Written by: David Scott

How Do Millionaires and Billionaires Make Money from Their Insurance Policy?

In the previous article (“How to Make Money from Your Insurance Policy”), we discussed the general concept of making money from our insurance policy. But do you know that savvy millionaires use the three marvels of wealth-building inside a tax-free umbrella? In this article, we are going to address the question, “How do millionaires build wealth using life insurance?” You are going to gain insights into opportunities that you never knew existed before. This is the the best financial instrument to allow you to have a tax-free retirement income and you can also double your money conservatively every 7-10 years totally income tax-free. The secret to wealth accumulation is not to make “pie in the sky” rates of return; it’s consistently setting aside money and having it earn compound interest and do it in a tax-free environment and also using what we call “safe positive leverage”. 

First of all, do you know that life insurance has helped many multi-millionaires? But, how?

  1. Walt Disney. He was able to save Disneyland at the beginning because he had money inside of a tax-free life insurance contract where he was accumulating money. After failing in the pursuit of traditional means of financing to build what would become Disneyland, Walt decided to provide his own financing. A large part of this came to be by collaterally borrowing money from his cash value life insurance.
  2. J.C. Penney. He used life insurance to build, protect, and preserve his wealth. The stock market crash of 1929 and the ensuing Great Depression devastated the stores. James Penney was able to borrow against his cash value life insurance policies to help the company meet its payroll and day-to-day expenses.
  3. Ray Kroc. He was the former owner and CEO of McDonald’s. He also used life insurance to accumulate money. And he was able to use that as his own banker like many business owners do. Ray Kroc borrowed money from two cash value life insurance policies to help cover the salaries of key employees. He also used some of the money to create an advertising campaign for the emerging mascot Ronald McDonald.
  4. David Walker. He was the comptroller general of the US during the George W. Bush administration. He finally resigned in 2008 because the US was so close to a total financial collapse. He wanted to tell the American public the truth, and they would not let him, so he left office. He went around in America speaking and teaching about how economics works, including taxes and the negative impact of taxes. And he revealed when he would speak to audiences that his favorite vehicle was “tax-free max-funded life insurance”.

“We are heading to a future where we will have to double federal taxes or cut federal spending by 60%!” said David Walker.

So, get ready to understand why that is so powerful and why it is used by many multi-millionaires and billionaires to build, protect, and continue to perpetuate wealth. Now, let’s talk about some of the key elements of prudent investing. This is what billionaires and multi-millionaires do to build wealth. And they do it using life insurance because life insurance has all the features – unlike many other investments – to pass what we call “the Liquid Assets Safely Earning Returns (LASER) test”, which includes:

  1. Liquidity. The first and maybe most important key element of a prudent investment is “liquidity”. When you set aside money, it’s imperative that you can access your money when you need it. Maybe with an electronic fund transfer or phone call. Too many investments are not liquid. If you access the money, it triggers a penalty from Uncle Sam, the IRS. For example, you pay tax for accessing money out of a tax-deferred IRA or 301(k). Money tied up in real estate is also not liquid. You want to be able to access money without having to sell assets or borrow money.
  2. Safety. We are not just talking about the institution’s safety but the safety of the principal. Whenever you set aside money, if it’s serious cash you want to make sure that you have it in a place where you will not lose it due to economic forces out of your control, terrorist attacks, recession, or a pandemic. You want to make sure your principal is secure as well.
  3. Rate of Return. You want to earn a rate of return that typically has beaten inflation. You can’t move forward with a 1-3% interest rate when the current level of inflation is coming in at 5-6%. So, you want to have a predictable rate of return, but it does not have to be “pie in the sky” rates of return if it is tax-free.
  4. Tax treatment. Tax-free is much preferable to tax-deferred. So, when we talk about how millionaires build wealth using life insurance, you are going to learn here that life insurance passes the liquidity, safety, and rate of return tests with flying colors and it’s tax-free to boot. 

Next, we are going to share with you the three marvels of wealth accumulation and how this relates to life insurance being by far the best option for accumulating money under a tax-free umbrella. The wealthy (e.g., Walt Disney, J.C. Penney, Ray Kroc, and David Walker, as mentioned earlier) have been using this strategy for over 100. What is it that these people know that you don’t?

We all perceive the same thing differently. And we have discovered that millionaires and billionaires are looking at the same things you are looking at, but they see them differently. Most people perceive taxes and interest as negatives. Most wealthy people view paying taxes and interest as a negative that they can turn into a positive by theoretically moving into a fulcrum. To understand what a fulcrum is, first, you need to understand how to leverage it. A lot of people think that tax and inflation are holding them back from accumulating wealth. In fact, there are three forces that help you overcome that, we refer to them as “three marvels of wealth accumulation”, which include:

  1. Compound interest. This is the first marvel of wealth accumulation. Albert Einstein said this is the 8th wonder of the world. But it was Rothschild who said “No, tax-free compounding is the 8th wonder of the world.” 
  2. Tax favored. You can have tax-deferred IRA or 401(k), but the tax-free is much preferred.
  3. Safe positive leverage. The ability to own and control assets with very little or none of your money tied up or without risk to any of your assets. Most people view paying interest on a mortgage as a “drag”. But we can assure you, someone like Donald Trump, if he was going to buy in a skyscraper, he wouldn’t just pull out a checkbook and pay cash. He would have asked his advisor, “What is the least amount that we have to tie up of our money to gain ownership of this skyscraper and they mortgage or finance as much as they possibly can. And every 3 or 4 years, they refinance it again and again, and they keep the equity separated; they keep it leveraged. And so, the “drag” of paying interest is actually their benefit because they are borrowing money at a lower rate than their earnings. Many of them are earning like 8% compound interest tax-free. Even if they borrow it at 6%, the mortgage is a net cost of 4% after the tax deduction. How much more is 8% than 4%? It’s 100% (2x) more! They are making a 100% rate of return regardless of whether the piece of real estate appreciates in value. This is how you can build real wealth!

To understand further and see some examples, please read further.

So, where do savvy millionaires and even billionaires keep their serious cash and continue to build wealth? Many of them use “max-funded life insurance contracts”. This is where you put the most money into a life insurance policy that the IRS allows. You take the minimum death benefit, they will let you get away with it, and you fund it as fast as the IRS allows, and it turns into a “tax-free cash cow”! In other words, many people have funded a life insurance policy with 1 million, 5 million, or 10 million dollars, and they were able to put the money in over a 5-year period under the “TAMRA tax citations”. When they reposition, let’s say, a million bucks, they know that once that million goes into a max-funded insurance policy, the insurance cost in the insurance policy goes down as they get older. Have you ever seen a life insurance policy that gets cheaper as you get older? 

So, you are putting the money in, and it qualifies as a part of the death benefit. But wait, why are we using life insurance? Because it’s the only vehicle in the internal revenue code that allows you to accumulate and access your money tax-free! When you die, it blossoms and transfers tax-free! After that, the millionaires or billionaires take advantage of “the velocity of money”. What is it? To provide an easy example, just imagine, what if you could put money in an account that paid you a 4% tax-free return WHILE allowing you to borrow the money to do additional investing AND earn money in two places at once? This is what banks do, it’s called tier-1 capital. As they loan money out to you over and over again, they are making a guaranteed rate of return.

Here is a quick example on how to use the velocity of money. When it comes to financing a car, instead of purchasing through the car company, you do it through your life insurance bank. Traditionally, if you were to buy a car, you put $20,000 or borrow $20,000 at 6% over 5 years, it may cost you $22,545. Now, that car five years later is worth about $10,000. When you finance it by borrowing from your life insurance bank and making those same payments over five years into your policy, the car will still be worth $10,000, the money will be worth $23,400. So, you would have gained $855. The bottom line is that the life insurance policy becomes a ‘bank’ that you can leverage to make different financial choices and you are always going to be better off doing that in most situations rather than actually doing traditional financing or working through those financial institutions that want to keep your money captive.  Another example is, first you earn 4% in your insurance policy AND access the money to put the money into a real estate deal. Second, the 12% cash flow you earn on a real estate deal you put into your next investment or policy. Third, continue velocitizing your money on multiple spins to maximize returns for even more money.  

When millionaires and billionaires put in a million, their money usually doubles about 7-10 years. And that doubled money can generate payouts of 8-10% using the three marvels of wealth accumulation. They borrow money for their business ventures and so forth out of their insurance policy. And they pay 5% interest to the insurance company so that their money can stay there and still earn 10%. In other words, if they have millions of dollars in their insurance policy, they can borrow using that as collateral and let the money still grow in the insurance policy. Some people earn 10%, 16%, or even 25% per year out of that money. While they are using their money for other things, they are earning net rates of return of 10%, 15%, and 20% on their money while using it for something else because life insurance allows them to do that. While borrowing using their life insurance as collateral at 5%, they keep earning 10%, 15%, or sometimes 25% or more on the money in the insurance policy. These are the examples of the third marvel or miracle of wealth accumulation, which is “safe positive leverage”.

It grows and comes back tax-free, while it’s growing you could take it out, and leverage it for other investment opportunities. The value of your death benefits will decrease, but the assets you manage to acquire through the process will more than make up for it. The death benefit is the last reason why you buy a whole life, not the first, in this case. You put your money in these policies, so that you become “the bank” on pulling that money out to buy other assets, and your money is earning in two places at once. What is the account that can offer the above-mentioned benefits? It’s called a “life insurance bank account” or “cash value, dividend-paying life insurance”. 

Final Thoughts

Utilizing the life insurance strategy is basically going to give you the ability to:

  • Have multiple returns on the same dollar
  • Optimize investments
  • Pay off debts faster
  • Generational wealth

Let’s connect the dots here. How do millionaires and billionaires build wealth using life insurance? They understand how money really works! They are their own bankers. So, as they accumulate money inside of a tax-free umbrella, “max-funded life insurance contracts”, they know that by putting in the most money that the IRS allows, it turns it into a “cash cow” and it’s tax-free. So, every million that they have inside of an insurance policy, if it’s earning rates of return that it can earn by using indexed universal life, they, like some people able to achieve, 6-10% rates of return. Even though, some years, they have earned 25% (even 55% using multipliers). But let’s just be conservative here, 10% tax-free returns would be like earning 15% taxable rates of return. So, they have money in their insurance contracts, and they are earning those great tax-free rates of return. 

But, if they ever need to access money, do they withdraw it and give up earning 10% tax-free? No! If they see a piece of real estate they want to buy they simply call someone who is knowledgeable in this field and start filling the forms to borrow a million dollars out of their life insurance policy (not withdraw it). Because if they borrow it, they are using the money the insurance company will lend them – the equivalent of the money in the policy – but they use it as collateral. So, the insurance company keeps crediting them 10% or some years 25% while they are using that million because they can borrow it. 

What does the insurance company charge them? Maybe 5%. For example, you borrow 1 million dollars at 5% interest rate, which means your interest is $50,000, but you are covered because your insurance policy earned $250,000, so you netted at 20% ($200,000) of tax-free growth on your money while you are using that money for your business in real estate. This is how to become your own banker! 

That is why, you need to check whether you get the right kind of life insurance policy which offers:

  • 3-4% guaranteed return by state law & contract
  • 1-3% annual dividend
  • Tax free growth
  • Borrow money and reinvest
  • Death benefit

If you want to use life insurance to grow your life financially:

  1. Open a life insurance bank account for free and start saving money the smart way
  2. Find a real estate/business/deal
  3. Borrow the money from your policy
  4. Make money on the deal and cycle it back into your policy

You’re now doing something that some of the wealthiest and smartest financial people on the planet are doing today as well!

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