Infinite Banking! Not only does it sound really cool it is a really neat concept that you can use to grow your wealth. Welcome Back to the Discount Property Investor Podcast! Today we are joined by Jeff Purkey of E3 Wealth. Jeff is a financial planner that uses an awesome method to fund Real Estate transactions. He calls it Infinite Banking and uses Life Insurance to fund Real Estate Investing. Listen in to hear all about the concept
To reach out to Jeff you can contact him at 314-822-4440 or send him an email at [email protected].
Mike: Alright guys welcome back to the discount property investor podcast, thank you guys so much for joining us. If you are a first-time listener, we are glad you are joining us and we want to encourage you guys to check out the freewholesalecourse.com. There Dave and I put together a program for you, teaches you everything you need to know to get started in wholesaling, pretty excited about that. So if you haven’t checked that out please do. Other than that, we are excited to have Jeff Perkey on; Jeff is a financial planner with E3 wealth. How are doing Jeff?
Jeff: Good, thanks for having me on guys.
David: Thanks for coming out Jeff, appreciate it man.
Mike: So tell me what you do? You said, I asked you to describe what your occupation was and you said basically, financial planner, strategist I guess?
Jeff: Absolutely, my day job is getting people to think differently about money and financially related decisions, so at E3 wealth we are a comprehensive financial planning firm, so when someone walks in the door to our office, we are looking at all aspects of their life’s, whether it be investing in the stock market, looking at their tax returns and just figuring out different strategies that we could work with our clients on to help protect and preserve their assets.
David: Ok, very cool. You work for E3 wealth, is that correct?
David: Awesome, E3 consultant group. I remember I originally met Jeff about a year ago at a weekend, a weekend seminar for local real estate investment association, REIA. And Jeff had come and -- actually we had it at Jeff's office. You guys had given us a pitch about -- really more of a lesson about -- life insurance and -- I think you called it infinite banking?
Jeff: Yeah it was the infinite banking concept, or specially designed life insurance contract.
David: Infinite banking, yeah I would like to dive into a little bit more about that today in this episode.
Mike: Yeah, let's get started. What is infinite banking? From somebody totally on the outside, what is that?
David: What does that mean?
Jeff: It means a lot of different things to a lot of different people. But the way that we look at -- the infinite banking concept is save money alternative to -- the traditional banking. So let’s take a step back here real quick and define what banking is really. It is more or less a place where we store our money, right? So instead of just keeping it under the mattress or digging it up in a can out in the back yard, it is just a place where we store our dollars, right? So the only difference between traditional banking methods and the infinite bank accounts is that way when we get our dollars in there our money is always going to be working for us, although we can still utilize the dollars at a later point in time.
Mike: Ok, so what do you mean get them in there? What is 'in there' for you guys?
David: So first of all, we are not using a metal can in our back yard. Not today ok.
Jeff: You might have some back there.
Mike: This is an alternative to that. We got the bank, the metal can, and then we got what Jeff is proposing, right?
Jeff: When we say 'get it in there' is more how do we go about designing an account that is going to fit and meet our client’s needs? This isn't you just walk into our office and we are going to say, oh -- this is right for you. It's more about understanding where you are at from a financial standpoint and what makes the most sense. We look at this from a [00:03:45.16 - inaudible] model. So it is a more, where is the money going? How does it work in your own personal economy? And how do we go about designing, funding strategy that is going to be appropriate for you, that you feel comfortable with it, you can do on a regular basis?
Jeff: Because this is -- this strategy is not something we just kind of want to set the dollars in there and forget about it, this is something we want our clients to actively use for the rest of their life, because this is a way we can help our clients accumulate wealth, get out dept, buy big ticket items. Some of our clients use this to take vacations, pay off their mortgages. It all depends on what your personal goals and objectives are.
David: Got it, got it.
Mike: That makes sense to, because as you said it is an alternative to banking. Most people think of their banking as their checking or savings account. So it has to be somewhat liquid for them I assume, or ways that you are going to be able to use some of those -- dollars that you put in right?
Jeff: Absolutely. And that is kind of an important concept going into the design aspect of this because -- we want to make sure we are working with a mutual insurance company that has a term that is called 'non direct recognition' and basically that is -- I am getting a little deep into the weeds here, but that means -- once we put money in and borrow against our policies then that money is still always going to be working for us, based upon the dollars that go in. So just a simple example; let’s say we put in $10,000. Then I want to buy a car for $5000, I borrow money from my policy -- well to go pay for that car. Now my money is still going to be working for me based on the $10,000 I put in there, not -- including the $5000 I just borrowed to go out and pay for that car in cash. So, I didn't have any interests costs associated with that, meaning buying the car, financing it. I can just go out and buy it straight up and be done with it. Does that make sense?
David: It does, but I just don’t understand why a company would allow you to -- deposit $10,000 to an account that is bearing an interest on $10,000 -- that is in the account, then let you -- to that institution and pull half of that money out and still pay you interest on the entire $10,000.
Jeff: Well there are a few qualifications that you have to go through in order to be able to make that initial deposit. First of all, number one; be medically eligible to receive one of these types of policies. This is a life insurance contract so we do have to qualify for it.
David: Gotcha. I will pause you right there. There are multiple types of life insurance, what type is this?
Jeff: This is -- on a whole life insurance contract.
David: Whole life. I know there is term, universal and whole -- so we are specifically talking about whole life insurance is that right?
Jeff: Absolutely. And the reason being is because -- on the -- in the spectrum of insurance, whole life insurance is the more traditional -- it’s not traditional -- it is the most conservative life insurance contract that is out there. So once you get your money in there, there is a guaranteed section of these policies that the money will always be there. So essentially once you are qualified it never goes away as long as you keep funding it, or have adequate cash value inside the policy -- so just constantly fund itself.
David: Gotcha, ok. So we have touched on the fact that it is -- a whole life insurance police, you have to be qualified -- so what would be some of these qualifications? You mentioned you have to be healthy, or somewhat healthy to qualify the health guide lines. What else is required for people to maybe get into some sort of policy like this?
Jeff: This is where it comes into looking at the financials -- I can’t just want into an insurance companies office and say hey I need ten million dollars’ worth of insurance covers -- they are going to ask for my tax returns, they are going to ask for all of my assets. Based upon where I fit with those numbers, that is how we determine what an appropriate lever is for a funding strategy for these types of policies. So we can just pick an arbitrary number and say this where we want to go and how much we want to get. So from our standpoint, the way we look at this -- it’s more of what is the most amount of cash that we have available to us, that we could put inside one of these contracts, and also keep the death benefit as low as possible? Sounds kind of counter intuitive --
David: I get it, it makes sense.
Jeff: It is more of we are looking to utilize the money while we are still alive, and can go out and do the things we want to do versus, just have it for our beneficiaries. Not saying that isn’t important, it’s just -- making sure we can do the things we want to do with our dollars while its always going to be working for us, while we are still here.
Mike: So I assume -- Jeff you are working with the companies? You know the companies that will allow you to do that? Meaning, maximise your cash value while keeping the -- face of the life insurance down. You guys --
Jeff: Oh absolutely, we are constantly talking with the mutual insurance companies that we work with and that is a key factor right there, we need to make sure we are working with mutual insurance companies, not stock insurance companies -- because -- very similar to a credit union it is owned by the police holders, or the depositors. This way it is benefit for everybody, so they want to make sure they are making good investment decisions so -- lend people the money in that regard.
Mike: Awesome, that makes sense.
David: It does make sense.
Mike: So who is your target client? Who are you looking to meet? Or who does this make the most sense for?
Jeff: For the most part I am working with a lot of real estate professionals and it has to do with a way to utilize your dollars for money that you know is going to be spent regardless. So, for example I am personally buying single family investment units as a rental portfolio for myself. When I first started to design my own contract -- I knew that I would have to make two primary payments on a regular basis regardless of what I did. My real estate taxes and my real estate insurance, make sure that I have those properties insured, those are two payments I am not going to miss regardless. Everything else? Yeah I will pay them but --
David: Not as important --
Jeff: It is important, but I designed my contract around those two things because that is a known cost in my mind. I have to pay that regardless, so build the policy around stuff I have to spend money on, and then at the end of the year when I have to make those payments, I just borrow money from myself, make the payments and I am still getting that money to work for me, inside of the insurance policy.
Mike: Ok, I am little confused, I am sorry I am just a little slow. So does that mean -- you are going to pay that money back then? So you are basically financing your -- payments to yourself or from yourself or?
Jeff: Yeah, basically. But the benefit is that I don’t necessarily have to at that given point in time. Like -- I am borrowing money from myself so now I am becoming the bank. So I control the terms of that loan, when I decide to pay myself back is entirely up to me. So it is not like going to a bank and borrowing money from them and they say, alright Mike, guess what? Every 15th of every month you are going to have to owe us this amount or we will come and repossess or take your property.
Mike: Take your car like you said earlier? Take your house.
Jeff: So in this scenario here it's -- they know that at some point in the future -- I am going to pass away right?
Jeff: It is the reality of the world we live in, you know? So -- my policy loans are already collateralised by death benefit. So -- once I pass away they are just going to take and subtract the amount from my policy against the death benefit.
David: So with these whole life insurance policies -- there is no -- it's not like term, its forever. Once you sign the contract with them it's forever, right?
David: So what happens if for some reason, and I am sure this is probably a rare scenario; but what if I deposit 50 grand into one of these policies, there are obviously terms and conditions that go along with that, but all of a sudden after a couple of years I need all that money out of there? Can I close the policy, or would I just borrow it all out of it then try and pay it back or -- ?
Jeff: In that scenario right there we would try to recommend for you to borrow the money first, unless it is just something that can’t be done. Because if you just take and close the policy, then that would possibly create a taxable even which is one of the main benefits on why we want to put money in there. Because everything inside of the contract is tax free money. So we don’t have to pay any tax on the gains, as long as it stays inside of the contract.
David: As long as it stays inside the contract.
Jeff: So if you are just saying, hey Jeff instead of taking the loan I just need this money, I don’t like this thing anymore, which does happen, can happen, we try to avoid as much as possible, but -- if that’s what you want to do then we can make that happen. You just need to be aware that -- it could bring up a tax --
David: I'm sorry, it brings up another question. So let's say I do deposit $50,000 as an example into one of these policies. I go buy a rental property and I pay cash for it and it's less than 50, let's say the property is 40 grand and it is ready to go. I get a tenant in there -- like you said I am going to have my taxes, I’m going to have my insurance, I may have some maintenance expense, I may have a vacancy here and there. But regardless, I am going to be bringing in more money -- a month off that tenant then I am going to have in expenses, aka cash flow -- is all that cash flow got to go right back into the policy as the tax deferred income? Or can I take that and deposit it in my check in account and pay my water bill at home?
Jeff: You can do whatever you feel is appropriate for you at that point in time. It’s just a matter of what does your personal cash flow look like in that scenario. It’s just a matter of making sure we design it appropriately, because there are limits that we can put into this initially. So if you are going to say I want to put $50,000 in -- the first year we want to make sure we try and put that in for at least 5-7 year period, so this way we optimise the portfolio, your portfolio from the life insurance standpoint. Because there are some rules; the IRS is aware of this type of strategy -- and they have given us some guidelines we have to follow.
David: So it wouldn’t make sense for me to put -- say I put $50,000 and put it all in day one -- because then year two, three, four, five -- so on and so forth, I wouldn’t be able to contribute and or match those -- so it would be better to break that out over a longer period of time you are saying then?
Jeff: Yes, for the most part. It just depends on your specific scenario. If you continue to buy properties and know you are going to continue to buy properties, and you know what your margins are -- you keep doing that, then we could possibly structure that to make that work, but it just a matter of what is going to be appropriate for you.
Jeff: This is why we spend a lot of time on the front end of this where we make sure that we design this appropriately for you --
David: It sounds like these policies are -- I am trying to think of the right word -- like pliable? I mean you can kind of structure them any which way you want, as long as -- you can keep the contributions coming in and -- you meet all the guide lines. It doesn’t seem like a cookie cutter -- once size fits all policy. Sounds to me like you can kind of design it any which way you like, right?
Jeff: Yeah -- the way that I am using mine specifically for my rentals is based upon my cash flow.
David: I love it, it’s beautiful.
Jeff: I know these numbers -- where it's like -- I know what I am going to be spending every single year on my properties, from those primarily those two expenses. Real estate taxes and insurance.
Jeff: And those are two -- I don’t like writing those checks --
David: But you know you have to regardless.
Jeff: It just drives me nuts but -- it's the nature of the business that we are in right?
David: Right, so are you only using the policy for those two things at this point?
Jeff: It's also kind of a reserve account, as the policy continues to mature, I am going to start building up more and more cash value inside of it. So it is going to keep growing and compounding which is key too. So even though I take the money out -- the money that goes into is still working for me. So I don’t necessarily have to make any loan repayments back but -- I do to make sure that the police will still be there for me.
David: Right, are there restrictions on what you can pull the money out for?
Jeff: You're the bank, man.
David: So you can do whatever you want with it?
Mike: Yeah and I think that is kind of a good point though too, so it's not just necessarily for someone who has $100,000 to invest today, it sounds like you are building up your policy. So I assume a ten pay or something like that where you are paying once a year, contributing to the policies’ cash value, is that right?
Mike: Obviously --
Jeff: You're thinking along the right lines. I base mine on a monthly premium payment, because it correlates with my cash flow. So as the tenants pay me on a monthly basis, I just take money from that and it goes straight into my policy.
Jeff: So I could do it on an annual basis, I just made the choice not to. So it is entirely up to you, what you guys feel comfortable with.
Mike: Yeah, again I just wanted -- because I think our biggest audience is newer investors currently -- that is the feedback that we have gotten. So I just wanted to point that out, you don’t have to have $50,000 I think to get started doing something like this. Is that fair or?
Jeff: You are absolutely right.
Jeff: My first policy is $1000 a month. So I am not by any means -- this isn't a big policy for me but I have a game plan going forward which I plan to do this to where I am going to open up another policy as soon as I get a few more rentals under my belt. This way the cash flow can continue to keep funding more and more policies. My ultimate goal is to essentially get rid of the lending institutions that are out there.
David: Which would be awesome. If you didn’t have to walk into the bank all the time and get loans and go through the [00:17:14.03 - inaudible] process and --
Mike: Give me thirty seconds on how you would get rid of the bank. I mean so right now obviously I think you are buying -- like B class, C class properties, paying cash. Then using the rent to make your policy payments and then -- you pulling cash value from that to pay your tax bills and -- taxes and insurance.
Jeff: Yeah I mean -- so my goal is -- yes I do come in, I identify a piece of property I want to buy, pay for it with cash. This way I can acquire it and have more leverage. On the back end I will come back in and re-finance out of that deal. So as soon as I close on the deal, get it fixed up, get a tenant in three, I am going to go and approach one of our local lenders here -- I worked with a few just to make sure I can pull out what I can out of the piece of property. This way I can reload and do it all over again. So that whole process takes between 30 - 60 days to close on that process. So if I do that the front end on every single deal, it’s going to take forever and I might lose some leverage --
Mike: As opposed to being a cash buyer.
Jeff: So -- being able to not have to deal with that at all to where the interest cost, the amount I am paying the banks. So at the end of the year you just look at your statement and you just see how much money is going to their bottom line and not to my bottom line. For now it is helping me from a tax standpoint but -- I don’t like seeing that money leave.
Mike: No, that's great. So fast forward for me -- in Jeff Purkey's world, 10-15 years down the road, how do you replace the bank I guess is what I’m asking? So we have built up policy one, then policy two -- then maybe we get a big one or something. Explain that to me if you don’t mind.
Jeff: I’m on the cycle where I am probably going to be buying every ten properties -- I’m going to set up a new contract. This way I will be generating -- give or take -- I will be generating about $100,000 gross revenue on those numbers right there. Based upon what I currently have out of my properties. So each $100,000 I am going to set up another $1000 a month contract -- pull it out, then just start taking out bank notes. So at the end of my first five years and my first balloon payment becomes due, I will have enough money in there to start taking out bank loans. So once my refinancing period becomes due with the lenders that I am working with -- because I have commercial loans and I have five year balloons -- I will come back in and just take them out to where -- I now become the back to where I can pay myself back through my policy instead of having to go through the re-finance process -- go out an deal with another appraisal -- deal with potentially -- I shouldn’t say potentially -- more than likely higher interest rates at that point in time which ultimately cost me more money.
Mike: Gotcha, ok. That clarifies if to me.
David: So the way I look at it is like -- instead of you depositing into a policy -- it is very similar as if you were just depositing this into a savings account. However, down the road when you go to borrow against that savings account, you have tax advantages -- as well as -- interest that you are acquiring on the total amount of money was ever in the policy versus -- what is in it at that day. Am I getting -- am I following?
Mike: Plus the death benefit right?
David: Plus the death benefit. So let’s talk about the death benefit because -- there is a disconnect there for me, at this point in time. So -- I just don’t understand -- walk me through -- I think this would be a better way to explain this. Let's do an exercise where you would walk me through --. So let's say I am the client, I come into your office, I say hey, I can put -- 10 grand a year into a policy for the next five years -- at minimum. How would that contract look for me? What else would you need for me to like -- figure out how the contract would look on a similar situation?
Jeff: Well lets back up for just a second. Before we came up with that number, it is like how did we come up with $10,000? From your point of view --
Jeff: We just want to make sure that -- this number is going to be sustainable to that way once that funding goes in to place we know that money is going to be going in there.
David: Gotcha. That is very important.
Jeff: Oh absolutely. It’s kind of a --
David: Because let's say that was the -- original goal and after a year or two I lose a job or something happens and I can’t make those contributions, is there bad penalties that would happen or?
Jeff: There is, we do have flexibility inside of these contracts to where we can reduce the death benefit and make that a potentially paid up policy. But it is just a matter of understanding; do we have additional savings elsewhere? It is just a matter of working through the problem to see if it still makes sense to keep it there. That does happen -- happens all the time, just a matter of how do we go about coming up with a reasonable solution for that type of scenario. But to you question though; is it more a matter of how do we go about funding, developing a funding strategy for this. So think of actually going through that wonderful process of dealing with the bank and getting a loan. We basically have all those same documents that we ask for, tax returns, bank statements, brokerage statements -- a list of all your properties. Because the insurance company is going to want to make sure that the dollar amount that we do apply for -- there is a reason for it. They are not just going to let anyone walk in off the street and just apply for some ridiculous amount of insurance. There has to be a purpose for it. So identifying what that is and how we can go about creating a policy surrounding a specific number that you feel comfortable with. Does that make sense?
David: Yeah that makes perfect sense. And that’s where I was going with my question is; setting up these -- these contracts to me -- because I have never done it -- seems like -- a lot more complicated than I think it really is, I think it is pretty simple so --
Jeff: It's just -- I mean the hardest part is if you don't like needles. You are going to have to go through a medical; they are going to ask you questions, do you smoke? They will come out and stick you with a needle, take blood and urine and all that wonderful fun stuff. But, that's part of the process to make sure that insurance company is doing their due diligence to make sure there is an insurable interest. Just because we submit an application doesn’t mean you are going to get an offer. So it is just making sure they are doing their due diligence for the policy holders that they have made offers -- because -- their obligations are to them to make sure that they are doing their job to make sure they are underwriting these policies correctly.
David: Ok, what kinds of interest rates are standard? I would imagine every contract is going to be a little different.
Jeff: For the most part, the range that we have been seeing right now and this is a historical low in where interest rates are; we have been seeing 4 and 5% in that range.
David: That's the annual rate, right?
Jeff: That is an annual rate. So just try and get this in your mind for a minute here. That is based upon the dollars that go into the contract but -- just imagine what you are getting paid in an additional savings account right now.
David: Oh yeah like --
David: Right, if that. It's nothing.
Jeff: It is just a matter of people saving money right now, are the ones that are being unfortunately punished for having good habits with money. So it is just a matter of repositioning some assets where some people may want to go down that road, some people may not. Because -- it’s their comfort bubble. So it is just a matter of understand where they are at individually.
David: Gotcha. Ok -- I am following, I do have another question though. I do still not understand the whole tax sheltering. So I have a [00:24:45.07 - inaudible] and it is self-directed here with a company here in town called the Intrust group, you are probably familiar with them.
Jeff: Oh yeah.
David: So I move over -- a decent chunk of my [00:24:54.21 - inaudible] to this company, and I have check book control. So I can go out and buy real estate or really I can buy anything I want. I just can’t lend money to myself and there are a couple of other little rules. I can go out and buy a piece of real estate which I have done, with my [00:25:08.05 - inaudible] and -- then I have a tenant in there, so all that income has to go back into that [00:25:16.05 - inaudible]. If I sell that property in a couple of years and I make a capital gain -- there is no tax on it, it isn't taxable. However it has to stay in that bucket, there is no -- co-mingling. That was really the number one thing they taught me whenever I went and set this account up was -- listen everything you do in this particular account -- whatever you own in this account, or any income or any capital gain that you make in this account is going to be sheltered from taxes. But one penny of co-mingling then potentially screws your whole situation up. So I know that now and I am very aware of it and it's really awesome so -- I love it. I am going to continue to buy properties with my [00:25:55.13 - inaudible] IRA and do deals within it because there is no tax on that. But I guess where I am having disconnect is -- if I did this a similar approach with a whole life insurance policy. Like you, you are borrowing to pay taxes and insurance, which is great -- then you just pay that back later. You are still -- you do not have to go to the bank and get that money and or come out of your personal checking or savings account. You just borrow from your policy -- which then pays those bills, and then you pay that money back on your own time. That could be weeks, it could be months, quarters, whatever the case is. But if I bought an entire property with that -- not just paying bills, i bought an entire property which I imagine you are going to start doing in five years or so --or hopefully sooner. Is it the same situation with the [00:26:39.29 - inaudible] IRA where every -- dollar that comes out of that property has to be thrown back into that whole life insurance policy? Maybe I am asking the wrong question.
Jeff: That is one of the control issues with the [00:26:59.11 - inaudible]. Not knocking that strategy -- that’s where a majority of your dollars are, totally -- it makes a lot of sense to go that route. But just the simple fact that you simply go over there and take our trash cans to the curb if I am not mistaken if you are dealing with the self-directed IRA's. You can’t do any of the work or the maintenance on there. Just like you said -- I just sit back and write checks which -- probably better that I just do that myself, sit back and write checks. Because when i start -- doing work -- it costs me a lot more money.
David: Right, me to.
Jeff: But the point is just having control in where those dollars go. So once you sell that bit of property, where does it have to go?
David: Within the [00:27:32.16 - inaudible] it has to go right back into the [00:27:33.24 - inaudible] account -- I'm assuming I make a capital gain and I get to keep that no taxes. But it goes back in the [00:27:38.24 - inaudible] and every single rent payment goes into the [00:27:41.12 - inaudible] -- then all the bills come out of the [00:27:44.21 - inaudible]. It is an entity of its own -- completely segregated away from my investments. It's great because it's tax free but I can’t touch any of that money other than invested into more assets until I cash in that [00:27:59.07 - inaudible] at 65 or 67 or whatever that number is, it's 30 years down the road for me at this point.
Jeff: A couple of things; what is the maximum that you can both into your [00:28:07.27 - inaudible] IRA on an annual basis?
Jeff: Depending where you are at from an income standpoint, --
David: You could cap that out quick.
Jeff: Yeah. Pretty quick right? Not to mention if you are making -- 160 maybe 180?
David: I think so.
Jeff: Somewhere in there. Hold on, I’ll tell ya. I have it in here; I did this on purpose --
David: Yeah I want to say --
Jeff: If you are single it is 118, 3000 so -- if you get those numbers, then you can’t --
David: Can't even contribute, got it.
Jeff: So that is one negative by all means, there is nothing wrong with that strategy, it works, and you make money out of it. It’s just controlling where those dollars go.
Jeff: And how much money you can actually put into -- that specific type of vehicle.
Jeff: So depending on where you are at on a financial standpoint -- that includes all of your assets, tax liabilities, all those different things -- we might be able to put more dollars on a regular basis into one of these types of policies. This way we can use it for whatever we want. So to your point though, when we take money out of the policy -- just keep it simple -- what we have been talking about. My real estate taxes and my insurance -- I don’t necessarily have to put it back in there, I am still going to be making money based upon dollars that went into the policy. So I am going to be getting an internal rate of return based upon -- that specific contract, and I will have an external rating based upon a property. So essentially I am doubling my -- return so to speak.
David: Got it, so when you borrow against the policy -- that money hits your checking account for example, then you are not obligated to -- have anything necessarily to do with the policy, its separated at that point you’re saying? So you just owe the policy, period? Whatever you do with that money that you lent yourself from the policy -- you can go and invest, take a trip to Vegas, do whatever you wanted to do?
Jeff: Careful if you go to Vegas --
David: Right. I am just saying essentially you -- can do whatever you want with it. But my [00:30:09.13 - inaudible] IRA -- I can’t --
Jeff: There are no restrictions.
David: So I have check book control but again it is very limited on -- what I can do and -- so on and so forth and has to stay within that account, there has to be paper trails in case -- with the whole policies it is a lot different.
Mike: Well I think what you are talking about though -- you are kind of headed down that path is -- the reason you use your [00:30:28.11 - inaudible] is for that tax benefit. It is a tax free basically -- earnings.
Mike: So --
David: I prefer to control the investment, If I buy Apple or Microsoft stock -- yeah I own something that may pay a dividend which I appreciate, but I am just praying, I can’t control what those companies do.
David: If I buy a property I can control the tenant -- so on and so forth.
Mike: So I guess the question is then what are the tax benefits of using life insurance?
Jeff: The main -- tax benefits are -- anything that is earned inside of the contract. So any of the dividends that are being paid --
David: So that internal rate of return you were talking about, that is tax free?
Jeff: That is tax free, as long as it is inside the contract.
Mike: Let me -- again I am a little slow, you got to explain it to me real slow. So -- the money goes into the policy so it builds up your cash value? Or your life insurance death benefit? What is happening?
Jeff: Ultimately both. So --
Mike: So both are growing? Good.
Jeff: Over time yes. So as your policy continues to grow -- once we start to reinvest the dividends inside the contract -- it is also going to add to your death benefit as well. So overtime you will start to see this -- on both sides of the table, the cash value and the dividends and the death benefit also increases as well. But, ultimately the main objective from our standpoint in trying to buy real estate or whatever anybody really wants to do as far as big ticket items, is how much money do we want to get in here? And have access to that money so we can go out and do the things we are going to do? Want to do I should say.
David: So brings up another question. What is the benefit of a big life insurance company or -- I guess you call it a mutual company right? Owned by the policy holders -- of offering of a four or five percent interest rate, for me to deposit my money into that institution? It seems like quite a high rate for them to pay me -- I am assuming they are taking that money and investing in their [00:32:36.00 - inaudible] and what they are paying me and what they are making?
Jeff: Oh, absolutely. So I mean you got to think about it this way. These insurance companies that we are working with have been around for --
David: Hundreds of years, right.
Jeff: Many, many years. So they go out an invest in -- invest in treasuries, invest in cooperate bonds, real estate, they truly use it in a dominant style model when they go out and invest the premium dollars that they get from people like us. So they go out and invest the money as well, and additionally once we take out a policy loan, that is also an investment from the insurance company. So essentially your money stays where it is, it’s just used as collateral so to speak for the money that the insurance company would lend to you. So they are going to charge you an interest rate but -- its -- pennies on the dollar from the way we design our contracts. So it is utilization strategy, an investment from them to you. So it is a way they are diversifying their portfolio -- their investment portfolio.
David: So -- let’s just say -- again I am going to use some random numbers because I want to try and make it easier to understand. So let's say I had $250,000 death benefit. I had built up my policy, I don’t know what the cash value would be, I guess it really wouldn’t matter. But let’s say I had borrowed against my policy and I had borrowed like -- $50,000 off of that -- something bad happened and I died. So that just means whoever was the beneficiary of that policy would then get -- $250,000 minus what I had borrowed -- is it that simple?
Jeff: It's that simple.
David: Wow that is pretty cool. So that 200,000 essentially would go back to the beneficiary then if I still had any money in that -- account would they also get that to or how would that work?
Jeff: It's just the death benefit at that point in time. Essentially you have already used that money, the cash value, where you borrowed it to buy a property, buy a car, take a trip -- whatever you decided -- that is the benefit to you, but you essentially leveraged -- your money four times. So you put 50 in, and then took it out, unfortunately passed away, so somebody is going to get a check for $200,000. So -- I hate to say it this way but it is a win win in that scenario. You made money --
David: Very interesting, I love learning more about these creative ways to invest and finance and -- just park money for example. I don’t think a lot of investors are aware that -- these options are out there. I think a lot of people buy term insurance because it's cheap but it obviously has a term. It expires.
Jeff: Look at it from a business owner standpoint. You are going to sit here and just look at your cost. Essentially you are just spending money for an event that may or may not happen. I mean hopefully none of us pass away prematurely. If you don’t lose it -- you just spent all this money in the event you did pass away. So it is a cost that you can’t really recoup so to speak. It is just gone, and this scenario is a way to utilize those dollars while we are still here, to make it work more beneficial for all of us.
Mike: That is pretty cool. So what about that? There has got to be someone that is on -- once you make your initial contribution, again let’s say somebody did a $50,000 lump sum one time -- how much can you actually use of that 50,000? Are there restrictions on that or --?
Jeff: Yet again, I will just back up for just a second. If we are going to do $50,000 and that is the number we ultimately come up with to fund this. We are going to try and break it down over five years just to get the funding down. That way it is going to make the dollars work that much more efficiently for you. If we just put it in all at once -- the internal cash value of the policy is just not going to work as effectively as if we stretched it out over a longer period of time. Does that make sense?
David: Yeah, I don't understand that either. But I think it is because the company is -- just like any company they want cash flow. They don’t want a big chunk of change sitting there.
Jeff: That piece right there is going to come down to the actual cost of the insurance. We are very conscious of that now we are getting real kind of technical in this.
Mike: It's getting deep.
Jeff: We want to stretch it out -- we want to stretch that out from a cash flow stand point for as long as possible to meet the IRS guidelines so we don’t do what is called a modified endowment contract. So we want to push the limit to that number --
David: What would that number be? Could you have a twenty year contribution? Or thirty year? Does it go out that far? Or is it typically five to seven?
Jeff: Basically what we have done is we have taken a traditional whole life policy which is -- typically about thirty years. We try to consolidate all those premium payments into a five of seven year period. This way it allows us to get that cash value to grow quicker and accumulate faster.
David: That's a great way to describe it.
Jeff: This way we can use the money for things like real estate taxes, insurance or buying properties depending on the dollar amount.
Jeff: Or travel -- the beauty of it is -- the flexibility. Having control of where I spend my money and when I decide to spend it.
Mike: My brain is -- I want to get 50,000, 100,000, 250,000 in there as quickly as possible, that is what I’m thinking so I can actually use it --
Jeff: So let’s stick with that same example, let’s say we did the $50,000. That is the number we came up with, we want to fund it for five years. So that means first year we are going to put $10,000 in the policy. We typically have access between 60 and 80% of that first year’s premium payment. That number will increase over that five year time period.
David: So more money, higher percentage of that money becomes available as the longer it's there?
Mike: Ok so let’s talk year two then. We put 10,000 in the first year, and we put 10,000 in the second year. So do we get 70% of all of it?
Jeff: Just to keep it simple, yeah. I would say 70% yet again it is going to be dependent on your specific situation.
Mike: Sure. And your policy and all that stuff. Then third year -- put another 10,000 in -- going to have 80% or something like that?
Jeff: Somewhere in that neighbourhood. We are just giving ranges here at this point so -- it is just one of those things where as we get closer to that five year mark we will potentially be able access 100% of the dollars that we have put into the policy.
Mike: And obviously your cash value is growing then to after year five. That is going to continue to grow even if you don’t put anything else in?
Jeff: You don’t have to.
David: Can you keep contributing or -- would it make sense then to have a new policy -- aka a new contract? What would be the difference? What would be the advantage though, that's my question? What would be the advantage of me -- for instance having the policy like we talked about? We had 50k and put it in over five years -- then you kind of capped it out. Then the next year I had another ten grand I was going to put in but I didn’t need to -- do I start a new policy? Or do I just add it to that existing one? What would be the pros and cons of doing such a thing?
Jeff: That’s why we spent a lot of time on the front end to make sure we understand how long we want to fund this -- because at some point in time we will be maxing out this specific police. So in those scenarios were -- we decided -- we have hit the limit on the funding. We would possibly open up another policy at that point in time.
David: There would really be no reason to keep contributing to it.
Jeff: The last thing we want to do is go over what is called the modified endowment contract for the tax code. So we don’t want to go over that limit because, once we do it basically becomes a [00:40:07.08 - inaudible] on steroids. Where we won’t be able to utilize the dollars the way we are talking about here today.
David: So it all comes down to -- just using these strategies for tax advantages and -- loop holes and banking without having to walk into the bank and so on and so forth.
Jeff: That's the biggest driving factor behind -- why I am designing the contracts the way that I am.
David: I love it.
Jeff: In my scenario -- the biggest thing to answer that question about -- once we hit that point. The biggest question we have to ask ourselves is -- are we insurable? Because if you are not insurable then -- we may just want to try and keep funding as much as we possibly can, maybe put in a smaller dollar amount. It is just going to depend on where we are at that point.
David: So what would make somebody non-insurable?
Jeff: Heart attack, cancer, medical issues -- because this is an insurance product, so they are going to have to test again if we decide to have another policy at that point in time.
David: Right, so if somebody is a smoker, then they are going to have -- they are not going to be able to get as good a policy, for example -- somebody that is a non-smoker right?
Jeff: It is going to cost you more money. So it depends on how much you want to pay for at that point in time, if they will even insure you in the first place.
David: Got it.
Jeff: So some companies will, some won’t. It is just a matter of understanding the front of the equation -- so.
David: Awesome. So I have read a book, it has probably been two or three years since I read the book. It is called 'Bank on yourself' I believe. I think it is kind of on this topic. Do you have any other books you would recommend our listeners and our viewers to read that would kind of give them a little more information about the whole life insurance game as far as investing goes, and -- some more places where they can learn --
Jeff: Oh yeah. I will send you a link to, there is the -- 'Specially designed life insurance contract' and we have actually wrote our own book with the help of the Nelson Nash institute. The founder of the Infinite banking concept.
Jeff: Worked specifically with them and going through this whole process. So I mean it is -- extremely helpful. So I will send you a link for that as well.
David: We will have it in the show notes.
Mike: Is there anything else -- Jeff that we didn’t ask? I feel like I learned a lot.
David: I learned a ton.
Mike: Yeah, pretty interesting concept for sure.
Jeff: I am just glad your heads aren’t spinning.
David: No, no.
Mike: Well I think they were.
David: We had a lot of good questions that you did a good job -- you clarified and put together a simple solution for us because -- this is a complex product. It's not -- it doesn’t have to be complex.
Mike: It sounds like a simple product you are using in a slightly complex way. So we are taking that insurance and --
David: They are not always simple, so this is a great tool.
Jeff: Ultimately this is just a way to minimise risk of market volatility. So there is a known factor here. If we are able to get the insurance -- then we know the rate of return we will be able to get at this point in time.
Jeff: While we are still being able to access those dollars that we put into the contract in a tax free manner so -- just having the flexibility, the control -- and minimising risk. That's huge. Knowing that god forbid something happens to me -- my wife doesn’t have to worry about any of these issues. That’s huge to me. She could just own a portfolio that’s earning $80,000 gross income right now to here. Why not right?
David: Why not?
Jeff: So it is just a matter of how do you go about positioning your dollars so that it is always going to be working for you. I want my money working harder than I have to work for it.
David: I am with you 100%. Absolutely man. We are on the same page there. Well if our listeners and viewers want to contact Jeff. Jeff what is a good way for -- somebody to contact you to get some information -- and or somebody wants to get the ball rolling on one of these whole life insurance products immediately? How would they reach you?
Jeff: You can give us a call in the office at 314-822-4440, call and ask for me. Or you can e-mail me at [email protected] or worst case scenario just look me up in LinkedIn. My information is out there, you can find me there, it's public.
David: Awesome, Jeff thanks for coming on the show man.
Jeff: Thanks for having me; I hope I didn’t scare anybody away.
David: No, you did great, you answered a lot of questions, informed our audience and viewers and listeners about -- a really awesome product you can use to -- help your investing goals and reach your goals. So again check out Jeff Purkey, he is over at E3 wealth.com. Mike do you want to go ahead and read us a quote.
Mike: Yeah, let’s wrap up guys. "It is not a matter of what you make, it is what you keep." Thanks for listening guys.