An Easy Path To Prosperity

The Premise…

Most Americans start their adult lives in rental homes, apartments, or condos. Most don’t want to rent and would choose to buy a home but feel they can’t afford to—especially in today’s economy. Many Americans also lease/rent their automobiles for the same reason.

Life insurance is like that too. Most Americans rent their life insurance policies—called term insurance —when they are starting their adult lives because they are led to believe that’s the best way to acquire life insurance.

However, there is a way to reverse this entire process of renting--which makes others wealthy and you less so--using a different type of life insurance to accelerate ownership of homes, cars, and other expensive items while still owning some term insurance for risk management.

John and Mary—An Example[1]…

John—age 27 and Mary—age 26 purchased their first home for $200,000.00. John and Mary had saved $20,000.00 in participating whole life policies for the down payment and owned term life policies to provide extra tax-free money for each other in the unlikely event of a death. However, the house they purchased was appraised at $250,000.00 and they were able to finance 100% of the purchase price.

Since John and Mary didn't need the down payment money for the purchase, they went shopping for their decorating, landscaping and some additional furnishings. They carefully completed all three projects at a cost of just under $12,000.00. They borrowed the $12,000.00 from their whole life policies.[2]

John and Mary chose to repay their whole life policy loans at the rate of $300.00 per month including interest. They repaid the loan in less than four years and they recovered all of the money they had spent. They also avoided paying hundreds of dollars in interest that would have gone into the pocket of a commercial lender.

The Story Continues…

That’s not the end of the story. In addition to repaying the loan they had taken from their policies they continued to add money to their policies at the rate of $700.00 per month. Just four and one half years later their policies had a loan free balance of over $50,000.00.

Based on their $1,200.00 per month payment during this same period of time, the loan balance on John’s and Mary’s home had only reduced to $185,000.00. John and Mary decided to use the $50,000.00 from their policy to reduce the mortgage loan. They also decided to refinance the remaining $135,000.00 and reduce their mortgage payment to just over $800.00 per month.

John and Mary continued to put $700.00 into their policy each month. They found their incomes increasing so they began paying the $50,000.00 loan from their policy back at the rate of $800.00 per month also. In just about 6 years the entire $50,000.00 they had borrowed from themselves was recovered in their policies and the policies had a balance of over $120,000.00 – enough to pay off the entire mortgage and hold a clear title to their home in fewer than 11 years .

John and Mary borrowed against their policy values and created a debt-to-themselves of $120,000.00. They decided to pay themselves back at the rate of $2,000.00 each month. Just over 5 years later they had recovered all of the money they borrowed from their policies including the interest that they would otherwise have paid to a mortgage company. They also continued to add $700.00 to their policies each month during this time.

The Bottom Line…

John and Mary paid off a $200,000.00 mortgage and put over $200,000.00 into their policies in just 16 years. Between the money in the policy and the equity in their home[3], John and Mary created an estate value of over $600,000.00.

If John and Mary continue to contribute to their policies at the same rate and continued to live in the same home until they are at retirement age—another 24 years—and do nothing else to improve their financial situation, they’ll have about $1,300,000.00 cash in their policies and over $1,000,000.00 in unencumbered home equity[4].  John and Mary, with the guidance of a EUREKONOMICS™ advisor, could create an after tax annual income of over $100,000.00 by combining the income producing ability of both their life insurance and their home equity.

Mortgage Example - The Spreadsheet…

The transactions described above with words and numbers may be hard to visualize, so there’s a spreadsheet below that illustrates those transactions. The spreadsheet reflects the amounts paid or contributed during the given year and the balances owed or accumulated at the end of each year.

Footnotes for the chart below...[1] Calculations were developed in late February 2007 are based on information from BankRate.com and from MassMutual Life Insurance Company. John’s and Mary’s actual policies, mortgage, etc. were older and the numbers are updated here to reflect current market conditions. [2] The actual repayment amounts in years 4 and 11 are mostly for interest. The interest due is less than amount shown as being paid in those years. The repayment amounts in years 12 thru 16 are less than the total amount due because of the overpayments shown in years 4 and 11. Years 6 and 12 reflect a loan at the beginning of the year used to pay down or pay off the mortgage and a payment through the year reducing the policy loan balance. The policy balance in year 17 accurately reflects these variances.

Footnotes for the body of the article...

[1] Calculations were developed in late February 2007 are based on information from BankRate.com and from MassMutual Life Insurance Company. John’s and Mary’s actual policies, mortgage, etc. were older and the numbers are updated here to reflect current market conditions.

[2] The actual repayment amounts in years 4 and 11 are mostly for interest. The interest due is less than amount shown as being paid in those years. The repayment amounts in years 12 thru 16 are less than the total amount due because of the overpayments shown in years 4 and 11. The policy balance in year 17 accurately reflects these variances.

[1] John and Mary are fictional characters based on real people and will appear in the following pages as we point out the uses you can employ for your policies.

[2] Policy loans are actually loans from the insurance company against the cash value accumulations in a participating whole life policy. The values of the policy do not decline and the borrowed funds do not eliminate dividends or reduce the growth within the policy unless the owner surrenders the policy or the insured dies. In those cases, the amount of the loan is deducted from the net proceeds.

[3] This assumes a conservative 4% rate of appreciation on their home yielding a value over $400,000.00 in 16 years.

[4] This assumes a conservative 4% rate of appreciation on their home.

[5] Calculations were developed in late February 2007 are based on information from BankRate.com and from MassMutual Life Insurance Company. John’s and Mary’s actual policies, mortgage, etc. were older and the numbers are updated here to reflect current market conditions.

[6] The actual repayment amounts in years 4 and 11 are mostly for interest. The interest due is less than amount shown as being paid in those years. The repayment amounts in years 12 thru 16 are less than the total amount due because of the overpayments shown in years 4 and 11. The policy balance in year 17 accurately reflects these variances.