Ryan Daniel Moran and Sam explain how the ultra-wealthy use whole life insurance policies as liquid capital. They warehouse money in specially-structured policies, borrow against the cash value at 2-4% rates without personal guarantees, then deploy that capital into depressed assets during downturns.
Questions this video answers
August 30, 2018
2–4% (example used: 3%)
A policy with $1,000,000 cash value that has grown to $1,200,000 (used to illustrate borrowing against $1.2M)
Chapters
We all know that real wealth, real money is made if you were to buy really low in a crash, right? So strategic investments, real wealth is generated if you could time the market at the bottom and buy up real estate and stocks. And so what I've done in the past, I've made the mistake of saying, well, I'm just going to wait for the crash. I'm just going to wait. I'm going to not put my money anywhere. I'm not going to put it in the stock market. And I lost all that upside because I was waiting for the crash. I was waiting for the real estate crash where I could put all my money into real estate. Where it gets exciting here is we can still be getting this upside, but we can access this capital and put it into a business or real estate.
But wait. But we would wait for the right opportunity. I think you said this as if we're going to put this here and participate in the upside. What are the chances in the next 10 years there's going to be some sort of a correction where we want to have that and we can have access to the capital here. Explain that.
So that's what's really key about this. So this is something that's kind of unique about this strategy. There's a lot of people who use this capital warehousing idea and call it different names where you use a life insurance policy to create this bank to go finance investments, your business. Off of what's unique about the way that we structure this, we've identified a few carriers who are able to structure the policy this way. We have some unique things that we do. There's actually one of our carriers has got a patented product that reduces expenses. And by doing that, what we've done is we make this function as little like life insurance as possible and as much like an asset as possible. So we're really focused with creating an asset out of this and not so much with the death benefit. The life insurance is necessary to get the tax treatment, to get these floors and caps. But now that we've got the cash value, which is the asset portion of life insurance, we maximize that. We've got as little going into the death benefit side as much going to the cash value side. That cash value is liquid. We can leverage that. We can actually apply really attractive leverage to life insurance cash value because it's a cash equivalent. We can walk into a bank with an A grade carrier, a policy from an A grade carrier that's got a million dollars in it, and say, hey, will you give US a loan against this. They'll give us a loan with that as the sole collateral. They don't require a personal guarantee. They won't require additional collateral. They'll offer us this cheap, cheap money. At a time when the market is down, your account still is at the same value. Because we got a zero percent return, we've lost no money due to the market downturn.
I've got to dumb this down. Absolutely. If we have a million dollars in here that has been growing over the last five years, it's now gone up in value. It might be worth $1.2 million as a result of growing for a couple years. We can now go into a bank and say, I want to borrow against this $1.2 million cash value life insurance policy and they will give us that at an attractive rate. Is that correct?
Absolutely.
What's an attractive rate?
So attractive rate would be anywhere from 2 to 4%.
Great. So let's just say it's 3%. Sure. Okay. So we could wait for the crash to happen, get 3% money, which you now have access to, and we can put it into all of these assets that have now come down, way down in value. Am I saying that right?
That is exactly correct. And here's what's really key is basically when this downturn happens, you want to have as much capital exposed to upside as possible because your likelihood of winning and your likelihood of growing your wealth after a downturn is a lot higher. So with this, you're actually getting to have two irons in the fire as the market rebounds, because you imagine this.
Oh, right. So this continues to go up in value over here.
This is going to continue to go up in value. So if we got a zero percent return the year before, that means the market went down. So it's going to reset and now it's going to say, well, what did it do? From say the market was at 2500, it went down to 2000. That's a 20% drop. Well, they're going to reset and say, what did it do from 2000 to the next year? Well, in that year, your likelihood of getting a 12% credit is a lot higher. So you might get 12% from the policy, you might get 20% from the rebound, and you're paying 3% cost along the way. So we're netting off of that like a 29% total net return after we net out the cost of the debt.
Yeah. So what you're saying is we're paying 3% on this in order to invest in real estate or businesses where hopefully we're getting a much higher return, 10, 15, 20% return. But the minute that the market turns around, oh, we're exposed to that upside again. Only are we getting this. We're getting that 10 12% that we're exposed to. And so we get to have the two areas of growth for no additional capital. That is really exciting, Sam.
