Make over 15% using a Max-funded IUL

Make over 15% using a Max-funded IUL

December 26, 2022
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Case Study:  How to make over 15% safely using a max-funded IUL

This is an update of my post from two years ago...

"With Income for Life (a.k.a Private Reserve Account, PRA), we put our money into a high-quality indexed universal life insurance policy from a solid company. And we set it up a specific way to supercharge the growing cash balance in your policy.

But why is the policy loan feature with a PRA such a big deal?

In short, your policy comes with a guaranteed policy loan provision. That means the insurance company will give you a loan (no questions asked) up to the value of cash in your policy—anytime you want it.

 For example, if I have $50,000 in cash value in my policy, I can call up the insurance company and request a $50,000 loan.

Now, here’s the great thing about this: The insurance company will loan money to me from its own coffers, not my policy’s. That means my money stays intact in my policy and continues to grow. This is huge.  Uninterrupted compound interest has been called the eighth wonder of the world.  If I were to use $50,000 of my own cash to fund something, I would likely have to liquidate an investment (maybe sell a stock or take money out of an interest-bearing account)—and that would stop the compounding process.

But with this policy loan feature, I get the best of both worlds—the money I need and continued compounding."

Opportunity Cost

In order to clarify, let's explore a related idea.  Few people understand the idea of opportunity cost. It almost never is discussed in the mainstream press. But it is a real cost

Opportunity cost defined: if you spend or lose a dollar, you not only lose the use of that dollar, you lose the ability to invest it and to earn with it. The potential future value of spent dollars is called Opportunity Cost.

Example: You pay cash for a $50,000 car. What did that car really cost you? At 5% annual for 5 years, the opportunity cost is $14,168. So that car really cost you $64,168. Paying cash means you have drained the tank and killed compounding on that amount of money.

But how does that work with permanent life insurance policy loans? With policy loans, the money inside the policy continues to compound. You have the ability to use money in other ways, and not suffer opportunity cost. Put your money to work for you in multiple ways.


Wealth Creator

We explored the differences between the Spender, Saver, and the Wealth Creator here.

The Wealth Creator wants to make the same $50,000 car purchase. We’ve already discovered that it will be the same $64,168 wealth transfer whether they finance or pay cash (assuming rates are equal), so what does the Wealth Creator do that’s different? They’ve saved and have the money so they could pay cash and drain the tank, but instead they decide to continue saving and keep their money compounding, (5% in this example), and collateralize a loan to make the purchase. By continuing to save, the starting balance of their savings or investment account will grow by $14,168 due to compounding over those 5 years (plus the ongoing additions to their savings account and the interest earned on that as well) while their lifestyle cash flow funds the their car payments.

The Wealth Creator is still obligated to pay financing costs of $6,614 over that time period. And because of opportunity costs, we know that’s really a $7,789 wealth transfer. So how do they minimize this? Since any interest paid is interest lost, the faster they pay off the amortized loan, the less interest they will pay and consequently, the less wealth they will transfer away. Paying your loan off quicker doesn't change the cost of what you bought, but it will impact your cash flow by eliminating your payment sooner.

The power of compounding in a Private Reserve is that you keep your money working for you.  You never want to reset compounding because the money you are saving and investing will one day be called upon to replace or augment your future lifestyle. Value and protect your savings and investment dollars.

Case Study of Investing using Other People's Money

Here is an actual case study. For this investment, we used a solid company pooling investments to buy single family homes for rental in the Dallas, Texas area.  We made two investments from our Private Reserve Account, and let it compound since then.  Each quarter we pay the distributions back into the loan. Here are the actual results as of December, 2022:

DatePeriodDetailsDistributed
12/15/22Q4 20224Q2022 Distribution$1,875.00
9/15/22Q3 20223Q2022 Distribution$1,875.00
7/29/22Q2 2022Special Dividend 2022$37,500.00
6/14/22Q2 20222Q2022 Distribution$1,500.00
3/1/22Q1 2022--$1,500.00
3/1/22Q1 20222021 Special Year-End Dividend$3,000.00
12/1/21Q4 2021--$1,500.00
9/1/21Q3 2021--$1,500.00
6/1/21Q2 2021--$1,500.00
3/1/21Q1 20211Q2021 + 2020 Year-end Special Dividend$3,750.00
12/1/20Q4 2020--$1,500.00
9/1/20Q3 2020--$1,500.00
6/1/20Q2 2020--$1,500.00
3/1/20Q1 20201Q2020 + 2019 Year-end Special Dividend$3,750.00
12/1/19Q4 2019--$1,500.00
9/1/19Q3 2019--$1,500.00
6/1/19Q2 2019--$1,500.00
3/1/19Q1 20191Q2019 + 2018 Special Year-end Dividend$3,750.00
12/1/18Q4 2018--$1,500.00
9/1/18Q3 2018--$1,500.00
6/1/18Q2 2018--$1,500.00
3/1/18Q1 20181Q2018 + 2017 Special Year-end Dividend$3,000.00
12/1/17Q4 2017--$1,500.00
9/1/17Q3 2017--$1,500.00
6/1/17Q2 2017--$1,500.00
3/1/17Q1 2017--$1,500.00
12/1/16Q4 2016--$1,500.00
9/1/16Q3 2016--$1,500.00
6/1/16Q2 2016--$1,500.00
3/1/16Q1 2016--$2,333.00
9/1/15Q3 2015--$1,667.00
Total:$94,000.00
Contributed:$75,000.00

So, we have contributed $75,000 of OPM, and that money has returned $94,000 to us over six years. The special dividend in 2022 fully paid back the original investment, and now it's cash flowing at $7,500, which is equivalent to a 10% annual return on invested capital. We now have:

  • no cost in this investment
  • access to all the original capital for other purposes
  • all the while it's been compounding uninterrupted interest in the Private Reserve account.

Collateral capacity is the key. And we’ve got to learn if we want to make that transition from every day savers, to be wealth creators who have an impact in the society we live in, we’ve got to build wealth. … and if we need to build wealth, we have to understand the concepts to create wealth. And collateral capacity is the foundation. 


So instead of draining the tank, we are going to be able to borrow against the money we have. Now for many people I just said the word borrow.
BUT I am not telling you to get in debt. I am showing you how to be wealthy.

And so collateral capacity allows us to invest, and to purchase the things, and take care of the things in life that we need to do - and while I am paying it off, my money continues to grow with uninterrupted tax-free compounding interest.

We never drain the tank.
We never start over.

We are making over 15% and it cost us essentially nothing. And, we see how this can be a part of our retirement now...

There is now a new opportunity with this group, with similar features, and you can be sure I'm going to 'rinse and repeat'!

To learn how you can take advantage of these strategies contact us.