Monthly Archives: April 2015

From Employee to Entrepreneur – What You Need to Know

Do you long for more independence or wealth? Maybe you should start your own business.

StartUp

A successful business can open up opportunities, options and freedom like very few jobs can offer. Starting a business will take time and require you to re-examine your priorities. The only thing we all have the same amount of is hours in the day. High-income business owners use their 24-hour allotment differently than employees.

Small businesses are a huge factor in the growth of the U.S. economy. True, the recession hit wannabe entrepreneurs hard. According to the U.S. Small Business Administration, the rate of new start-ups went down 12 percent from 2007 to 2010.

Getting the Money

Most businesses are started with a large investment — made with owner equity, borrowed funds or both — in goods, space, equipment, labor, marketing and other factors.

When you think of borrowing money, banks of course come to mind. Find out what banks specialize in your type of business. Network with others in your industry and find out who is helping them with financing. To get a loan, be prepared with a business plan, personal financial statement, an explanation of your experience in this type of venture, additional collateral, relevant industry facts about growth rates and demand and other pertinent information.

Finance companies and venture capital firms might be a better fit. Be very wary of companies wanting large upfront fees to simply review your application. Files for many small business ventures can be reviewed and underwritten with very little upfront costs other than an appraisal.

The Unique Selling Proposition

The most important part of any business is getting many people interested in what you have to sell. One critical point is a “unique selling proposition” that can separate you from most of your alleged competition. Some famous examples are Domino’s (DPZ) “Fresh, hot pizza delivered to your door in 30 minutes or less or it’s free” and Subway’s promotion of healthy subs with its Jared weight loss campaign.

A USP should quickly tell prospects what’s in it for them, and it should be used in all of your marketing messages. The USP is not necessarily a slogan but could be a mission. One of mine is helping families all over the country create tax-free generational wealth. It is simple and to the point, and many prospects want to know more.

Potential Customers Are Online

Thanks to the Internet, you have a worldwide marketplace at your fingertips. But how do you get just a tiny fraction of the billions of people online to check you out and do business with you?

A website is an absolute to be taken seriously. A website needs to be “sticky” (meaning the content urges people to stick around) and should generate leads by giving away something of quality. All prospects need do is to give their name and email address to get this free item. Most of your leads are not ready to do business with you right away, but if cultivated inexpensively over time via email and occasional snail mail, they can be worth a fortune to your business.

Internet marketing can generate leads to a targeted group of people. Google (GOOG) AdWords and Facebook (FB) marketing can be quite successful for entrepreneurs who take the time to understand how they work.

To start a successful business, spend time researching with the U.S. Small Business Association and elsewhere. Spend money on business training. Make it a priority to make your dreams of business ownership and financial possibilities come true.

Myths of Whole Life Insurance

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There are many myths about life insurance that most people unfortunately consider as facts. Most of these myths are perpetrated by Wall Street and people who want every nickel of your money in the market under their management. The first huge myth is “buy term and invest the difference” and this one is so big it required its own article to debunk.

Myth #2

Life insurance is a lousy place to put money

What I described in previous articles about designing policies is very true but there are also some other facts that blow this myth away. Simply ask yourself this question, if putting money into life insurance contracts is such a lousy place to put money, why do the biggest and most wealthy institutions put loads of their own money into life insurance products? Major Banks, large corporations, and family dynasties have been putting boat loads of money inside these kinds of policies for generations. Are they that stupid about money? Not hardly. They are very savvy with money which is why they use life insurance contracts and other products to grow and protect their wealth.

Major Banks High Cash Value Life Insurance
As of 12/31/2014, Federal Financial Institutions Examinations Council Call Reports

JPMorgan Chase 10.6 Billion Dollars
Wells Fargo Bank 17.995 Billion Dollars
Bank of America 20.794 Billion Dollars
PNC Bank 7.699 Billion Dollars

Whole life insurance is too expensive

When someone tells me that I will simply say “in relationship to what?” If you are just comparing it to premiums for a term policy on the same coverage amount you are correct. However, because of the tax free guaranteed compounding of a proper life policy many of my clients will overcome the actual cost of the insurance in the first few years of the policy. These policies will get to the point where they self complete which means the insurance company owes you more than you owe them in minimum premiums. So if you decided to, you could have the basic premium paid out of cash value and your cash value will still grow and move forward. So when 20 years from now you still want coverage and go to extend your old term insurance policy or buy another one, get ready for the shock of the new premium based on your attained age. If you had strongly funded a life policy 20 years before, that policy’s death benefit would have been growing these last 20 years (all part of proper design of the policy with a proper carrier) and no more funds would be required to maintain the policy due to the huge cash values you have accrued. You would have also have had access to large cash values to use for other wealth strategies.

Myth #4

Universal life or Indexed Universal life does the same thing as Whole Life

This is such a myth that I will need more than the space allotted to let you know how these policies really work over time and why the cost of insurance will skyrocket over the life of the policy. Please download my free report at my website and find the indexed universal life report under the video. Don’t you dare buy one of these policies until you read this free report. If you already have one of these policies get the report and be thankful there is probably something we can do for you to help. Ask us about a 1035 exchange of that kind of a policy to one that is better suited for long term and being your own bank.

Myth #5

I am too old or in too bad of health to obtain a life insurance policy

I have clients all over the country who once believed this to be true but now own life insurance policies. If you like the concepts of self banking and insurance policies don’t assume you can’t qualify for one of these policies. You may be able to qualify and the numbers will still make sense. If you indeed can’t qualify yourself there are other options.

Many of my clients take out policies on their children or grandchildren which mean the younger, healthier person qualifies for the insurance but my client owns the policy with all the benefits. I have clients in their 70’s who took out new policies but put the policy on their adult children. They then went on to use the funds in the policy as their own bank. Contact us to see if this might be an option for your situation as well.

When I am speaking to a crowd on this topic I often call a properly designed whole life policy as the “one account” because it is so truly unique and powerful. It is the only account that I am aware of that can function with many different uses that all work together. This is the only account that can be:

Savings Account– When you are not using your money it is sitting inside of the life insurance contract collecting much more in interest than it would if it was sitting in a bank. As of this writing most savings accounts are paying 0.5% or less and some life carriers dividend scale is almost 6.5% on life policies. Even after you take out the cost of insurance in the early years of the policy your money still does far better than dying a slow death in a traditional bank. You have easy access to your funds just like a savings account so why keep most of your money in the bank doing nothing for you or your family?

Your Personal Bank– Just as described in the last chapter you can put these funds to use to plug up your 4 massive wealth drains and help you grow wealth as the bank. Because you are doing this inside of your life insurance contract your earnings are tax deferred inside the policy and when properly done can be accessed tax free. Also with some policies and carriers the money you borrow out will still be credited with growth and dividends. This is not common but there are carriers that allow this and we can help you determining which carrier is best for your needs

Retirement Account- There will come a time when you desire to pull an income stream out of your policy. You will be able to either withdraw the money as you see fit (not optimal most of the time) or take policy loans that you will not pay back. In most cases policy loans are optimal because you don’t have to pay taxes on policy loans. If you choose, you don’t have to pay the policy loans back during your lifetime. The loans can be paid back out of the death benefit after you pass away. For instance you have a $1,000,000 death benefit but have borrowed out $250,000 in policy loans and deferred interest and you pass away, your family will receive the $1,000,000 death benefit less any outstanding policy loans which in this case are $250,000. This will produce $750,000 tax free to your estate after you pass away.

Rainy Day Fund- You should never borrow all the cash value out of your policy but rather keep a chunk of money in the policy in case of emergency. This is a rainy day fund that produces solid interest rates and return.

Estate Creator- Let’s not forget you are creating all this wealth inside of a life insurance contract which will automatically leave behind money for your family and/or anyone else you choose after you pass away. My mom, as she aged, started to worry more about leaving money behind for her family instead of living as abundant of a life as she should have lead. This is the only kind of program where you can spend every nickel during your lifetime and still leave behind extra for your family. Wherever you have your money saved or invested currently, ask yourself if the account you have it in has all of the benefits listed below. These are all benefits of a properly designed life insurance contract. Please feel free to contact us if you need more information.

An IRA Option Your Financial Advisor Won’t Tell You About

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When you set up an individual retirement account, you’re usually given a list of investment choices — mostly stock-based funds, and some bond funds. Many financial professionals call this a self-directed IRA, but it’s really just a multiple-choice IRA: “You can invest in anything you like, as long as we approve it and control the funds.”

However, a real self-directed IRA can be set up with an administrator who is approved to handle nontraditional investments, such as real estate, private loans, tax liens, limited liability corporations, options and other non-stock and non-bond investments. These IRA are for the active and educated investor, not for the investor who just wants to put money away and turn the management over to brokers or financial advisers. It’s more work, but the potential with this type of account is tremendous.

Let’s consider a few hypothetical investments.

  • If you bought a home for $50,000 using funds from your self-directed IRA and leased the property out for $900 a month, your net cash flow wouldn’t be taxable. If your net monthly positive cash flow was $550 (a reasonable figure), your $6,600 would either be tax-deferred or tax-free depending on the type of IRA you had used (traditional or Roth) to purchase the property. If you leased it for five years, that would mean $33,000 of positive cash flow would be in your IRA tax-free — plus, you still own the home. If you sold the home for $80,000, your net profit would be tax-deferred as well. In five years, you would have made $33,000 in cash flow plus $30,000 in appreciation, for a total of $63,000 of nontaxable profit in your IRA. And, yes, you can still take advantage of these types of deals.
  • You could buy a fixer upper for $50,000 and put $25,000 in repairs for a total investment of $75,000. If you flipped that property for $110,000 and netted $105,000 after sale expenses, that would be a $30,000 profit. That profit will be tax-deferred — and you can repeat the process. If you had flipped the property outside of your IRA, you would be subject to short-term capital gains taxes, payable at your ordinary income level. You would have had to give $10,000 to Uncle Sam, and you’d have been left with just $20,000 after tax profit.

A More Complicated Scenario

You could buy a property and sell it with a wraparound mortgage. Let’s say you find a fixer-upper where the seller is willing to take a small down payment and carry the balance of his equity in a note and mortgage. The seller will take a payment for his equity for a number of years. Say the purchase price is $100,000, and your down payment (from your IRA) is $10,000. You have a $90,000 mortgage payable to the seller with a 30-year amortization at 5 percent, with a five-year balloon payment, giving you a principle and interest payment of $483.

You later sell with these terms:

  • $125,000 purchase price.
  • $20,000 down payment (giving your IRA the $10,000 investment back plus a $10,000 profit).
  • $105,000 wraparound mortgage payable to you with a 30-year amortization at 7 percent, with a four-year balloon payment, giving you a $699 payment coming in every month.
  • You are responsible for the underlying payment of $483, giving you a positive cash flow of $216 per month or $2,592 per year. This will be a four-year net cash flow of $10,368, plus the $10,000 profit up front.
  • Also in four years, you will still be owed $100,000 but will only owe the underlying seller $84,000, giving you another profit on the back side of the sale of $16,000.

Let’s do a little back-of-the-envelope calculating to see if it’s worth your time to get educated on the ins and outs of this type of transaction. The profit over four years is $10,000 up front (the difference between the down payment you made and the down payment collected upon sale), $10,368 of positive cash flow and $16,000 of back end profit when loans are paid off for a $36,368 net profit for our IRA on a $10,000 investment that we received back in the first 90 days.

The Dodd-Frank Act mandates certain disclosure and actions be taken if you deal with private mortgages and financing. Get qualified help. Balloon mortgages are not acceptable anymore when selling to an ordinary buyer, but could be fine if you are selling to another investor.

In a transaction like this one, you would use borrowed money in the form of a seller-held mortgage. This would make some of your profit taxable out of the IRA, but the rest of the money would get to stay there tax-deferred. Your IRA can borrow money, but it has to be non-recourse debt, which means there are no personal guarantees on the money you borrow. If you don’t pay the seller, his or her only recourse is to foreclose on the house; he can’t come after the IRA or you personally for any deficiencies. Consult a highly knowledgeable real estate professional and an attorney to help you set this up properly. You should do research and get more training on these types of deals as well.

Some Limits Apply

There are some things you are not allowed to do with your IRA. Among them:

  • You can’t invest in collectibles such as stamps, coins, comics or baseball cards.
  • You can’t self-deal, which means no loaning money to yourself.
  • You can’t loan money nor do business with IRA money with anyone in your direct linear family chain, such as your spouse, children, grandchildren and parents. Your IRA may do business with family members not in your direct lineage, such as siblings, aunts and uncles).

Several companies offer self-directed IRAs; two of the bigger ones are Equity Trust and Entrust. Before you go this route, it is important to do your homework on which is a good fit for you and what you are trying to accomplish. But if you’re up for the challenge of nontraditional investments, you should take a close look at this fantastic opportunity to be fully in control of your IRA.

The Trans-Pacific Partnership and the Death of the Republic

WEB OF DEBT BLOG

The United States shall guarantee to every State in this Union a Republican Form of Government.    — Article IV, Section 4, US Constitution

A republican form of government is one in which power resides in elected officials representing the citizens, and government leaders exercise power according to the rule of law. In The Federalist Papers, James Madison defined a republic as “a government which derives all its powers directly or indirectly from the great body of the people . . . .”

On April 22, 2015, the Senate Finance Committee approved a bill to fast-track the Trans-Pacific Partnership (TPP), a massive trade agreement that would override our republican form of government and hand judicial and legislative authority to a foreign three-person panel of corporate lawyers.

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Network Your Way to Prosperity

And I don’t mean Social Networking

Networking

I am sure you have heard “It’s not what you know, but who you know” many times. This is an excuse as to why someone else might be more successful than we are. However, as with most adages, a grain of truth lurks inside.

Much of your business and financial success will be determined by your network — not just who you know, but much more importantly who knows you. All of this boils down to your network — people and businesses that support you and your business, and vice versa.

Many people mistakenly believe that quantity strengthens your network, but quality is more important. For example, I have know person who can get me in front of thousands of qualified prospects with his endorsement. His solitary efforts could be more valuable than 500 weak ones.

With the advent of social media, there is a huge myth that “friends” or “followers” equate to your network. The person I mentioned above is not even a social media friend, and yet that relationship could be worth huge money to my company. Social media (such as Facebook (FB), Twitter (TWTR), LinkedIn (LNKD), Google Groups (GOOG) and Pinterest) is just one small part of a solid network.

There’s Gold Out There

Social media is a modern gold rush. Some people have made a fortune finding gold and utilizing social media. However, bigger fortunes were created selling all the stuff to help you find your mineral or virtual fortune.

You should spend some time on selected social media outlets because there is no doubt that some good things can come from social media involvement. I know many people who have landed a job or gotten great leads from their social media accounts. Unfortunately, many of those same people totally ignore their non-social media networks.

Anywhere you go and almost everything you do can be a part of your network. Make a list of the top five places you visit every month. Your list could look like this:

  1. Supermarkets and other retailers.
  2. Gym (build your body and your contacts during the same time).
  3. Groups you or your kids belong to such as sports teams, scouts, clubs.
  4. Your workplace or place of business.
  5. Social groups, such as golf, cards, hobbies.

Within such groups is your next great job opportunity, your best new clients and life-saving people. The key is to know how to be a part of a network successfully.

Ditch the Pitch

Far too many people are trained to develop a 30-second elevator speech and shotgun it out to anyone who will listen. The results are dubious at best. Yes, you will occasionally get something. However, take that brief opportunity to expand your network to focus on what the other person does and how you can help. Consider this hypothetical conversion between you and me:

“John, what do you do for a living?”

“I have my own wealth strategy company.”

Wealth strategy? That’s interesting. What’s your specialty?”

“I show families how to create tax-free generational wealth without risk or a 401(k).”

“Great, John, give me your card, and while you’re doing that, tell me how I might be able to help your business in the next year.”

Give (Most Importantly) and Take

This approach will blow John away and show you are not just a taker, but you are first a giver. When you get back to your office, immediately send John a thank you note with your card. Mention that you would like to find out more about how you both can help each other’s business and you will be calling next week to set up a short chat. Don’t ask for any business.

By following this simple strategy every time, you are separating yourself from the crowd and showing that you are a professional and are genuinely concerned about the other person’s business and wellbeing. You are not machine-gunning them with your speedy pitch, but instead you are establishing yourself as a resource for them.

Try this simple strategy of asking your contacts what they do or what they need that you might be able to help with. If you can help, make sure you do, and you will develop future contacts for that perfect job or business and someone who will go the extra mile for you when the chips might be down. Get in the habit of finding out more about your contacts than they know about you. Focus on quality relationships with the right people rather than thousands of meaningless contacts that really don’t care if you live or die. “Dig Your Well Before You’re Thirsty” by Harvey Mackay is a required read for anyone serious about developing a powerful network.

Are Your Finances Running like a Well Oiled Machine?

If you can master these seven gears of riches you will own a rock solid financial fortress that runs like a well-oiled machine.

7 Gears of Wealth

Most of my clients are not balanced when we first meet. When you can appropriately balance these 7 gears they will feed off of each other and you could have a wealth creation perpetual machine. How are your 7 gears working together?

  1. Income from job and/or business is your life blood to live your life and pay all your bills. I don’t feel we were put on this earth just to live, pay bills, and die so this cash flow must be large enough to pay your bills and live a certain lifestyle with options such as vacations, nice home, automobiles etc. When your cash flow is weak you cannot plug up your wealth drains nor can you fill in the other 6 gears. You should be working toward a results driven income so you are not limited by other people’s opinions of what income you should make. One of my mentors told me years ago that profits are better than wages. He was so right and for many reasons.We will be exploring several ways to immediately increase your income in future articles. I want to give you several options to make extra money and for some of you that might lead to an entirely new career in the future. There are millions of families whose lives would be greatly influenced for the better if they just brought in an extra $1,000 to $2,000 of monthly income.
  2. Investments are the second critical gear and there is a seemingly endless supply of places you can invest money that could make you wealthy and other seemingly endless supply of places that could also take all your money and leave you poor. The secret is to find a few core investments that you understand very well and work those investments. Become an expert at even one or two solid investments and focus your efforts in those areas. One of the biggest mistakes people make is to put all or most of their efforts to just their investment gear and little effort into the other main gears or drains of their financial life.
  3. Cash on hand is seemingly self explanatory and is not a difficult concept. However, even though it is a simple concept many people focus on putting so much into investments that if a short term cash need arises they might not be able to satisfy that need. They also might be able to satisfy the need but at a cost of selling investments at losses or incurring penalties and fees to get their cash needs met. Cash set aside is usually thought to be low interest bearing but that does not have to be the case. There are great financial vehicles out there that will allow you quick access to cash while still giving you a decent return on your cash as it sits in the account.
  4. Guaranteed income is the income we can count on after our job or business income either goes away completely or drops significantly. Do you know how much income you need every month to live your current lifestyle? Would you like to live even better? Most retirement accounts such as IRA’s and 401k’s make no guarantees on how much monthly income they will provide in your retirement years. Do you have a pension? How much will you receive from Social Security? Will Social Security be there in the future for your retirement years? The Social Security Administration’s own web page says that if you retire after a certain year you will only qualify for 77% of the current amount given to you as your projected retirement account. A successful and abundant retirement will require safe and stable income.
  5. Debt elimination or reduction will be critical to a worry free life and retirement. If you have a $2,500 house payment and $2,000 of that amount goes toward principal and interest you will have $2,000 more net cash flow if you can pay that home off in full. You will learn how to do that faster and easier than you ever thought possible in future articles.
  6. Long term care or home health care in your older years. Most people’s plan for dealing with long term care boils down to one word……..Hope! Hope is not a strategy but there are strategies that are little known that can aid you should you ever need extra money for long term care or home health care. If this one gear falters it can systematically destroy all the other gears you have been working so hard to build. The average cost for care varies by state and even by city. Many times, by simply reallocating existing assets you can control the potential back breaker of long term care or home health care without expensive long term care policies
  7. Estate or legacy is what you would like to leave behind in this world after you move on to the next one. Would you like to give family more options in their lives as far as education or opportunity? Do you have a special cause or foundation you would like to help long after you’re gone from this life? Would you like to make sure that all your hard work doesn’t go to Uncle Sam after you pass away or to a greedy court system? A proper estate plan is critical to closing out your financial life and leaving a positive influence behind generations after you’re gone from this world. If you want to determine who is entitled to what than a simple estate plan is a must.

We are going to show you how to build out all your 7 gears of riches while at the same time plugging up your 4 main wealth drains.  You hold in your hands a completely new way to look at money and wealth. We can’t wait to continue to add more articles as the weeks and months pass!

Are Mortgage Loan Assumptions Dead?

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Not so many years ago, obtaining a mortgage was a local affair. You’d walk into your neighborhood bank, fill out a few papers, and get your loan — and the money would usually come from the institution you’d walked into.

But over the last 25 years or so, the banking industry has undergone a series of sweeping changes. Mortgage lending has become much more standardized and national, so your local bank is probably underwriting your loan based on Fannie Mae and Freddie Mac standards. Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.) supply cash to the primary mortgage markets by purchasing large blocks of loans originated by other lenders. Mortgages that don’t conform to their standards can’t be sold on the secondary market. The bank will hold these rare in-house loans on its books or possibly sell them to another bank directly.

What Is a Mortgage Assumption?

This article isn’t about Fannie or Freddie, but you need to know a little about mortgage lending’s history before we start to discuss mortgage assumptions, which allow new borrowers to assume the terms of in-place mortgages, such as payments, interest rates and pay-offs. Mortgage assumptions were the norm for many years.

There were two kinds of assumable loans: simple and formal. A simple assumption was simple because you didn’t need to qualify for the loan. Nobody ran a credit check (there wasn’t even standardized credit reporting back when simple assumptions were the norm); your income was not verified; and the now-standard mortgage qualifying process was not done. If you could pay the difference between the home’s price and the underlying loan balance, you could just take over that mortgage. It might have looked like this:

  • You agreed to buy a home for $80,000, and the current mortgage rate was 9 percent for new loans. The home you were buying had an underlying simple assumption mortgage balance of $50,000 at 6 percent, with 20 years left on the mortgage.
  • If you had the $30,000 in cash to give the seller, you could simply assume the lower-interest rate loan and be 10 years into the payoff schedule. You would have a significantly smaller payment than you would have had on a new loan, and more of that payment would be going to principal and less to interest.
  • If you didn’t have the whole $30,000, you could try to get the seller to carry some of his equity back in the form of a second mortgage and make a smaller cash down payment

Most mortgages were simple assumption loans. In formal assumption loans, you might be able to assume the underlying loan if you qualified financially, and the lender was allowed to change some terms. Up until the mid- to late 1980s, Federal Housing Administration and Veterans Affairs loans were simple assumption loans. Some people mistakenly believe that the simple assumptions went away because there was a high default rate caused by too many people taking over loans they wouldn’t have qualified for, and couldn’t really afford. In fact, it was much more about banks’ profits.

The Problem of the Reverse Spread

As interest rates went through the roof in the late 1970s and early 1980s, lenders faced a problem with what’s called “reverse spread.” If banks were making new mortgages at 14 percent, they might also be paying 10 percent on savings accounts. That’s a comfortable 4 percent profit margin. But if people were assuming older 7 percent mortgages, they’d keep paying the older, lower rate on those loans while the bank had to keep paying out 10 percent on deposit accounts. And that, obviously, equals a 3 percent loss.

To alleviate this problem, loans started including “due on sale” clauses in their mortgages that took away the automatic assumption option. This doesn’t mean that loans are not assumable today, but it does mean they aren’t easy to assume. Mortgages now state almost universally that the loan cannot be assumed without lender approval. You are free to approach the note holder about assuming an underlying loan. They are also free to tell you to forget about it.

If the loan is in default, you have a better chance of taking it over if the loan is current. And even if the lender sanctions the loan takeover, don’t be shocked if it wants to change the terms.

Many private loans (commonly referred to as land contracts, contracts or contracts for deeds) and mortgages can be written to be assumable if that is what the buyer (borrower) and seller (lender) agree because there are no banks in the middle of those transactions. Some investors also take over a property “subject to” existing financing.

Right now, with interest rates still near their all-time lows, there is, unsurprisingly, little desire among home buyers to assume mortgages. Why take over an older loan when you can get a cheaper new one yourself? But when interest rates rise dramatically again (and they will), you will see assumption come back into vogue. Once money starts getting expensive, buyers and sellers will have to get creative like they did 30 years ago.

Indexed Universal Life – A Ticking Time Bomb!

How would you like to put money into a financial product that lets you benefit from market gains, but never feel the pain of its losses? The money and growth inside the policy will be 100 percent tax-free for life. That’s the seductive pitch often used to tout an investment called indexed universal life insurance.

Based on that sales pitch, it would be no wonder if your response were, “Sign me up for that right away!” Unfortunately, all that glitters is not gold. The sales materials for your IUL policy will almost always be illustrated with unrealistic compounded rates of return. But as we all know, stock market growth does not simply compound over time. Sure, you can measure an “average rate of return,” but in the real world, prices oscillate, and performance can be a creature of timing much more than investing.
Bomb
In fact, an indexed universal life insurance policy will almost always leave you holding the bag.

Let me clarify first that these are entirely different investments than the “properly designed whole life policies” that I wrote about in February. When you invest money inside an IUL policy, you’re setting up a life insurance policy with an annual renewable term cost of insurance. The extra money placed in the policy goes into sub accounts, and those funds will generally follow an index (or indices) in some form when that index increases in value. This structure will cause the cost of insurance to rise every year, which is why most people let these policies lapse in later years.

One Man’s $50,000 Premium

A retired neurosurgeon at one of my seminars told me about his IUL nightmare. He invested substantial money in an indexed universal life insurance policy when he was 49. He funded this policy for 20 years, and the projected profits never seem to materialize. Among the reasons why:

  • The projections that were illustrated for him were not realistic.
  • The expenses of the insurance and many other hidden fees come out daily.
  • The guaranteed growth of 3 percent was only payable at policy cancellation.

Much worse was the bill when he turned 70. This policy was structured with a 20-year guaranteed term policy for the death benefit, and his premium hit almost $50,000 — and not one nickel was going into any cash value.

Surely, something must be wrong, you say? He assumed it was clerical error until he called the carrier and was told that is how those types of policies are built. In the 21st year of the policy, the premium was supposed to be almost 100 times the first year’s premium, and it was only going to rise further, since term insurance gets more expensive as people age. This man closed the policy down, which meant he no longer would receive the death benefit, and even the pitiful gains his investment had realized were now taxable because he’d lost the umbrella of the insurance policy tax structure.

Lousy Ideas, Without Clear Numbers

Welcome to the wonderful world of indexed universal life insurance. I can’t wait to see in this articles comments that somehow, one of you knows about a “special product” that has a “no lapse” guarantee or some other new (and yet old) wrinkle that allegedly makes these lousy policies better. These dogs with fleas are generally sold to those with high incomes, such as doctors, as a way to put loads of money away in a tax-free environment instead of the limitations of an individual retirement account or 401(k). The illustrations are not realistic and fail to speak plain English as to what is going to happen with these policies.

If you have been sold one of these policies, examine the illustration you were shown and notice the cost of insurance cannibalizing the cash value in the later years of the policy. Study the cost of insurance, which will never be plainly spelled out in dollars and cents (your first clue something is amiss) but rather in decimal points. Watch how that number grows in the later years.

If you have the misfortune of having one of these policies, you might still have an option to roll into a 1035 tax-free exchange. It would allow you (assuming you qualify health-wise) to exchange your cash value in your IUL policy into a properly designed whole policy with solid guarantees and fixed costs all disclosed up front.

For more free training and information on this topic, watch our video of the week and get free downloads.

Could Rental Properties be your Cash Flow Machine?

houseforrent

After the real estate bubble burst in 2007, and property values in most areas of the country collapsed, many investors soured on real estate. But rental markets remained strong, thanks to all those people who needed places to live after they had given their homes back to the banks. In some areas, you were able to buy solid properties at prices from the 1960s while rents stayed at their modern prices or even went higher.

Most of these properties had strong positive cash flow, which made them solid deals just based on the rent-to-value ratio. Imagine buying homes in the suburbs of Detroit for $35,000 to $50,000 while renting them out for $850 to $1,000 per month. You could also buy homes or condominiums in Florida, Arizona, Nevada and Texas for prices not seen in decades. It was a bonanza if you had guts, access to cash and someone local to run the properties.

After several years of decline and stagnation, many areas of the country have experienced double-digit rebounds over the last few years, but there are still some great opportunities in to create your own cash flow machines. According to ABC News, the top five markets to own investment property are Detroit, Chicago, Houston, Minneapolis-St. Paul and Boston.

The rent-to-value ratio is king, in my opinion; the prospect of having nice appreciation in your resale value is strictly secondary. Remember, buying a rental property is about cash flow, not speculation about growth. To successfully invest in rental real estate, adhere to these rules:

  • The three most important things in real estate are not location, location, location; they’re cash flow, cash flow and profit. That location mantra? It’s for homeowners raising families, not for investors.
  • Location is still important because quality tenants will gravitate toward quality homes in solid blue-collar areas. Buy where the tenants you want, want to be.
  • Buy properties only in areas where a significant percentage of the homes are owner-occupied.
  • Make sure the property is in good repair and is clean to attract the best tenants. You (or your management company) pick the tenant. Quality tenants will fight over solid homes in nice areas.
  • Complete background checks are mandatory — not just credit checks. Just because someone has had a one-time financial bump that led to a foreclosure doesn’t mean they won’t be a solid tenant. Judge people by their overall background, not just by a credit score.
  • Offer small discounts on the rent for timely payment and enforce late fees. Set the tone early and often. Be fair, but firm.
  • Don’t over-leverage your investments. Doing so puts your empire at risk of crumbling during the next real estate downturn. Many investors are paying cash in the less expensive markets (such as Detroit, Buffalo, Indianapolis) or putting large down payments on their investments in the more expensive markets. Leverage can be a great thing, but has been over-taught and overused. Use leverage wisely or not at all in your next round of investing

A lease with an option to buy can be a very effective strategy if the property is in a solid location. The rent you charge will be more a month, but a portion of it might go toward the credits on the purchase price for the tenant/buyer. In return for an option to buy the home and the credits, the tenant might agree to handle small repairs, thus relieving you (or your management company) of some of the upkeep duties.

There are still big opportunities out there for people who would like to invest in rental properties, but it will take education and a strong team to help you become a successful real estate investor.

COULD SOME DEBT ACTUALLY CREATE WEALTH?

There is a big misconception in the financial world and among consumers today that all interest is the same: that, for example, a 6 percent mortgage is the same as a 6 percent line of credit. That’s not true, because the type of interest you are paying and how it is calculated are just as important.

Most U.S. mortgages are financed with fully amortizing loans. This means that a monthly payment to pay off the loan is based on the interest rate, the amount and the term. For example, if you borrow $200,000 using this kind of loan, your payment based on a 6 percent rate and 30-year amortization schedule is $1,075.

You may have heard that just one extra payment a year toward the principal of such a loan will pay it off about 10 years sooner. Homeowners have many reasons not to do this. They don’t want to tie up that extra $1,075 in their house. They receive no immediate benefit. They would rather keep their $1,075. They want to spend it on something they probably don’t need and won’t want three months after they buy it. They reason that they will sell their home in eight years anyway, so it doesn’t matter. Or they believe interest rates are so low now that they should borrow as much as they can, and invest all of their money rather than paying down debt, because they will come out ahead that way.

That last argument is seriously flawed.

HELOC

Reduce the Finance Charge

In home equity lines of credit — also called HELOCs — the interest rate is less important than the finance charge. Finance charges on lines of credit are figured on average daily balance for the month. For example, when the 30-day finance period closes, your bank calculates that you had an average daily balance of $50,000 and the interest was 6 percent, so you will pay $8.22 per day in finance charges. Your interest charges for the month total $247, so your total payment might be around $325 because the bank will also require some money toward the principal. Simple enough, right?

What happens if on the first day you pay $5,000 on the principal? Your balance is now $45,000, so your 6 percent rate now produces a finance charge of $7.40 per day or $222 for the month. You consider that $5,000 as a pay-down, but your bank considers that $5,000 as your payment for the month.

Where do we get the $5,000? How about if you used your paycheck? Too many Americans let their pay sit in checking accounts until they pay bills. Why let that money sit there earning zero (or very little) interest? Let that income sit in your revolving line of credit to reduce or cancel finance charges.

If the line of credit is properly set up, would you be able to access your funds by writing a check? Absolutely! Would you have immediate access to any extra loan pay-downs, such as the $5,000 in the example above? Absolutely! Would the time that your money sat inside the line of credit affect your finance charge to your favor? Absolutely!

Make Every Penny Count

Let’s go back to that example. You pay down $5,000 on your line of credit — but only for 20 days, until you need most of the money to pay bills. The money then gets withdrawn (borrowed again). Your average daily balance and finance charge have been reduced. This is making every penny count by earning or canceling interest every day.

The next step is to leave some discretionary income in the line of credit. Over time, your line of credit will fall dramatically and seemingly without effort. When you balance goes down to $40,000 and all the bills are paid for the month, you can borrow $10,000 from the line of credit and send it to your first mortgage as loan pay-down? You should and do it as often as possible.

You are systematically transferring your debt from front-end-loaded amortized debt to average daily balance debt. Every time you do this, your will increase the port of your regular mortgage payment that goes towards the principal and reduce how much goes toward interest. In this was, you can use the principles of interest cancellation (and some of your discretionary income) to pay off mortgages, cars and any other amortized loan in a fraction of the scheduled time. I’ve had many clients take almost-new 30-year mortgages, and using this program, put themselves on pace to pay them off in six to 12 years without it affecting their lifestyle.

Many Australians open big lines of credit to buy their homes and pay their mortgages off in a fraction of the time it takes most Americans.