What If
...And Do It All On A Tax-Preferential Basis!
It's neither new nor novel! The underlying contract of a whole life, dividend paying life insurance policy has not fundamentally changed in over 100 years. So, the concept of how to convert that contract into a tax-advantaged vehicle with similar transactional mechanics of the banking process is central to wealth acquisition. This process is based on the commitment of a long-term discipline to save…the working knowledge of how to apply this system to the owner's greatest advantage by following designated guidelines…the application of the correct insurance contract along with the prescribed options, riders and ratios…and, the belief and understanding that this program works because of fundamental economic principles, U.S. tax laws and insurance contractual guarantees. Learn the process of using your current flow of finances versus consumption of money, for integrating protection and wealth accumulation, enabling one to enhance their assets without creating additional liabilities. By using a front loaded, cash value, life insurance contract offered by a participating mutual insurance company enables one to benefit from expense funding while integrating protection and wealth accumulation. "One can possibly enhance their assets without creating additional liabilities" (Peter Konrad)
By Randall Davey
Matters & Common Cents
About Net Worth
Dan and Kristen have lived in the same house for 20 years. They paid $36,000 for it and now it’s worth $375,000. They have a $4,000 balance on their original 20 year mortgage and that will be retired before they are 50. They drive a new Toyota Avalon on which they owe $31,000 and have a small business loan for $200,000. Not counting the money in their 401k or their meager checking account, their net worth is $140,000. (Unfortunately, when Dan and Debbie start withdrawing taxable money from their 401k, they will have no deductions to offset it since their home will be debt free). Their neighbors two doors down live in an identical house and are also small business owners. They boast of no business debt, pay cash for their cars and have $50,000 in savings but they owe $285,000 on their home, having refinanced it multiple times. Their net worth is $140,000. Debbie’s cousin, a single-mom with two kids lives in an apartment, owes $12,000 on an 03’ Corolla, $15,000 to Sears, $22,000 to the local hospital for an uninsured surgery she had two years ago and $8,000 in student loans. Her ex-husband gave her $95,000 at the settlement, half of the proceeds on the home they owned together. Fortunately, she inherited $102,000 from her parent’s estate. Given her job at Boeing, she feels reasonably secure. Her net worth is $140,000. The point? Repositioning equity does not automatically increase debt or change one’s net worth. Equity and Debt can either work for you or against you. Equity that is earning little or losing ground coupled with debt that erodes ones estate is like a ball and chain around the ankles of a runner. One may make some forward motion but it will be compromised at best. Consider: while retiring debt, position equity in a safe way that is tax advantaged, liquid and working for you.
Repositioning Equity
Amelia Frame, 65, has $20,000 in CD’s at Cambridge City Bank. She keeps $20,000 in a money market account, $30,000 in savings and $10,000 in checking. Her financial advisor recently reminded her that she has $60,000 in a stock fund her late husband set up years ago. The advisor faithfully re-balanced her account. Living in a home her daughter owns, Amelia lives on social security and pension income and doesn’t draw dividends from her cash account. Fortunately, she has long-term care insurance and a small life insurance policy. Her net worth is $140,000. In 2007, when Amelia moved from her home in Cambridge, she transferred her money market account, savings and checking to the Bank of America in Zanesville, 24 miles away. When her CD’s mature, she’ll transfer that money to BOA as well. It won’t change her net worth but BOA is closer, pays ¼ point higher interest and offers cookies to their customers.
Going Forward in Reverse: Debt Demons
Even when one controls spending, there are still two habits that will retard retiring debt: 1) paying interest to financial institutions on depreciating assets and 2) paying cash while forfeiting the interest one could be earning on the same money for the rest of one’s natural life (lost-opportunity-cost). In both cases, those who finance and those who pay cash forfeit interest that could stay in the estate. Consider paying cash in a manner that allows you to convert a liability into an asset by recovering the lost-opportunity-cost. Teaching these principles is at the heart of accruWealth’s mission.
By Randall Davey
©Copyright 2008 accruWealth