Life insurance? That’s supposed to become an income machine?
We’re used to hearing about flashier assets–things like bitcoin and gold and real estate. But… boring old life insurance?
Yes! Life insurance might seem boring, but its track record sure isn’t! For example, did you know that there are life insurance agencies that have been steadily paying out dividends since before the Civil War? Or that the cash value in whole life insurance policies is guaranteed to not go down in value? Or that insurers announce each year ahead of time what the growth rate and dividends will be? Or that the growth is often tax free?
Now hold on. Really stop to think about that. With the exception of a bond, CD, or the tiny interest rate of your savings account, not many assets can really compare–at least not in terms of safety and predictability. The safety of whole life insurance is half of the puzzle of turning your life insurance policy into an income machine.
On Cash Value Insurance
Before we get into explaining the other half of the puzzle, it’s important to clear a few things up.
To be sure–not every kind of life insurance policy works for this. Only “cash value” life insurance does–and even then, results vary depending on the insurer, underwriting, agent fees, and so on. We have found the best results with “whole life” and some IUL insurance policies.
At this point, some of you may be hearing imaginary alarm bells. After all, Dave Ramsey and others are pretty vocal about their disdain for whole life/cash value insurance. They loudly and repeatedly encourage people to “buy term and invest the rest.” How is a whole life insurance policy supposed to become an “income machine” if the best thing to do is “buy term and invest the rest?” Is the safety really important enough to give up potentially higher but riskier returns?
Well, a life insurance policy on its own really won’t have “remarkable” returns. Dave Ramsey’s advice has some good points… if all you’re doing is buying the insurance. But “income machine” is no understatement when describing the potential a whole life insurance policy has.
That’s where the second piece of the puzzle comes in: ancient banking principles.
Tried and True Banking Principles
Even with the safety, predictability, and tax-free status, a whole life policy’s growth (about 5%) isn’t too much to get excited about–let alone “an income machine.” So how can we take it to the next level? By using the same strategies banks have used to stay in business for centuries: borrow money at one low rate, and use it to earn more money at a higher rate.
Think of your own savings account. You might earn a measly 1% in interest each year. What if you were to take out a loan for your car or home from the same bank? Will you be paying 1% interest on what you borrow? Unfortunately, no–the bank lends out the money at a much higher rate than it costs them. This difference is called the “spread,” and is how banks turn a profit.
We’re not the only people mimicking the banks, though. People try to use this same strategy with real estate. They know that if they can 1.) borrow money from the bank at one rate in order to buy a property, and 2.) make more in rent each month than their interest payments on the loan, that they can make a profit without spending nearly as much of their own money!
The problems come when the market goes down, rent stops coming in, and all of the sudden they can’t pay back the bank. This principle of “leverage” (using the bank’s money to help pay for assets) can be highly profitable… or highly dangerous. Leverage is really only as good as the asset you use it on.
Now… remember how the cash value of whole life insurance is guaranteed not to go down in value? That sounds like a solid asset to leverage, now doesn’t it?
With that single idea, “The Flex Method” combines two different worlds and strategies into a single practice that safely and consistently turns a boring life insurance policy into a money-making machine.
The Flex Method
By borrowing money from the bank at one low rate, and using it to pay the premiums of your whole life insurance policy, the amount that you personally need to put into the policy goes down. The bank’s money in your policy grows at a predictable and safe rate that is high enough to be able to pay back the bank plus interest, and put money in your pocket.
In fact, whole life insurance policies are so safe that banks will actually use them as collateral for the loans that they give you. Because your cash value grows faster than the interest of the loan, you can continually request more from the bank to match the growth inside of the policy–often dollar for dollar. You can save or spend that money however you want, because the bank knows, when you die, they will be able to claim the cash value growth of your policy and get back 100% of what they loaned you, and make their money from the interest you owe, too. Even after paying back the bank, your policy will still leave a death benefit for your beneficiaries.
This may sound like another transgression of Dave Ramsey’s commandments, by not staying out of debt, and “owing the bank money.” It’s true that this method might not be called “debt free,” but it is “debt neutral.” Every dollar you take from the bank can be immediately paid back at a moment’s notice from your cash value. If, one day, the bank decided it wanted its money back, (which would be unlikely and unwise of them to do–seeing as they make money in this, too!) you wouldn’t have to pay a penny out of pocket–the cash value in your policy would cover everything.
The Flex Method is a powerful strategy that combines two different worlds that have never been put together before. When you take a historically safe asset like the cash value in a whole life insurance policy (that is again, guaranteed not to go down in value!) and put it together with age-old banking principles that have earned billions, you end up with an absolute income machine. You end up with the Flex Method.