Is NOW the right time to start an insurance policy? with Rod Zabriskie & Blake Brogan

But essentially what we're doing with the Investment optimizer is we're optimizing your opportunity fund to deploy capital into the investing that you're already planning on doing. So what people are typically doing before they're implementing that strategy is building up money in a bank account that's safe and liquid.

Welcome to the Next Level Income show, where it's our goal to take your income, your investments and your life to the Next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, nextlevelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On this week's episode of the Next Level Income show, we welcome back Rod Zabriskie and Blake Brogan of Money Insights. We're going to talk about some updates here, questions that you might have about rising interest rates and how they affect life insurance and specifically our investment optimizer strategy. And we're going to talk about a new strategy called the Capital Avalanche. So, Blake and Rod, welcome to the show.

Chris, thanks for having us. Happy to be on this show here.

Absolutely. Absolutely. I know we've been talking a lot about interest rates rising, I mean, faster than we've ever seen in our lifetimes. Certainly, Blake, in your lifetime. But you know, Rod, you and I are probably seeing rates not, not quite as high as they've been in our lifetimes, but we won't get specific about.

What age we were at the time.

Yeah, exactly. But, you know, we, we talk a lot on the show. We have a lot of investors that invest in real estate. And we've seen, we see some real positives in terms of rent growth in commercial real estate. We've also seen some challenges in terms of interest rates. They make deals hard to pencil out. And a lot of our investors are using the investment optimizer, which Blake, you and I spoke about on episode 106. So if you haven't heard that, go ahead and check that out. That episode aired earlier this year, just about five months ago. And you can hear Blake and I talk in depth about the investment optimizer. You know, Blake, how are interest rates affecting, you know, that approach, if at all? And, you know, is it, is it still a good idea, is it still a good time to employ this type of strategy with rates where they are?

That's a great question. And really, as you know, let me give an overview quick for people who might not have listened to that episode, but essentially what we're doing with the investment optimizer is we're optimizing your opportunity fund to deploy capital into the investing that you're already planning on doing. So what people are typically doing before they're implementing that strategy is building up money in a bank account that's safe and liquid liquidating it, going to invest, producing cash flow, and that's just funneling right back into the bank account. So they might love what they're doing on the investing side, but obviously they're not really getting much benefit in between deals. So the investment optimizer is using a special type of overfunded life insurance policy that's built for cash value and tried to minimize cost as much as possible, but we're using that as our opportunity fund to go invest. Now, one of the unique parts about the strategy is as we build up these policies and we're about to go make an investment, we don't actually have to take the money out of the policy to go invest. What we're actually able to do is take a loan either from the insurance company or from a bank, and we can talk about why we would choose one or the other, but take that loan and go deploy that loan in investment. What that allows us to do is to keep our money growing for us in the opportunity fund, in addition to earning whatever returns we're getting on the investment side. So very. We're adding that layer of profitability. So some of the questions that I've been getting, you know, people from your community and others are saying, okay, the numbers that we're illustrating as we kind of look into this makes sense right now. But what. What happens if that loan that we're either taking from the bank or from the insurance company start to rise? Right. So go ahead.

Yeah, and that's. I think one of the things that you've helped me employ, Rod, you and. And Blake have helped me employ, is utilizing a line of credit alongside of the investment optimizer, which I think really makes it, you know, really achieve its full power. And I mean, when I first did it, you know, rates were in the low 3% range. So, you know, very, very low cost of capital, you know, but. But they've risen. So I think that's what you're referring to, Blake, is if you're. If you're doing that versus normally, the strategy is taking a loan from the general fund of the insurance company, which. Which comes out of kind of a different bucket, and you. You can See the bucket as Blake and I talk about that in that last episode that we referenced.

Yep, exactly. So we can either take. When we're taking the loan to go invest, we can either take it from the insurance company when we do. That way, when we take the loan from the general account of the insurance company, the interest gets charged and our policy grows in a certain way. And we should get into some of the details here. When we take a. From the cash value line of credit from an outside bank, the interest works in a little bit of a different way because it's. It's more variable, but it also doesn't affect how the policy grows. Rod, do you want to jump into why we implement that and then how interest rates are affecting kind of both sides of the coin there?

Yeah.

The best lead in on this is, is when we talk about using this loan and going and investing and flowing the money back. One of the things that is really powerful with this and we create this really cool arbitrage, is that we do pay interest on the loan, if you were wondering. Yes, we pay interest, but because of the way the money, we're actually paying simple interest on our loan while earning compounding interest inside of the policy, the cash value that's there growing. So even interest rates are roughly the same. We. We end up earning a lot more interest in our account that's there compounding and growing than the interest that we pay in. In on the loan.

Yeah.

So now what kind of. What you're referencing, Chris, is if you could then take that to the next level and say, well, if I'm earning 5 to 6% in my. In my account, that's compounding and growing, but I could pay three, three and a quarter percent on the loan. All the better, right?

Oh, yeah, still.

Still paying simple interest, but paying it on a lower rate, earning the compounding interest on the bigger rate, which again, six months ago was. Was exactly what we were doing. That's exactly what people were doing. With interest rates having changed dramatically since then, we're now starting to get to a place where we're back to kind of that equivalency of paying roughly the same rate as what we're earning on the collateralized cash value in the policy. But what happens next month? The Fed gets together and raises rates again, Then what? Right. Then we're starting to get into a place where you could be paying higher interest on the loan than what you're earning inside of the policy, which would happen if you kept the loan at the bank.

Right.

However, one of the Primary company that we use has what's called direct recognition. So if you're carrying the loan with the insurance company and paying the interest there, then direct link between the interest rate you're paying on the loan and the interest that you're earning on the collateralized portion of your cash value.

Gotcha. So that is, that's direct recognition, correct?

Yep.

They call that, some companies do and actually have two different types of policies. One company is direct recognition, one company is indirect recognition.

Yeah. And on the non direct side it's not as you know, you, it's different. Right. And, and we, I don't know we necessarily need to get into all the different, the differences here. But what's really cool with direct recognition is when interest rates have stabilized, then it makes sense to carry the loan of the, with the cash value line of credit with the bank. When we're in a situation like now, interest rates are on the rise. We don't know how much, how much further they're going to continue to rise. But the cool thing is, is that if you all of a sudden, let's just say you're paying 8% now on your policy with the insurance company, well, you're immediately going to be earning more interest in your, the cash value of your policy at the same time.

Gotcha. So, and that look, and if you're listening and this doesn't make sense to you, that's why I work with Money Insights is because they work with investors like you every day and they can explain to you, hey, this is, this is the, these are the dynamics within the market and these are the options that you have out there, which is really important. The other thing I was noticing, so I just look back over the past few years here because the stock market's been on a wild ride and my policies have averaged just under 6%, I think 5.88%. And actually if you look at the broad markets that actually beat out the broad markets in general, which I think that might surprise some people to hear that you can earn, that's a tax free return, nearly 6% tax free return. How does this compare, Rod, kind of historically to where rates have been? I know we went through nearly 15 ish year period solid 10 year period of kind of abnormally low rates. We're coming out of that a little bit. How's that, how's that compare historically?

Yeah, it's, I mean that was unusual to have as large gap as there was, which. One of the reasons for that is because with these whole life policies, the growth that we generate is done by a guaranteed interest rate plus A. But these insurance companies that we're using have just been very consistent paying a dividend. Just to give you an idea, a lot of them have been paying it for 150, 180 years in a row. So. But of course, the actual rate that they. The dividend that they do pay fluctuates primarily with interest rates because a majority of the dividend they're able to pay is ties back to the kinds of returns that get in their own investments. So as interest rates go up, they're able to pay a higher dividend. As interest rates go down, they aren't able to get as much return investment, so they pay a lower dividend.

Gotcha. And that's why I think it's important to be, if you have a comprehensive understanding, you can utilize the line of credit, you can utilize loans from the insurance company. You can take advantage of both sides of that equation. So what types of investments do life insurance companies invest in to make these types of returns?

Yeah, so they're primarily investing in bonds and notes, things like that, that are going to be sensitive to interest rates. If you take maybe 10 to 15% of their portfolio, then you would see real estate and, like, equities, you know, securities type of things or things like that. But the bulk of it, the vast majority of it is in some of those fixed things, which. So then people might say G, Rod, if they're, if they're investing in bonds, how on earth were they able to pay out a 5,6% interest rate in the last 10 years when. When bonds have been paying next to nothing? Right. Two, 2%. In the good times.

DJ Van Kern, it's good to see you. I look forward to talking about the four Institute and your upcoming fall program. I'd love for you to just introduce yourself real quick and tell us a little bit about what it is.

Yeah, so DJ Van Kuren, and I'm the founder of the 4 Institute. And then I've also worked for a number of very prominent families on the real estate portfolios.

Yeah, we've had DJ on the podcast and DJ works with family offices that are typically, and correct me If I'm Wrong, $250 million or more in network worth and the 4 Institute. I'm super excited for this program that I'm going to be attending. Typically, this is information and access to. Typically only these family offices get. But you're opening this to our investors as well.

So we actually. It's an executive education program. And in the program. We've put together some of the most prominent professors around the country and industry experts. So we have professors from Wharton and Harvard and University of Denver University Chicago. We have family, office and real estate experts. And we focus in on, you know, what it is to maintain and really generate significant growth through real estate. And it's in a format that's extremely valuable. And you know, on our front page@4.institute not.com but.institute you can even see videos of people and their experiences.

Awesome. And so I guess dj, what is someone going to learn that attends this class?

They're going to learn how to analyze opportunities. They're going to understand about market size, cycle, where are we in the market cycle and what to look like, look for in the various property types. They're going to understand, you know, get into some of the issues about maintaining your wealth from a long term perspective, tax strategies for your investments and really how to make better decisions on real estate investing.

No, I think it's awesome. I think a lot of people have concerns about where we are right now in the economic cycle. What's going to happen to real estate. I follow one of the faculty, Dr. Miller's quarterly reports to stay on top of these things. And I'll tell you what, it makes me feel a lot more confident knowing this information, knowing historically what has happened and to have access to these faculty this information. I'm really excited about it. How can people find out more if they want to attend?

Yeah, so they go to Ford Institute, which is F O R E for family office real estate. So it's for.in dude it's not.com but it's.institute. so for.institute. and you can click on there to receive a brochure and then sign up for the course.

Perfect. And we'll have the links right here along with this short video. DJ it's great to see. I look forward to seeing you in person here later this month.

And the answer is that they're investing in long term types of things. So think about 30, 40, 50 year types of bonds and notes. So that quite literally if you go back to where interest rates were in the 80s, they're actually there are companies that are a portion of their investments that they're still earning those returns on even today.

And so yeah, I just talked to a guy yesterday and his buddy bought bonds back in the 80s. They were paying out 25% just it just finished paying out and he's upset because he, yeah, he doesn't know 25% annualized and they were, they were, they were tax free bonds too, because they were, they were state issued, which is interesting. But yeah, I think it's, I think it's wild when you actually look down, you drill down to these insurance companies. We have some of the smartest minds out there not only looking at the analytics in terms of, you know, the actuarial tables for people, but also some of the smartest minds out there when it comes to timing these investments to line up with those liabilities or obligations that the insurance company has.

Yeah. And, and I'll just as a reminder, with the Investment Optimizer, we're not. Our, our strategy is not contingent on us having a better rate that we're earning in our policy versus what we're paying on the loan, because again, that difference between simple and compound, but when it works out, it's even better. Right?

Yeah. Yes. I think, I love that you just said that. I think kind of the point is, you know, you can, you can certainly, you know, use this strategy kind of as a standalone, a very conservative standalone strategy. But you know what we illustrate with the Investment Optimizer, we have it up on the website. We have it in that podcast episode 106 again that you and I did, Blake, is how do you combine this? How do you do what I wish I was taught how to do 13 years ago when I started our policy instead of having to learn the hard way? And then finally getting in touch with, with you and Christian several years ago, Rod, and figuring this out. And that's why I'm excited to kind of recap, you know, the Investment Optimizer, but also introduce something that a lot of listeners might not have heard about, which is called the Capital Avalanche. And I believe I've enabled you to share your screen here, Rod. So if you're listening along, you can check us out on YouTube on our channel. Rod is going to have some slides to go along with this as well that hopefully help you better understand this concept.

Perfect. And, and what we'll do for this part of the, what we have is I'll let Blake kind of lead us out, give us the agenda and kind of some of the key points that we're going to talk through and then we'll just dive in and get into some of the detail.

Sounds great. So let's give a high level overview of this strategy. What we're doing with the avalanche is really designing the strategy for people who have liquidity, want to maintain some liquidity over that money, but have it be significantly more productive both on what they can do in the short term and then dramatically increase what their capital is able to produce in the long. We do use the same type of insurance, overfunded whole life insurance policies that we are, that we're using with the investment optimizer, but we're also using a type of overfunded life insurance policy that's called indexed universal universal life insurance as well. So it's a combination of those two. But really the power of this strategy is the, the leverage that we're able to produce in conjunction with the policies is what is able to give us very significant results and the effects of the, the rising interest rates. We'll, we'll jump into exactly how that's, that helps us on the growth of the insurance policies and also what to be looking out for when it comes to the financing and leverage that we're able to use on this as well. And then we'll jump into kind of a sample case of where we see this being used most often as well. Okay, so why are people implementing the strategy first and foremost able to generate predictable double digit returns? Now we say that and realize that's a pretty bold statement but we've, we've done significant back testing. This is something that we've done a lot of research into and we're confident that we're able to very predictably, even on the conservative end, say that we're going to be able to generate double digit returns over the long time. Long term I should say. And why are we doing that? Well, we want to be able to produce maximum tax free income. So if you're looking for a place where hey I want some benefits over this money but, but really it's more long term focus and how can I produce the most amount of income to me and my family over the long term? This is going to be a great fit app. Where do we see it being used? Well, inactive that's being sit around. We can have some of the same checkbook access and same liquidity over that but all but also again have it do much more for us and then there's a significant liquidity for our estate in the form of death benefit. We'll get into how that works and you may be familiar with things like premium finance. You, some of your audience may have heard that word before. There's limitations in the premium finance world. In certain situations it can be extremely valuable. But what we're able to do with this strategy is utilize leverage in a very conservative way. Doesn't require outside collateral. So with a lot of premium finance Strategies we need to be posting large amounts of collateral which could be a challenge for you know, people like you Chris, who are active in their investing. Right. Just having money sitting around not doing much isn't going to be super ideal with this strategy. We're gonna, we're gonna to keep it all within one strategy and not require that.

Gotcha.

Okay, so let's talk a little more about the vehicles. Blake mentioned using whole life insurance, which again is the exact same policy designed in the exact same way as we talk about with the investment optimizer. So from that standpoint gives people a good starting point if they're already familiar with that. But then in addition to that we're adding another type of policy that's called indexed Universal Life. And here in a minute I'm going to talk about the, the differences between the two and the reason we do we do it. But the idea is that we're kind of like adding a level of diversification inside of the strategy. The taking advantage of the strengths of each while the other kind of helps us hedge against some of the, the less desirable potential parts of, of each of them. So specifically let's look at the, the max overfunded whole life insurance. We talked about this earlier but we're, we're creating a predictable net five plus percent return. We put that plus in there because in the recent low interest rate environment we were, have been producing a 5% return. With interest rates having gone up then the expectation is that the dividend will be able to produce even more. And again that's on a very predictable basis. That creates a really clean baseline solid foundation that again creates some really a lot of predictability in there. And then when we add the max over funded index Universal Life, what it's doing is it's similar in a lot of ways. And we'll touch on the re the ways that they're similar here in a minute. But the difference between the two is the way that the cash value grows side of the account. It's not based on, I talked earlier about the guaranteed interest and dividend on the whole life side with the index Universal Life. What it's doing is it's growing based on what's happening in a market index. Something like the S&P 500. The money is not actually invested in the index. What it's doing is using it as a measuring stick to determine how interest, how much growth we create each year. And so more specifically let's again use the S and P in a year where it is up then we participate in a portion of those gains up to a cap in a year where it loses value, we don't participate in those losses. We have a floor of 0%. We don't lose any. We just don't earn any interest in. In that year. So that's kind of the good news, bad news on that. But again, because we're combining the two, we know there's going to be some growth inside of the whole life. So even when we have those years where we don't earn interest on the IUL side, we're. We're creating level of predictability from the whole life, but having more upside potential from the IUL side.

And look, I'm going to interject here for a moment, Rod. One of the things that we employ in, in our investments, in our real estate investments are a is or is a interest rate cap. Is. It is an interest rate cap. Took me three tries there. So it's. It's kind of the opposite. Right. If we have a low interest rate that's variable, we can basically buy insurance on that to cap it at a specific level. So we met. We. We limit our risk when it comes to that. This is, this is the same strategy we're just doing. We're taking the other side of the equation, which is we're capturing the upside and we're limiting our downside. Is that right?

Exactly.

Yep.

That's exactly.

Awesome. Awesome. Yeah. So if you've heard that, if you're familiar with how we use that in our investments, this should be a pretty familiar concept with you.

Cool. And then let's talk about the few points where they're. They're similar. We get the benefits across both types of policies. And Blake hit on this a little bit a minute ago, but all of the growth we're generating in here is tax free when we start accessing the money, it's tax free when we die, and it pays out a benefit that's tax free. So huge tax benefits come along with it. We're building it with maximum growth for the cash value and minimum cost. So it's kind of the irony of the fact we're using life insurance because it brings these benefits with it, and yet at the same time, we're minimizing the amount of insurance on the policy so we can minimize cost, make the cash value grow even better. It creates a level of creditor protection, meaning if I get sued and I have exposure in certain assets. Well, the good news is the cash value in my policy is not exposed, accessible through lawsuit and that kind of thing. And that does differ from state to state. So just, you know, be aware of how it applies in your own state. And the last one, the death benefit, I talked a minute ago about how it we're minimizing the insurance, but the fact is it provides a certain amount of insurance I don't have to pay for in either way. Right. I'm getting in for these other benefits, the growth, the accessibility of it, etc. But again, it comes with a certain level of insurance. And it's not that I'm not paying for it, there are costs associated with that, but it's insurance I don't have to pay for any other way. Okay, Blake, do you want to walk through the, the process, how this all works?

For sure.

So for those on YouTube, you can see this nice Dr. Dennis with cool hair who's sitting here. So essentially in the first year of this strategy, what's happening is we're taking our dollars and funding these life insurance policies. So oftentimes we'll split it up into half whole life, half iul, but we can create different combinations. So we're saying these life insurance policies are two separate policies that we're funding in some combination. But really this is where this might be a little bit different than other types of financing strategies that you've heard of, because we're making one contribution into the policy, overfunding that to the most that we can. Yep. Just one single contribution. Yeah, that's.

Yep.

So one time contribution. Now, of course, you could continue to fund more if you wanted. That being said, the way that it's designed is we only are requiring one combination or one, you know, premium essentially to go into the policy. So that's going to build cash value now after year one. So being in year two and then moving forward, we're going to set up a line of credit just like we would to used for the investment optimizer strategy to go out in something else. In this case, we're just going to be using it to fund the next year's premiums, essentially fund the policy moving forward. So from year two on, we have this line of credit and we're able to use the cash value that we built in year one as the collateral for these lines of credit. And then we just continue to fund the policy from that line of credit each year, which is just going to continue to build our cash value. And now we have some leverage that's, that's being started now. We of course, could go do this multiple times. So we'll have someone who, who will Come in and say, hey, I want to start for some certain amount now, but maybe I want to do this for the next five years. You could always just continue to fund the first policy, but in an optimal situation you can start stacking these policies on top of each other. But really the high, this is one contributions going in from you and then after that there's a lot of flexibility. And typically what we're setting up is the bank financing every year after the single first contribution.

So I know you and I have talked about this, Blake. You know, I've looked at this for instance for funding college by saying, hey, we have, you know, we have maybe a windfall or an investment that's paid off we want to use. This is a, basically prepaying in advance what other circumstances. I know you're showing the tax free income on the screen here, but for those who can't see, like what other circumstances or what would this be a good fit for in terms of a scenario?

Yeah, so we, we've talked to people, I'm thinking specifically of, of business who for whatever reason they need to keep a lot of capital on hand. Right.

Okay.

Could be a couple hundred.

Let's, yeah, let's say I need, let's say I need a half a million dollars of, of liquidity for, you know, you know, business needs or unforeseen business circumstances, that sort of thing.

Yeah, that's a perfect example. And we, and that those are people who are regularly taking advantage of the strategy. So someone says, yes, I have half million sitting in this checking account. I need liquidity over it. I don't necessarily have a place I'm going to deploy it, but you know, for operating costs or for whatever, whatever reason, I need access to this liquidity. Where can I put these dollars that I'm going to have some safety, some liquidity. I can tap it at any time. But I want it to be doing more for me than sitting in an account earning 2% taxable when interest or when, yeah, inflation's sitting there at 9, 10%, I'm losing value all the time. So that would be a perfect example of someone saying, let me take a look at this strategy to see I can maintain a lot of the benefits that I'm getting in this bank account, but just have it do more for me. And we'll have a example of exactly what you said actually coming up here in a minute.

And the other category that I would say is for people who are wanting to set aside money for retirement or some future, like you said, for the Kids, college or future purpose. I don't need it now, but I will need it after, you know, 10 years or whatever. Then it's a really good way to allocate those dollars to again be doing something for me. A lot of the people we work with don't like the traditional retirement accounts. This is a great alternative way to do it, primarily because in addition to the dollars I'm putting in, I'm leveraging, I'm getting a lot more dollars going in through those loans. They let that work for me as we build up that benefit and later are able to start turning it into income. I can just create a lot more income coming out the back end because of that leverage than I could if it's just my dollars going into it.

I love that. When would this be a better alternative compared to the investment optimizer? Or maybe a different way to ask that question is why wouldn't you do this?

Yeah, I'll take that one. So when we set up the investment optimizer, that's your opportunity fund for other investment deals, Right. The purpose of setting up that policy is not to try the 5.88% tax free return that you mentioned, Chris, it's to get that return in combination with what you're doing on the investing side. So while we're saying that this does have some liquidity and it certainly does have that, think of it more as an emergency fund, right. Something where you're, you're going to tap, you could, you know, fix a roof or whatever, but the idea is that six months later you're going to put the funds back. So this strategy isn't built that we're going to leverage to go do other deals. This is more of a self contained strategy that you do have some liquidity over.

Gotcha. That makes sense. Very good.

So the last piece of this is yes, we're overfunding these to try to minimize the death benefit. But we'll bring up an example here and show some numbers. But these life insurance policies in combination with the leverage and financing that we're building do create some incredible death benefits that will move to the next generation or a business income tax free. And you know, it's a really valuable benefit. As Rod said, that's something that you're not having to pay for in any other way.

One thing that's interesting about this is the person doesn't have to decide on the front end if the strategy is more about income or more about this kind of estate planning piece. We have, we have people who I would Say most of them are primarily planning to use it for the income and then whatever comes out in the death benefit is, is fine, but that's not the primary reason they're doing it. But we, we also have people who come planning on like needing some liquidity along with this estate transfer. Maybe they have a lot of real estate or they have their business and along that they need liquidity. Otherwise when the kids inherit it and all of a sudden there's different things going on. Who knows, estate taxes or whatever, they have to start liquidating things in order to have cash to take care of those things. Well, if instead of that we can have some life insurance in place that pays out at exactly the right time with that estate transfer, then it creates that liquidity. But even if that's their primary purpose for the estate planning, they also idea that they can tap into it for income if needed. So you don't have to choose on the front end which one you want. You get to choose as you go. Does it make sense? The income? If yes, great. If not, then there's just more to pass on to my heirs, which is.

You know, which is, it's really hard to do if not impossible to do with any other vehicle. It's something very unique with respect to life insurance. Yeah.

Okay, so next we're going to jump in and do some, just do a comparison because sometimes we'll have people say, okay, well I, I can wrap my head pretty easily around putting money into a investment portfolio where I can predict, you know, create some sort of return. How does this equate to that? Or how am I going to draw some sort of line between what I know and what you're kind of teaching me here? So on the capital avalanche side, or for this example, we're going to show a 46 year old business owner putting 500,000 in. You used that earlier, right? With 500,000 business reserves. And compare that to. Do you put it in the capital avalanche or do you put it into this traditional investment portfolio? Well, as we play it out, we set the 500 aside while she's 46 years old and then at age 60, we're going to start producing income from this. With the capital avalanche, we're able to produce $17 million of income between age 16 and 90. Just for, for purposes of the example, we're going to assume she lives to 90, but then there's an additional 15 and a half million dollars, the benefit that pays out.

So you do. So this would be that business owner, like you said. And I, for For the record, I didn't know you're going to use a $500,000 payment.

That was just, we were just on the same wavelength.

Yeah, but, yeah, so you know, half a million dollars and in a reserve. So you make one payment and that business owner, if I understand this correctly, it has access to that liquidity over, over a period of time as well. So this isn't an either or necessarily, is that correct?

Yeah, and we'll show kind of how much liquidity because you don't, you don't maintain the 500,000 liquidity. We'll show how that works over time. But, but yes, the point is that we do have access to cash if needed.

Amazing. Yep.

And then in comparison, when we take the same 500,000 for the 46 year old, she puts it into traditional investment where she earns over time a 7% return. And this is 7% net of everything, net of fees, net of taxes. So in reality, you might have to produce like a 10, 11% return in order to, to get, to net out the 7%. But when it comes time to take the income from age 60, what we did is we said, well, we need to match the income we're taking out on the other side. Well, that income unfortunately only lasted for 7 years, so they only end up 1.24 million of income. The money runs out and there's no death benefit on the end. So it's maybe a little bit ridiculous to, you know, now show it side by side. But, but again, to, to help people see how powerful this can be. And again, when we talk about double digit returns pounded over a long period of time, it makes a huge difference in comparison with, I think, what a lot of people are more familiar with.

Yeah, so is this, I mean, I think a lot of people would be asking right now, is this, is this a good time to do this when the markets are as volatile as they are, Rod?

Yeah, and we'll absolutely get into some specifics on that. What I think I'd first like to do is talk about the leverage. And maybe because, you know, people look in these numbers and they're like, okay, this just seems silly, right? The 500,000 turns into that kind of a benefit. How are we getting there? Like, we need, we need a little, little bit more meat, a little proof to kind of this up. So we're going to talk a little more about the leverage. And to begin with, we're putting money into assets, right? These life insurance policies, they're building cash value, they're growing that cash value. At roughly a 5% rate. But when you take the leverage on top of that, that pushes your return, the individual's return to double digits. Because when we measure the return, we're measuring it off of, in that example, the 500,000 that that individual put in. Like how much benefit do I get off of that 5,000? But in reality, it's not just the 500,000 going into the plan. She put her 500,000 in, but then we started financing. Every year after that you do another 500,000, year three, another 500,000. So over time, millions and millions of dollars are going into this plan, but her return is measured off just that initial 500,000 she put in. So in other words, when you add leverage to the type of return that we're projecting in these policies, that's what pushes it digits. And then of course. Yeah, go ahead.

Well, I said, you know, if you're looking at this and you're thinking like that's crazy. Is it? Is it crazy if you take a loan against a piece of property and you only put 20% down and you take a 5% increase in that property, but your increase is 25%. It's not crazy. We do it, we do it every day. Our investors participate in that all the time. And I think the difference is this strategy has typically been reserved for really the, not just the rich, but you know, the, you know, exceptionally rich in a lot of cases.

Right, right. Yeah. And done is brought those pieces together to make it more accessible for still high income, still high net worth types of people, but, but more usable by them. So, and let's actually look at a quick example. So again, you just talked about. We, we're used to using leverage in certain contexts, maybe not so much in terms of funding life insurance, but, but in real estate. Right. So if someone has 500,000, could go buy a piece of real estate, that might be great, right? They might, they might do that, they might create cash flow, they might have appreciation on the property and over a long period of time produce a decent return, maybe 10 to 15% wouldn't be unreasonable to think of. But if instead they took the same 5,000, use that as the down payment, and instead went out and invested in four different properties, that's when you can turn that 10 to 15% return into 30 to 40% returns, which again is not unreasonable. It's the same original $500,000 used in a different way with leverage to, to just increase the return.

Absolutely.

And so essentially here what we're doing is recruiting an arbitrage Right. So our definition of arbitrage is the process of growing an asset using leverage, creating a differential between the average rate of the asset and the average interest rate we're accruing on the loan. So visually what I'm doing here is I'm creating kind of a chart here where I have a protocol typical compound curve starting on the left that's, that's recently flat, but then increasing over time to where it's a pretty steep growth curve by the end, that's our asset.

Okay.

Simultaneously, because we're using loans to, to build the asset, I have a loan also with a curve that's very similar, but not, not only is it lower, again because like Blake mentioned, we're creating we always have higher cash value in the policy than any loans or whatever having, but also because on average we're able to produce higher growth in the policy than the interest rate that we're accruing on the loan. Then we create this spread, and let's just put it this way, life insurance consistency creates a return that is on average higher than interest rates with loans. And, and as we've gone back and done a lot of back testing on this, we feel like, and what we use in our projections is a 2% spread. On average, we earn 2% more in the asset than the interest we're accruing on the loan. And in reality, that's actually a pretty conservative because when you spread out over a 10 year time frame, there's never been a 15 year period where we wouldn't have been able to produce at least a 2% spread. All right. Dual years. And in, in maybe a five year period or ten year period, you won't necessarily always produce that. But when you spread it out and you average it out, then average spread is, is very, very consistent, historically speaking. Love it. Okay, so now we'll get back to your question. So you asked about the interest rates, right?

Yeah. Yeah. So let's talk about kind of where we are. Like you said, the stress testing. I think a lot of people are thinking and seeing this and listening and saying this really seems too good to be true. Like what am I missing here?

Yeah, yeah. And it's not without its risks. And interest rates obviously matter. So the very first thing to make clear with people is that a rise in interest rates affects both sides of our spread. We're most concerned about it in terms of what it's doing on the loan, and rightfully so. But a rise in interest rate, and we talked about this earlier, in higher interest Rates on the whole life side means the insurance company can pay out higher dividends. We earn more in our policy as a result of interest rates having gone up. Well, a similar, similar thing happens on the IUL side. As interest rates go up, two things happen. Number one, higher interest rates slash inflation. Right. We're seeing both right now will drive markets higher. Right now things are going crazy. Right. It's crashed. But in the long run, inflation drives all prices higher, including stock prices. Okay. One thing. And then the second thing is that a rise in interest rates means that the, the cap that we're able to produce inside of the IUL is higher as well. So we're capturing more of the upside of the market when interest rates are and have been higher as a result of. Makes sense. So what's interesting about something like what's happening right now and we can go back to the 80s and see this kind of play out, I call it an interest rate reset. Interest rates have been really low for a period of time, which on the, on the whole life side has driven dividends lower on the side has driven caps lower. Well, as interest rates are going up, what's going to happen is that's going to push again I mentioned just that the interest rates will push the growth in the policies higher, but not for just a short period of time. Do you remember earlier in the conversation I talked about how we're still even now seeing the effects of the interest high interest rates of the 80s because the insurance companies are investing in long term types of vehicles.

Yeah.

But when interest rates have been down, it makes sense that they wouldn't replace the 25% bond with a 2% bond and get into that for 30 years. Right, right. Get into shorter term stuff until something like this happens now where interest rates are going up and then it makes sense to then get into the longer term stuff which allow them to capture and create higher growth in the policies for a longer period of time than the more transitional kind of shift of interest rates like what we're seeing because they're going up now, chances are it's going to create a recession and this time next year we're going to be talking about interest rates going down again. Right. Probably not to where they started as low as where they were, but. But certainly not to where they're going to top out here in the next two or three months.

Yeah, yeah. It seems like the Fed is really reloading their gun to be able to lower rates when, when they need to. So. And we've seen that typically the Fed overshoots, they undershoot. I was just reading an article this week. It talked about how housing prices have kind of moderated. They've gone up year over year. Same thing with rent growth in the multifamily market. Our portfolio is up nearly 10% year to date in rents. That certainly slowed recently, but it's certainly not reversed. So I hope things continue to kind of get back to a healthy level. And as you're saying, like we are getting back to what seemed to be more normal interest rates.

Yeah. And they'll stabilize. Right. Once they stabilize, then across the board real estate, everything else will become doable because now we, at least we and the banks and everyone else know kind of what to expect moving forward.

Exactly.

But take it to another level. I mentioned earlier, the spread when we take that over a long period of time is very predictable. Well, what about in these shorter time frames? How does this capital avalanche strategy perform when interest rates are going up quickly like they are now? Well, the good news is we have a great historical case that we can look at. Go back to the 1980s. So anytime we run a projection, we'll actually run it against the 80s. And again, we call it our stress test. How does it perform in conditions? And what's interesting about that actually is in the short term, in a short three to four year period of time, it doesn't perform as well. In other words, we get where we have a negative spread. Our interest rates on the loan are higher than what we're able to grow in the policies for a short period of time. But then it all of a sudden, now we're earning higher returns, but even higher returns than we would if we hadn't had the high interest rates. Right. So in that stress test, that 1980 stress test, we actually end up producing more growth, more income in the long run than we do in our baseline projection.

Awesome.

Yeah. So no reason to be concerned, really. The main thing we want to know is do we survive the short term reversal or at least shrinking of the spread, which we know will happen from time to time. And the answer is yes.

Awesome.

Okay, Blake, you want to run us through the market?

Yes. So I think we'll wrap up here with some key takeaways. If you do want to learn a little bit more about that, we have some other information available both on Chris's website and our website as well. But why are people implementing the strategy? Like what, what is the whole point of it? Well, we're able to predictably get double digit returns. We can use that either as a place to generate tax free income later in life or able to use it as a legacy piece for our estate planning. A lot of business owners or individuals who have inactive money, this is a great place to maintain a lot of those benefits where you have the checkbook access for your short term needs. But it's just doing a lot more for you both with the financing coverage as well as being able to take the money out of the plan tax free. And really at the end of the day, we love this because it's taking Chris, as you mentioned, strategies that were only available to people with super high net worth down to the, you know, more common, maybe high income earners in allowing them to take advantage of some of these principles that we're doing in things like real estate but not need to have outside collateral for the strategy. So hope that has been helpful for you.

No, absolutely. And if you want to learn more, first off, if you haven't and you want to take a look at this slide deck that we've been doing here on YouTube, take a look at our YouTube channel. If you want to learn more about it, you can go to our banking page. You can put your information in on our website or just send me an email. Chris nextlevelincome.com Chrisxtlevelincome.com and put capital Avalanche in the subject line and I'll connect you to Blake and you can discuss this strategy in more detail. Gentlemen, Blake, Rod, thanks for joining us again. It's been a pleasure.

Thanks Chris.

Hey Chris here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also please like share and take just 90 seconds to give us a rating on Apple Podcasts.