Low-cost money and making saving a habit
Cash Value Life Insurance as a Lifeline to Cheap Financing
September is National Life Insurance awareness month, and I mentioned that we would be discussing some of the often-overlooked benefits to life insurance. When a client seeks permanent life insurance, an indexed universal life (IUL) is a popular choice for its ability to provide a permanent tax-free benefit along with competitive cash value growth potential. One of the overlooked benefits to these policies is access to the cash without having to close out the policy. There are many companies that offer this type of insurance, for example I’m going to use Midland National's product because it is the most used company in our office.
Let’s assume that an individual had an IUL policy through Midland National, and the need for a car unexpectedly arose. They seek a loan through their bank or local dealership but the best they can do is 6% interest. Their Midland National IUL policy presently allows for a net loan of 1.5% in years 1-5 against the cash value of the policy. After year 6, they have the option of a 0% loan or a participating loan. A participating loan allows the policy holder to continue to earn interest on the amount of money that is loaned, providing the potential for arbitrage…that is having the potential to make more on the interest credited to the policy than what they are paying in interest. It should be noted that IUL policy performance is typically linked to the performance of the stock market, but the cash value in the policy is not in the stock market. If the stock market had a negative year, while the cash value won’t decline, the policy holder would not be able to earn more on the interest received over what they paid out. On positive stock market years, the potential to earn more is present. In uncertain times, the policy holder may “play it safe” and elect the 0% loan after year 5.
Access to low-cost money can put the policy holder in charge of their finances. In low-interest rate environments, banks may serve them well. In high-interest rate environments, they have access to low-cost money through the cash value of their IUL. It should also be noted that loans against the cash value of life insurance policies are not required to be paid back, however, while the policyholder is still in the accumulation stage of their life, we recommend they are eventually paid back to make the policy whole for potential distributions in retirement.
How I Made Saving a Habit
While nothing in life is ever a guarantee, I realized at a young age that I could put odds in my favor through the sum of my actions. What I found to be amazing is I really didn’t need to understand the finer workings of things; I just needed to stack actions in my favor. Let me give you a few examples.
When I was a kid, my dream was to play football in college. Football was on my mind most of the day and often while I slept. My minor obstacle as I saw it was that I was not a “gifted” athlete, to whom strength and speed came easily. As a result, I controlled the one thing I could control, hours of training. I would put the sum of positive action in my favor. I would simply lift more weights and practice more hours than others were willing. I did this throughout high school and as I entered Mount Union, I made a promise to myself that while there may be better athletes in the Purple Raider secondary, there would never be a better conditioned player than me.
As I got into life beyond college the habit of strength training never left. Habits are hard to break, even good habits. I still workout 5 days a week, doing many of the same training programs I did as a 20-year-old, with slightly less forgiving joints. I thought, “What if I began to attack my financial goals the same way I did my athletic goals?” Here is where the magic happens.
A significant portion of our current situation is the mathematical sum of prior choices. A net positive or net negative choice creates momentum in either direction. Consider a baseball player that is on a hitting streak - the batter can’t miss, and the baseball seems to be the size of a beachball. He has positive momentum that is hard to stop. Now consider a baseball player that is in a slump. The ball could be the size of a beachball, and he still wouldn’t be confident that he could hit it. He has negative momentum that builds with each strike out.
We can create positive momentum by linking old positive habits with new positive habits. I knew that I would work out 5 days a week. What if I added to my investment account upon the completion of each workout? I could honestly say I will own more shares of my investments tomorrow than I do today. I own more assets than I did a week ago. Some days my budget would only allow me to add a few dollars, on other days it was much more, but the important component was not the amount I was saving, it was the habit I was creating. To this day I don’t feel whole if I haven’t worked out or contributed to my future.
This tactic works well with any habit that you’d like to add to your life to create positive momentum. After dinner, a father or mother may decide they want to spend 30 minutes playing with their children. Prior to brushing your teeth before bed, you may spend 20 minutes reading books that will assist in mastering your trade or developing new skillsets.
We touch on this topic in greater detail in our book, “Dynamic Growth.” You can request a free copy by email or simply stop by our Ashland office. “Tomorrow owes you the sum of your yesterdays. Nothing more than that, and no less.” -Robin Hobb
When Should You Use a Financial Planner
The answer is never black or white because people have different goals, objectives and financial skill levels. In a recent 15-minute podcast, Nate reviews common life stages when clients have decided a financial planner was in their best interest. You can listen to it here.
MicroStrategy’s Macro Strategy
Derek, our analyst, recently posted a blog on our website that is blowing up in clicks. How Strategy is using Wall Street to Stack Bitcoin. You can read it here.
Disclaimer: Crosby Advisory Group, LLC is a registered investment advisor. This podcast is for general knowledge and is not intended to be individual investment advice. Investing involves risk including potential for loss. Understand all risk and fees before investing. NMD Insurance is affiliated with Crosby Advisory Group, LLC.
