wife has tremendous skills, but they have chosen to be a single income family for the early years in the life of their child(ren). Michael knows that he has a lot riding on his ability to bring home a paycheck, and that is a big reason for new business endeavor. But what if it all falls apart? Or even worse, what if something happens to him?
Michael knows that he needs life insurance to protect his family in case he loses his life. He doesn’t want his wife to be forced into extreme financial struggles just because he failed to plan accordingly. Thankfully, he got a whole life policy that doubled as a funding tool for his business venture. There were other options available to Michael, but this option suited his personality the best.
What about Term Life?
Some had suggested that he buy term life insurance vs whole life and just fund his business via traditional financing methods. That was years ago when he didn’t know what he wanted to do with his drawing skills. Now that he knows, and has looked into traditional financing, he understands that he would never have been able to move forward without his whole life policy.
In addition, he was able to supplement his whole life policy with a convertible term life insurance rider that significantly increased his death benefit for very little additional cost. Down the road, if his business turns a decent profit, he’ll convert the term rider into whole life and secure the future of his family even more.
Michael couldn’t be happier with his whole life policy and his start-up business. His family is secured against catastrophic loss, and his business is funded and off the ground. And down the road Michael knows that his retirement will also be secure if he continues as planned.
Entering the Banking Business
Jack is living the dream because he happened to get discovered while doing improv on his own personal YouTube channel. He doesn’t make millions of dollars per picture, but he does make a good living solely off his acting – which is extremely rare.
Jack is thankful, but Jack also knows that his success and discovery didn’t happen by accident – he had to put in some hard work. And his hard work was accented by very strategic and creative business maneuvers.
Jack learned how to create a YouTube channel that would generate a healthy following. He created content that would get noticed, and he partnered with others to boost his rankings and his overall visibility.
Ultimately Jack became a student of he process and worked hard to get noticed. He learned about all this by reading and reading and reading some more. And in his spare time he talked to people and talked to people and then talked some more.
Not a Traditional Bank
This philosophy of hard work and research has led Jack to become interested in starting his own banking business. Obviously he doesn’t have the funding to start an actual FDIC bank. But he does have the funding to start a strategic banking policy.
Jack learned that the whole life banking policies allowed the owners to finance all sorts of family needs and wants. Because of his success as an actor he had been approached multiple times by family members for small loans.
That was how he became interested in the personal banking in the first place. The whole life banking strategy, sometimes called Infinite Banking, taught Jack how to help his family with their financing needs while also improving his overall financial picture.
Who are the Customers?
Jack uses his banking policy to loan money to his siblings, nephews, nieces, and cousins. When they need a new car, or they want to fund some business venture, they come to Jack. He now has multiple whole life policies on many family members so he can fund all their needs.
Jack remains the owner on all the policies, but the family pays to grow the policies. They are the insured, so if they die before they pay back the loan, the death benefit goes to Jack.
Another benefit, is that Jack has the option of handing over the policy ownership to his family. Assuming Jack doesn’t need the money and wants to benefit his family. Jack can give the family members their policies at any time. There may be tax consequences for gifting policies, so Jack would need to get professional advice.
It’s definitely an advanced strategy, but that is what Jack is known for, doing the research and attempting things others would never dream of. In fact, Jack plans to use this strategy with his own children whenever he has some. He’ll be the owner at the outset of the policy, and he’ll grow it accordingly.
But ultimately he’ll gift the policy to his children when they are old enough and have a need. Jack likes to think it would make a good wedding gift someday, or perhaps a graduation present.
Covering Estate Costs
Jack is doing so much that it can be hard to wrap your head around it all. But one thing that Jack believes is that his estate is going to continue to grow until his death. He understands that his heirs will have some significant tax problems when it comes to inheriting his estate. At such a young age Jack doesn’t worry about his heirs and his estate too much. But Jack likes to be prepared, so it’s comforting to know that his whole life policies help protect his estate.
To Trust or not to Trust?
The tax consequences for those that have large estates can be significant. The whole life cash value and death benefit are exempt from taxation, so that’s not a concern for Jack. But he does have property and other assets that will eventually be quite considerable at their current rate of growth.
Most of his estate will likely be in the tax sheltered whole life policies, but for the assets that aren’t Jack may choose to do a Charitable Remainder Trust with his favorite charity in mind. It’s another advanced strategy, but it allows Jack to put cash and other completely owned assets into a trust and then donate it to his favorite charity, while still earning income from them annually.
Charitable Remainder Trusts are a whole other topic and strategy that we’ll get into at another time. And for someone as young as Jack it may not even be his best option. But for now, it’s clear that Jack is content and happy to be the personal banker to his entire family. Jack never thought he’d be a banker when he made his first YouTube video 10 years ago.
For Peter, Michael, and Jack, the whole life policy features fit nicely into their lives. They can easily see how this flexible and dynamic financial product can be shaped into something that perfectly fills the hole in their financial plans. Each one has a different desire and need, and yet whole life can adapt to suit each as needed.
If you identify with these characters and would like to talk about your own financial plan, please don’t hesitate to contact us – the whole life strategy may be exactly what you need.