Rate of Return

I was talking to a guy today, a client we’ve been working with for a couple weeks, who is deciding if he wants to pursue his insurance policy through us or another guy. He’s a great guy, he’s a slalom skier (course skier), which is something we love to do, and waterskiers are somewhat hard to find these days. His big question is what I discussed in my last post about universal life and whole life. He understands the incredible benefits of life insurance, and is thrilled about the cash value accumulation by over-funding and maximizing his policy. He realizes that he can self fund it in about 5 years, and it is a great wealth creation tool, but there are 2 problems….

1. He was only seeing the half of it. He saw the advantages of life insurance as a great tool for wealth accumulation, that solves the need for insurance at the same time, but his mind was heavily focused on the product, not the process. Today we helped him see a little more of the “banking” equation, and that he wants to be able to use it as a financing solution so that he can recapture a lot of wasted dollars. This is key to understanding wealth accumulation. So many lose wealth either unnecessarily or unknowingly, because they don’t understand the PROCESS of wealth, and that it is not a product. Understanding the benefits of life insurance is one thing, but understanding the incredible power of banking is another. Its the larger part of the equation. But we talked to him about the cash values in a universal life policy, being eaten up in later years. We told him of a lady we know, who is currently debating whether she should put up the $88,000 to keep her universal policy alive, or lose all the money she ever put in. Her policy has literally deteriorated because the projected numbers (the TRAP), were well below the actual growth. His exact words were, “well…I don’t want to do that.” No one does, but the reality is for this lady, that if she puts in the money this year, it will only keep it alive for this year, she will have to fork up more next year, and even more the year after. Where are the numbers the policy illustration showed now?! These policies are never what they seem. With whole life, you pay the same cost of insurance every year, and the numbers will ALWAYS get better every year.

2. The second problem is this. The agent working with him on the universal life policy is pushing what ever one else pushes…RATE OF RETURN. Though important, and sought after, this is not the factor that should be looked at. This is no what produces the best results. Its the environment of your money that is key in wealth creation. These universal life guys are showing him returns at 8.75% projected over his lifetime, this is just not possible, or realistic. Again, they are alluring him by projecting numbers and rates of return that are just not feasible in this market. What is not understood is that whole life is the safest version of insurance, but will rise with the market as well. The only difference in growth is that whole life policies with a mutual company don’t have to pay stock holders. The Universal life will take more risk in order to compensate both you and the stockholders of the company. With a whole life policy in a mutual company, YOU ARE THE STOCK HOLDER. They don’t have to take more risk to get you your money, you become the stock holders, and by mathematical equations, actuarial data, and safe, safe investments, can get you strong returns that create the foundation for wealth. The rest is the process of wealth accumulation that lies in understanding how to handle money at its most efficient levels.

Example:

The average American spends 34.5 cents of every dollar on interest alone. On the other hand they are doing everything they can to save even 10 cents of every dollar (average saves less than 5), a 3.45 to 1 ratio of interest to savings. Instead of searching for a higher rate of return and risking those hard earned dollars, changing the environment in which your money is working will dramatically change your financial status. Imagine a plane flying at 100 miles per hour, a relatively good speed, but the actual speed relative to the ground will be determined by other factors as well such as a 345 mph headwind. How fast is the plane going now? Still 100 mph in speed, but relative to the ground it is actually going in the reverse direction 245 mph. The pilot might as well ground the plane and wait it out, its only doing him worse. Now let’s imagine that he waits for a 345 mph tailwind. He is still flying his plane at 100 mph, but this time with a powerful tailwind that brings his actual speed, relative to the ground, to 445 mph! A 690 mph difference all because the change in environment.

The same applies to infinite banking and wealth creation. In the case of flying an airplane you cannot necessarily change the environment, but in the financial world you can. You see, most financial advisers are trying to increase the “speed of the airplane.” Going from 100 mph to 110 or 120 mph is not the answer to the problem. It’s the environment. Implementing the principles of Infinite Banking will create as radical a change to your financial situation as the change in wind is to the airplane.

So in the end he understood the concepts we were showing him, and realizes that its not all about rate of return, but about safety and understanding the process of wealth accumulation. Plus, he realized that universal life is not the answer, but another way to project radical numbers that are never realized.