A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™
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Patrick Donohoe: In this video, we will discuss what “High Cash Value” means. The Wealth Maximization Account is a core financial product that we place at the foundation of our client’s financial lives due to its multifaceted roles. We’ve previously discussed whole life insurance, its characteristics, workings, and applications. Now, let’s delve into maximizing cash value.
This involves a strategic design by our wealth strategists, which minimizes the death benefit coverage while maximizing the liquid living benefits for the policy owner. The strategic design is crucial because clients come to us at varying stages of life and with different financial circumstances, leading us to position life insurance accordingly.
We’ll also discuss how life insurance is the ideal wealth vehicle and where it fits among your other assets. First, though, let’s clarify “High Cash Value Whole Life” or “Max Funded Whole Life.” What does that mean? I know you address this question frequently and educate clients about its significance and the regulating bodies involved in life insurance.
Additionally, we’ll explore why we aim to maximize benefits without compromising the tax advantages, a vital aspect of the Wealth Maximization Account.
John Stewart: You touched on several key components. When discussing typical insurance, whether it’s standard whole life insurance or a term policy, the emphasis is primarily on the death benefit coverage and its associated cost. However, with a high cash value policy, the focus shifts to the cash value and the premiums. The key question becomes: How much can I afford to pay in premiums while securing the minimum death benefit required? This becomes the primary focus of cash value policies.
In the late 1980s, the IRS established guidelines that are often misunderstood. Unlike the dollar amount limitations seen in 401(k)s, IRAs, or HSAs, these guidelines are more relational. They concern the relationship between the death benefit and the cash value, which can vary with age, gender, and health. We aim to make the policy as cash-efficient as possible while adhering to these guidelines.
Patrick Donohoe: The IRS’s initial motivation for these regulations stemmed from individuals purchasing insurance primarily for tax benefits rather than its intended purpose. They instituted requirements for a minimum amount of insurance relative to the premiums paid. This aspect is part of our educational program when we work with clients one-on-one.
It’s important to note that these limitations apply to each individual policy and depend on factors such as age, gender, premium amount, and health.
John Stewart: Indeed, health plays a significant role in these calculations, making it challenging to provide a straightforward calculation due to the complex interplay of these factors within life insurance.
Patrick Donohoe: When considering this approach, it’s essential to establish this asset correctly. Also, the amount you put into it matters, and it can vary, just like with other accounts. I’ve accumulated 20 policies over the years, starting with some smaller ones even when I was just beginning to understand how they work. As your business and profession grow, you can add more policies, but the key is to ensure they serve your specific needs.
Clients’ circumstances differ, and not everyone is at the same stage in life. If you’re starting out with significant student loan debt and a new career, whole life insurance might not be the best fit initially. You might opt for term insurance to establish a sound spending strategy. As you pay off your student loans, you can gradually incorporate one or two policies.
The flexibility is a significant advantage. Unlike retirement accounts like 401(k)s and IRAs, which have dollar amount restrictions, these policies allow you to accumulate multiple ones. The restrictions are on the insurance company’s end, ensuring you don’t get more insurance than you’re worth.
John Stewart: Absolutely. The absence of specific dollar limits is beneficial. We work with a diverse range of people, from recent college graduates with student loan debt to individuals wanting to put away millions annually in a policy. The ratio of how it’s built remains consistent, but there’s no fixed dollar limit.
Now, why do some individuals, like you with 20 policies and me with 17, have multiple policies? It’s not about setting out to have a specific number of policies; it’s about working within our cash flow when we set them up and adhering to high cash value guidelines.
All the policies follow similar structures, but they differ in death benefits and other living benefits that we might not cover in this video. By spreading the protection between multiple policies, we avoid over-relying on a single policy.
These policies are fantastic for covering education costs for children and serve various purposes. Having multiple tools isn’t just about efficiency; it’s about cash flow and tailoring protection to individual needs.
Patrick Donohoe: Building on that, accumulating multiple policies is an evolving process. As your life changes, you add more policies to accommodate those changes. Perhaps you start with two policies for each of your kids, initially using policy loans for small expenses to teach them financial responsibility. Later on, when college comes around, you can use a substantial portion of the policies for educational expenses.
The way your estate is structured plays a crucial role. When your kids pass away, their insurance policies pay out to the trust, which ultimately benefits your kids and grandkids. These policies have multiple uses, including teaching financial responsibility, covering educational costs, and being part of an estate plan.
The core of your financial life should include a Wealth Maximization Account, allowing you to optimize the use of money both in the short and long term.
John Stewart: Indeed, various strategies can lead to different outcomes. I also have three children, and I’ve set up two policies for each of them. My strategy is to pass them on to my kids. My oldest two have already used theirs to buy cars and invest in homes. The second policy goes back to our family trust. These policies give you control over the assets even when they’re minors, and you can choose not to pass them on if it’s not in the family’s best interest.
Patrick Donohoe: When maximizing cash value, the emphasis is on liquidity and how to use it in the short, medium, and long term. We’ve seen clients use policy loans for various purposes, all while maintaining protection through the death benefit. Typically, we assess the coverage needed to replace an individual’s income in the event of premature death.
To achieve this, we use a complimentary term insurance policy that’s convertible. As you fund your Wealth Maximization Account and approach IRS limitations, instead of halting the funding of your first policy, you can convert some of the term insurance. This way, you can continually add new policies based on your evolving circumstances.
John Stewart: Many people wonder why they would want a high cash-value policy. They tend to associate life insurance with a benefit paid out after they’re gone. However, the key lies in the multiple uses of these policies, from education to emergencies, investments, and business, and providing a hedge against retirement volatility.
A Wealth Maximization Account differs significantly from a typical whole-life policy, offering a broader range of benefits and uses.
Patrick Donohoe: Let’s discuss how the Wealth Maximization Account fits into your overall financial strategy alongside other investments and interest-generating assets. We don’t promote the Wealth Maximization Account as the sole financial vehicle; rather, we emphasize its role within a broader strategy. Around 2013-2014, we introduced the concept of the Hierarchy of Wealth, which resembles Modern Portfolio Theory but adapts it to our approach.
The traditional breakdown involved stocks and bonds, with bonds offering safety and fixed interest payments over time, while equities presented higher volatility but potential for growth. Recognizing that our clients had varying financial acumen, some capable of intelligently selecting and managing stocks, others not, we realized the need to accommodate diverse interests and backgrounds. This led us to create the Hierarchy of Wealth, organizing financial vehicles into four tiers.
Tier one comprises assets with minimal risk, high returns relative to that risk, optimal control, and influence. As you move up the tiers, risk increases, control decreases, and you face more uncertain outcomes. Whole life insurance falls into tier one, offering control, minimal risk, and solid returns, in addition to its tax efficiency.
We’re specifically discussing the cash value component within the Hierarchy of Wealth, excluding policy loans, death benefits, and legacy value.
John Stewart: The cash value component has significantly impacted my investment approach and overall financial strategy. Liquidity is a crucial aspect of wealth building. Recent bank failures, as well as the 2008 financial crisis, highlighted the importance of liquidity. Many individuals lacked liquidity because it offered low or no returns, leading them to invest in assets they couldn’t hold onto.
High cash value, as a tier-one asset, maximizes returns, and it plays a pivotal role in maintaining liquidity. It’s critical for buffering cash flow, which is essential for building wealth. Liquidity is particularly vital during unexpected events such as job losses, market volatility, or unforeseen expenses. Without liquidity, individuals may prematurely liquidate their assets, negatively impacting their financial plans.
Patrick Donohoe: Especially when faced with emergencies, you’re often in a position where selling assets is not ideal, yet liquidity is essential. We’re discussing a situation where you need funds quickly, and selling assets might incur losses or unfavorable tax consequences.
John Stewart: Exactly, and liquidity is a fundamental component of the foundation of your financial strategy. Without it, you can’t navigate unexpected events effectively. Life is unpredictable, and a linear, milestone-based approach to financial planning rarely holds true. Events like health issues, job changes, or economic downturns can disrupt even the best-laid plans.
Patrick Donohoe: Life’s unpredictability should encourage us to have liquidity that doesn’t just sit idle but earns a reasonable return. This way, there’s no opportunity cost associated with having funds available when needed. You remain protected, earn a good rate of return, and, in case life throws you a curveball, you have a liquid asset to maintain cash flow, weather the storm, and even capitalize on opportunities.
For example, during market downturns, like those seen in 2008-2009 and 2010, many people panicked, sold assets, and missed the ideal time to invest in real estate. Emotions clouded their decision-making, leading to missed opportunities.
John Stewart: In contrast, individuals who approached the situation rationally and unemotionally could capitalize on opportunities and achieve success.
John Stewart: Absolutely. Some individuals who are critical of life insurance or high cash value policies often compare them to starting a business or investing in real estate, implying that these policies are meant to replace such endeavors. However, that’s not the case; instead, these policies are designed to complement other financial strategies.
It’s essential to have reserves both on a personal and business level. For example, if you’re involved in real estate and have rental properties, having reserves for potential repairs and vacancies is crucial. The Wealth Maximization Account streamlines and enhances what you should already be doing, making it more efficient and providing a secure place to store capital, ensuring a solid financial foundation when you’re ready to make your next move.
Patrick Donohoe: Let’s touch on one more crucial aspect before moving on to our more visually engaging videos. In the world of financial services, we’re often conditioned to focus primarily on growth rate, investing, and maintaining a balanced portfolio.
However, there are stages in life that carry more significance. While wealth accumulation is important during the growth stage, it’s equally vital to protect your wealth along the way. Life can be disruptive, and this is where life insurance plays a crucial role.
As you progress, there comes a point when your wealth begins to supplement or replace your earned income. At this stage, you’ve likely accumulated various assets, such as home equity, business equity, retirement accounts, or investments. It’s during this transition that life insurance, particularly Wealth Maximization Accounts, becomes your legacy asset.
These accounts are still accessible, allowing you to make withdrawals, take loans, or use dividends for supplemental income. It’s a far more flexible and certain option compared to traditional retirement accounts like a 401(k). Life insurance positioned for retirement income strategy can help accelerate and optimize other accounts originally intended for income.
For example, if you own a small business, there are strategies involving permanent life insurance to tap into your business equity and create an income stream. Similarly, you can leverage assets not originally meant for income, such as your primary residence, through strategies like reverse mortgages.
The role of a Wealth Maximization Account evolves as your life unfolds. It serves different purposes at different stages of your life. It’s essential to understand these roles and how they can benefit your overall financial plan.
Additionally, life insurance policies often come with riders like chronic illness or chronic and critical illness riders. These living benefits can be invaluable, especially in the later stages of life, helping you pay for expenses related to chronic illnesses.
John Stewart: Indeed, these living benefits are a significant advantage, ensuring that you benefit from your policy when you need it most.
Patrick Donohoe: So, to summarize, the Perpetual Wealth Strategy utilizes Wealth Maximization Accounts that adapt to your changing financial needs throughout your life. These accounts aim to provide you with financial certainty, making them a strong foundation for your overall financial plan.
A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™
