Airplane Business - Case Study
This strategy will leave you flying high and in first class. I'm fortunate to know many of the brightest people in the insurance world. I was blessed to learn about the Become Your Own Banker strategy right from best-selling Author, Nelson Nash.
Last week I was able to interview someone that has been involved with cash value life insurance for a long time. He shared a story with me and gave me permission to share it with my readers. I've changed a few details to keep things anonymous but I heard it from his own lips.
This friend is obsessed with planes and flying. He's also a big fan of being his own source of financing to recover the money he spends on major purchases. His major purchase has been an airplane. Yes, he has used this strategy for other, smaller purchases but this one was pretty unique.
This friend is partners in a flight school where they teach students how to fly and collect the hours of practice required to become a private or commercial airline pilot. He loves his job. Not long ago these two partners had the opportunity to buy several airplanes but couldn't secure the financing from the bank. On a new plane you can usually get a 20 year loan at 6%. On a used plane, you had better have cash or be willing to pay 15% interest on top of collateral equal to the plane purchase price.
The used planes he and his partner were looking at easily generated over $100,000 in revenue even though they are older. So instead of passing on these planes, he was able to dip into the insurance contract he owns as a source of capital. He had set up a plan for himself 16 years earlier that had grown and grown.
At age 46 he has nearly $390,000 in cash he can borrow at 5% interest and set up his own pay back schedule. So this is what he has done! The plane cost him $80,000 and he plans to pay it back and depreciate it over a 20 year time frame.
If he had been able to get a bank loan he would have had a 240 month repayment plan with a $573 a month payment. Over that time period he would have lost $57,555 to interest. I typically like to show what would have been lost to depreciation but that is hard to do on an airplane and 20 years. Planes tend to hold value better than cars because they aren't made in great numbers like cars are so we'll leave it at $57,555 lost to interest.
$573 paid for 240 months is $137,520 for an $80,000 plane. My friend instead of paying that will have that amount back in his possession by paying himself instead of a bank. Plus the money he borrowed against from his insurance contract will continue to grow and compound uninterrupted.
Had this friend taken $80,000 out of earning to pay cash for the plane, he would have missed out on his money growing to $212,263. I got this by having $80,000 compound annually at 5% interest for 20 years. Paying cash is typically worse than financing a loan. Uninterrupted compounding interest coupled with not losing interest and depreciation on major purchases is a lethal combination.
However, understanding the tax code and wanting to be smart with his money, the friend plans to buy the plane himself and then lease it to his LLC at 15% interest. The business gets to write off the interest and the depreciation and the friend gets to put the additional money back into his account. This is all legal and its the same rate he would have paid a bank could he secure financing on a used plane. This payment will be higher but the business makes enough to cover the lease and be profitable. This pays off his $80,000 loan at nearly double the rate and puts all that extra money back in his pocket. He will max out this policy eventually and have to buy another plan. What a great problem to have.
This friend stands to come out far ahead financially by purchasing his airplane for his business through his insurance contract. Because of his diligent savings, he will be able to take advantage of an opportunity he couldn't have imagined 16 years earlier. He also has enough money to purchase 3 planes and leave himself a cushion of emergency money. Now multiply these numbers by 3 planes and you can see why this friend was excited to share his idea with me. I was excited for him.
Most people will have a greater need for financing in their life time then they will be able to save. So why not save and be your own best customer on good loans instead of giving away all your money to the bank or risking it on Wall Street? If you are a business owner, you know you hate handing all this money off to the bank. Not only can you be smarter for your business, but you can make your business stuff more money into your pocket.
Let me show you how a properly built plan can be an incredible money maker for you down the road. I don't know what opportunities or emergencies will come your way during your life, but they come and things turn out best for those that are prepared.