One of my great joys of being in the insurance business, offering custom designed cash value policies built to help clients be their our source of financing, is when I see the lights come on in someone's eyes and you know the concept of being their own source of financing just clicked.
Today I want to share a time when this happened for a successful Towing company owner. This clients business does well. It keeps him busy and every day is a new day. However, this client is always looking for ways to save money for the business, his future retirement and on taxes. I started by sharing a few pages of written information so he could see how the numbers would work to his advantage if he were to fund a policy for several years and then become his own source of financing on his tow trucks and other equipment.
Not long after sharing this packet with him, I got a text that said, "I want to do this, when can we speak?" This client picked up on the concept faster than most. The first thing we discussed was how the concept worked. He already owned a few cash value policies but they were small and would take 4 decades to build up what he needed.
The first concept we discussed was how to capitalize the program. Unlike most of my clients that aren't business owners, he knew this policy was specifically for recovering the money he was losing to interest and depreciation on his tow trucks. Depending on the tow truck, they can range in cost between $40,000-$90,000.
We also discussed how he would need to consistently fund these for a few years to get close
to the breakeven point and also, to have enough capital to start being his own source of capital on truck purchases. He determined that he could put $15,000 a year away.
In all financial products, except a properly designed cash value insurance policy, you can only use your money in one place at a time. With these plans, you can use your money in two places and the result, if done correctly, is more money for the policy owner. The first thing the client pointed out was that he was shocked and pleased that he would have access to $10,802 of his cash value in the first year. This gave him confidence to buy the death benefit and place the money, knowing if an emergency came up, he had money he could tap into to help him. However, his plan was to just let it grow if nothing came up.
He then committed to funding the policy. As you can see by year 5 he has about $73,000. With the trucks he is buying, he typically spends around $60,000. At that point, he would be ready to ditch the bank, stop handing off money and interest he'll never see or be able to use again to the bank and start recovering the depreciation.
This was the second part he really needed to understand. How could he borrow money from his policy and have it continue to earn interest as if the money were never gone? This is the power of these policies when built correctly. The money you place never actually leaves the policy, rather the insurance company provides you with an easy to secure loan. The loan is easy to secure because the insurance company uses your money and death benefit as collateral. A loan literally takes 5 minutes to request.
I'll bet you've never had a car or tow truck loan that took 5 minutes, didn't require tax statements, proof of income, collateral, credit check, proof of employment, debt to income ratios and all the other hoops banks demand you jump through in order to utilize their money. With an insurance contract loan, you simply fill out two pieces of paper to prove you are the owner, request the amount needed and direct the company where to send the money. It's that easy! Seriously!
The third thing the client needed to understand is the power of uninterrupted compound interest vs paid back simple loan interest. I'll use his same real numbers to help you understand. The client let me know his typical loan is 60 months and 8% interest and the loan is $60,000.
This makes his payment roughly $1,217 a month for 60 months. Over these 60 months he would normally hand over $72,995 to the bank. That means he paid off the $60,000 truck but also gave the bank $12,995 in interest for the right to borrow their money. After 5 years, the client determined his truck would still be worth $30,000. So he"ll lose $30,000 in depreciation from the original $60,000 tow truck.
If we combine the $12,995 of lost interest and the $30,000 lost to depreciation, his total loss on this truck is $42,995. This is a large loss but in the past he was at least grateful to have been able to write these losses off on his taxes. This is the way banks teach us to behave with money. Now I want to show you my way to behave with money.
You may need to read this a couple times but trust me the math is all correct. Instead of borrowing $60,000 from a bank at 8%, the client is going to borrow $60,000 from the life insurance company and leave his money intact in his policy earning between 5-6%. For simplicity sake, we are going to assume the lower 5%. We are also going to assume he borrows money from the insurance company at 5.5% but keeps paying back at 8% since that is what he has been used to paying over his 15 years of being in business.
Since the amount borrowed is the same, the interest rate paid back at 8% is the same and the time frame of 60 months is the same, his payment remains $1,217 a month. However, at the end of 60 months he has paid back his policy the $72,995. He has possession of the money, not his bank. This is money he will see and be able to use again and again and again. Now, if he is smart with his money, which this guy is, he will sell the truck instead of trading it in and will dump the $30,000 truck value into his policy for a total increase of $102,995 back in his possession. This was possible because he stopped making premium payments after 5 years. That means over these 5 years of paying back the car he has $75,000 of premium capacity he could back fill with the interest and tow truck value. Any premium you don't pay, the amount you could have paid (in this case $15,000 per year) stays available for future dump in.
So at this point, he has recovered the $12,995 in interest and he has recovered the $30,000 he would have normally lost to depreciation. Side note - when set up correctly, he still gets to write off the interest and the depreciation on his taxes as a business owner, but he also still gets to keep the money. I know, you are thinking this all sounds too good to be true. Please trust that it is true because I am going to show it gets even better and then you will really be questioning me. (I will spend as much time as you need before your own light bulb comes on.)
I say it gets better because, remember, this clients $60,000 continued to compound at 5% in his contract. That means at the end of 60 months his $60,000 has grown to $76,577. See picture below so you can follow the math.
If math tends to fry your brain, then maybe skip this next part because it is very technical. I think it is good to understand but whether you understand or not, this is what will happen with your money. You now have the $72,995 back in the policy but the actual policy increased internally by $76,577. The difference between the two is $3,582 of interest you are up by in the 5 year period. That is additional money you were able to stuff back into your policy (not the insurance company or bank) just by paying back on a truck you would have purchased and paid back on anyway. This is the smart way of buying major purchases. Same time, same interest, same amount, totally different outcomes. Which do you want?
I've already placed too many pictures in this blog post but a picture of a smoking brain would be appropriate right now. Needless to say, compound interest will always outperform simple interest being paid back on a loan over the same time period. The point is, you saved a bunch of money in typically lost interest and redirected it back to your future tax-free retirement bucket. You also recovered the lost depreciation back to you while still being able to get the tax write off and you dumped the left over tow truck value back into your account. This all leads to significantly more money in your plan. I wish I could show you how this looks in a plan compared to if he had never borrowed and just let his money compounding over time, but it takes months to design with an insurance carrier. However, I think you can see that you end up with a lot more money in your plan that then carries on earning compound interest until the next loan. This is how you amplify your wealth using the same dollars you already use but in a smarter way.
Fortunately, for this tow truck company owner, I will be here to help him along the way and he has a second truck he'll be able to start recovering on within a few years of the first loan. Two trucks will be better than one and his account will end up with a large sum of tax-free money when he is ready to retire.
**Side note - as we reviewed this concept and the client looked over his current policies, he and his siblings realized they could take advantage of some of their money immediately. They had been contributing $50 a month and the shop $50 a month for a decade. One sibling paid off a high interest credit card so they could recover that money and the other paid off a $10,000 car loan to recover the remaining interest and depreciation of that loan.
Whether you own tow trucks, own a business that purchases equipment or you are just someone that needs to save for retirement and hates losing on every single car purchase, let me show you how a plan like this could amplify your wealth and help you recover the money you will inevitably lose on major purchases.