Have you heard about 401k plans? If you have ever worked for an American employer, there is a high chance that you know everything about it. Or maybe you think you do.
Even though it is the most common retirement plan, only 32% of Americans contribute to their 401k. Why is that?
Well, there is no single answer to that question. But one thing is sure – 401k isn’t a profitable way to save for your golden years.
However, it can still supplement one powerful weapon – a whole life insurance policy. Firstly, we will break down the general idea of whole life insurance and infinite banking in case you’re not familiar with these financial terms.
After that, we will explain in detail how you can utilize whole life insurance, infinite banking, and your 401k to create a financial system that works for you and helps you ensure future years.
Whole Life Insurance – What Is That?
There are two types of life insurance: term and permanent. Term life insurance only offers temporary coverage, usually between one and 30 years. On the other hand, permanent life insurance gives you life protection as long as you pay the premiums – i.e., your entire life.
Both of these have further sub-categories and many discrepancies. We won’t get into details, but you can check our previous articles to learn more about the differences between term and permanent life insurance.
We mention this only to make understanding what whole life insurance is easier. It is a type of permanent life insurance. In fact, it is the most used and acceptable kind of permanent life insurance, according to Insurance Informative Institute.
This reputation is not without reason. Besides lifelong coverage, whole life insurance has a savings component called cash value.
Every whole life insurance policy is designed uniquely for its owner. The insurance company creates this policy based on several factors – your mortality risk, medical history, coverage level, and optional additional features.
Based on your results, especially your medical exam, the insurer will set guaranteed values for the death benefit, cash value, level premium, and endowment.
So, you have a promise that nothing will change in your policy over the years. It is a significant advantage because other policies don’t grant you this.
Here is an example of a policy where premiums remain the same for 35 years while the cash value increases annually.
If you’re thinking, “Okay, it sounds great for life insurance, but what about retirement?”
You should get ready for this.
Because of the cash value component, a whole life insurance policy is adequately designed for infinite banking. Basically, it is the process of becoming your own banker. And when you have your own bank, you can use the money for anything you want – retirement income replacement, buying a new house, paying for your children’s college tuition, you name it.
Let’s see how you can achieve it.
Infinite Banking Concept
Infinite Banking is a financial process that relies on a whole life policy and helps you build wealth. How? Well, you will recapture the interest, which will otherwise go to the banks.
You borrow money against your whole life policy, and the cash value continues to grow. At the same time, it will also earn dividends (if you purchased your policy from a mutual company). The main principle of Infinite banking is over-funding your whole life policy and then leveraging the cash value through policy loans.
You can use the money for any financial goal – personal and business investments, self-financing debt, or passive income for retirement. You can use it in ways that suit your lifestyle.
So, you’re copying the traditional banking system – you borrow money, finance whatever you need, and repay the loans. But, instead of borrowing from a bank, you borrow the entire amount against yourself. It gives you control over your cash flow even though the money is being used elsewhere.
The best part? Repaying loans is optional. It means if you don’t want to pay it back – you don’t have to! And if you choose to repay it, you control annual interest payments and loan repayment time.
As a result, you’re getting wealthier, not banks. You’re collecting the interest, and there are no high-interest rates, application fees, and other additional fees traditional banks require.
Before we move on, we want to highlight the key takeaways from this part of the article.
- A whole life insurance policy works two different jobs simultaneously – offers you permanent insurance coverage and an opportunity to build cash value.
- With whole life insurance, you can start your personal banking system – infinite banking. This process allows you to operate and borrow money the same way banks do, but without the involvement of third parties.
- Whole life policy and Infinite banking are working together to support you in building wealth and achieving various financial goals by borrowing and re-paying the cash value of your policy.
Now that we’ve cleared that up let’s move on.
401k Plans – Understand the Basics
A 401k is a retirement saving and investing plan sponsored by an employer. It gives employees a tax break on the money they contribute.
Every employee has a list of available offerings. After they choose one, they start contributing. Contributions are automatically withdrawn from their paychecks and invested in funds.
Sounds great? It does, but there are many flaws. You can’t contribute as much as you want. In fact, 401k plans have an annual contribution limit. For 2022 it’s $20,500 (for those under age 50). For the following year, the limit will be $22,500.
Since these plans are designed for the future, you can’t easily access the money. You can’t withdraw your money before age 59 ½ without penalties.
And penalties aren’t the biggest problem here. Let’s say you started working in your 20s and immediately contributed to your 401k. Until you’re 59 ½ years old, you will be contributing for almost 40 years. And there is one more condition – you must spend all your contributions until you’re 70 ½.
So, this means you won’t touch a dollar in 40 years of contribution, and then you have only 11 years for spending. Furthermore, our lifespan has really increased in the last decades. There is a high chance that you will live longer than 70 ½ years, and what then?
401k companies will force you to take a Required Minimum Contribution (RMD). It is the specific amount of money that the IRS requires you to withdraw.
Another thing with the 401k plans is that firms usually have vesting schedules. That means you have to work in that firm for a certain period to become eligible to own the contributions.
If you quit the job before the funds are vested, you will have no money from it. However, once funds are vested, they will remain in your account, even if you change company.
The Real Deal
Now that you have the facts let’s move on to breaking down what we like to call – the real deal about retirement accounts.
Since the 401k is oriented toward the future, let’s ask some questions about what we can expect.
Are taxes going up or down?
We like to think that taxes are going up! Of course, this is a generalization, but you get the picture that we want to paint here. Year after year, taxes are going to increase.
Is a dollar stronger today or tomorrow?
The answer is – today. If you didn’t think about it before, compare what you could buy with $100 in the supermarket two years ago and what you can now. Every day as we continue to progress as a society, inflation is a huge eroder of our finances.
So, the dollar is stronger today.
However, with retirement accounts, we put our stronger dollars up in order to receive weaker dollars in the future. By putting money into a retirement account, we lose the ability to turn strong dollars today. Instead, we just put them on a shelf and wait to collect weaker dollars when we’re 60.
Do you want to be taxed on the seed or the harvest?
To be easier, picture a corn kernel and a corn field.
We think you’ll be rather taxed on the corn kernel. We’re not planning to invest in agriculture, but here is an explanation.
With 401k and traditional IRA accounts, you’re not taxed on the seed. Instead, you’re taxed on the harvest. This means your funds go to a retirement account pre-taxation (the money is not taxed). That leads people to believe this is a great benefit because the money isn’t being taxed. But as a matter of fact, that money will be taxed when you hit 59 ½.
So, in this instance, you will be taxed on the corn field and not on a corn kernel. You’ve been building that money for a significant amount of time, and when that money reaches its maturity – you will be taxed on that amount.
And there is more. We assumed in our first question that you’ll be in higher tax brackets. So, tax brackets will also take into consideration how much taxation isn’t paused on your retirement account.
With 401k, you spend many years building money up just to have it eroded away in retirement.
These are the main reasons we think 401k isn’t the way to ensure prosperity in your golden age. However, there is still a way to turn your 401k into an advantage.
Let’s turn the tables!
Fund a Whole Life Insurance Policy With Your 401k
We want to help you move your nest egg into a place where you can obtain cash flow. The nest egg is what we consider a retirement account because you’re contributing money into it over and over just to have the security of a nest egg.
And what happens when you get the maturity of it? You just depleted it. And you’re back at zero.
We want to have a paradigm shift instead of upgrading the nest egg. We need to figure out how to create a cash flow and mailbox money for ourselves, so we’re not so dependent on our nest egg.
Let’s see how to use your 401k to fund a policy for retirement.
First, we need to make some assumptions. Let’s assume that:
- You have $50 000 available in your 401k account;
- You’re going to use this money to fund a $20 000 premium for 4 years;
- You’re not going to come out of pocket at all for this premium for the 4 years;
- You’re 57 year-old-male with standard health.
So, you’re right now funding $750 per month for your 401k. If we multiply this by 12 months, that gives us an annual investment of $9,000.
Since you’ve been contributing over time, your current availability is $50 000.
How do we get the policy funded with the $50 000 in your 401k?
Remember: the premium is $20 000 for 4 years, and you’re not going to come out of pocket.
The first thing we’re going to do is borrow $50 000 from our 401k. So, that sum will be in our bank account.
Anytime we get a loan – we have stipulations for repaying that loan. Loans from 401k are not exceptions.
We assume you got this loan at 6% interest per 60 months. That is a monthly payment of $966,64 that you repay to the 401k company. And on an annual basis, it is a sum of $11,600.
Where will you find the money to pay this loan monthly?
Remember those $750 you pay faithfully to the 401k company every month?
We’re going to stop that! Instead of paying your 401k monthly, you will use that money to repay the loan for the 401k company.
So, you have $9,000 (annual sum) that will use to repay the loan. But, the required yearly sum is $11,600. Where are we going to find an additional $2,600?
We will get it from our whole life insurance policy.
You have your loan of $50,000 available. For the first year of your policy, you use $20,000 to pay the premium. This is going to give you roughly $10,539 in cash value.
From that available cash value, we’ll borrow $2,600 for loan repayment. You’ll add this to the $9,000 you freed up by not paying your 401k this year. So, you have your annual payment for the loan completed.
After the first year, your remaining available balance is $30,000 in cash that you have in your possession to use for life insurance policy premiums. Your policy had $10,539 in cash value, but because you borrowed $2,600, the cash value is $7,939. And you still owe $41,160.
Let’s do this cycle again. You have $30,000 available from that loan, and you’ll use $20,000 of it to pay your premium for year two. The cash available in your policy is $19,435. Again, we borrow $2,600 from the cash value of our policy. And we add this to the $9,000 we directed from 401k to pay our loan.
We pay $11,600 to the loan of the 401k. And after year two, we reduced to loan to $31,774.
A loan balance is $10,000, and the remaining cash value is $16,835.
As we promised, we came to year three, and you didn’t use money from your pocket. Year three is interesting because we only have $10,000 available from the $50,000 loan we received from our 401k. Our policy premium is still $20,000. So, how to find an additional $10,000 to pay your policy premium?
We get these funds from the cash value! At the end of year two, you had $16,835 available in cash value. We borrow $10,000 from the cash value and add it to the available loan that we have from our 401k. It gives us $20,000, which will pay us a premium for our third year of a policy.
That leaves us with a cash value of $35,650. This is very important: you got a policy loan of $10,000, and you still have available cash!
We have to borrow $2,600 to add to the $9,000 that we redirected to pay the loan of the 401k. A total of $11,600 repays the loan for year number three.
Overview of the third year:
- The balance remaining that we owe back to the 401k investment company is $21,810;
- The loan balance we have available from the $50,000 loan that we received is $0;
- The available cash value from the whole life policy is $23,050.
How will we pay premiums for year four when we have $0 in the loan balance? The answer is the same as every time before – from our cash value policy.
We borrow $20,000 from the remaining cash value from the third year and pay our premiums for the fourth year.
After the fourth year of premiums paid, we have $22,638 in our cash value. The next step is to borrow $2,600 to add to the $9,000 to pay a 401k loan for year four.
We reduced the amount we owe to $11,231. Our balance again is $0. And the cash value remaining inside of the policy is $20,038.
Note: We borrowed $22,600 from this policy and still have $20,038 available going into our fifth year. And how is that possible? Simply by moving money.
In the fifth year, our premium amount is reduced by 60% because you no longer pay additional riders. That means your premium is now $8,000 instead of the former $20,000.
So, in four years, do you think you could’ve saved more than $8,000 to fund your policy? Yes!
You fund the policy for year five out of pocket for $8,000. Your cash value is now $29,959.
You still owe money to the 401k company because you borrowed $50,000 five years ago. And this is the last year to make these payments to the 401k company.
In the fifth year, you borrow $2,600 from the $29,959 available in the cash value. This is added to the $9,000 you stopped contributing to the 401k, but you’re now using it to pay down the 401k expense. This amount reduces the 401k loan to $0.
You’ve now put every single dollar back into the 401k and fully funded your whole life policy.
Now that balance is zeroed out, you have found a $20,000 premium for four years and still have $27,359 available in the cash value.
And there is more! Now that money is back in 401k, you can do it again!
This is one of the numerous ways to utilize the assets you already have to fund your banking system.
Do you think this is a powerful way to turn your nest egg into a cash flow? You can do this on your own, and we’ll teach you how!