176. Cash Follows The Leader - The Foundation Of The Policy

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Chapter two.

Summary.

Cash follows the leader.

This particular chapter was interesting. We were just talking about the essence of it because there's supporting graphics, which is a great idea, by the way, to include those in the book. Because people learn and absorb information differently. Some prefer to read, some prefer graphic images and it's just much easier to develop a context. And what we describe in, in the second chapter is we describe the tool. We're really getting into the, to the design attributes of the tool with an emphasis on a strong foundation. And Nelson said a lot. He was approaching it from two particular areas of thinking. One was in your, your understanding of the concept. So if you, if you focused on the policy, the tool, and all the calculations that you can do to determine the efficiency of the tool, and you're really starting from that vantage point, he would ask you the question, is it possible for a skyscraper to stand on a weak foundation? So if you have a very weak foundation of knowledge of the concept of the process, then it's going to be impossible to build a skyscraper on that weak foundation. And then the other element that Nelson referred to often is that this is not meant to be achieved within the construct of a single policy. He's talking about designing a system. And that system is built gradually and incrementally over a period of time.

And on the aspect of building that gradually and incrementally, you know, sometimes people have questions on that. Well, how do you go about, how do you know it's time to go put another one? When do you know those kind of things? Well, that really happens in a natural way. You, as you start to implement the process and you begin to create proficiency, you, you actually see things happen. You take a policy loan, you repay a policy loan, you see cash value accumulating. You think your behavior, because your mind gets open to looking at, okay, how was money flowing through my budget? How is money moving in and out of my corporation? How was money moving to pay for my vacations and to. And to pay for all the things that I see the Money going to. Yeah. Prior to implementing the process, you have a way of looking at all that information. And for many people it's kind of these automated built up habits over time and for some they're not looking at it at all. There's no looking at it, there's no looking at the transactions or the, the way that money's moving through your life. And once you begin implementing the process and you start practicing with, with becoming your own banker, taking a policy loan, using it to pay for something you would have otherwise paid for, setting up a loan repayment schedule, completing that activity, you automatically begin to create habitual change which now your brain starts to see things it didn't see before. And so your natural progression is to think. You reach out to your coach and say, hey, I noticed based on how I'm spending my money, I actually think I can move some things around. I actually think I could go get another policy. Can you help me set that up? So you, you be, you start to naturally determine both through a combination of activity level and then through desire to see how you can go and increase the size of your system. So it might be hard to see that when you're just getting started or you're just learning about this, but as you actually begin to do it, those things become more and more clear to you.

And then the more you see infinite banking concepts, the more you'll see you didn't see. And that, sir, that serves as inspiration for you because we talked earlier in the first chapter summary. It's one thing to gain control.

It'S a whole other to maintain it. And if you, if you are embracing this process as it relates to your needs, the way that you get into a maintenance mode is through simulation. You're actually implementing the process. The policy itself, the tool that's used to implement it. You, you can, you can create a system to store almost unlimited sums of money. But if, if you're, if all that you're doing is, is storing some of your capital there, the insurance company is going to do a pretty good job administering that policy. They're going to do really well.

It's historically proven.

But your behavior can create a much and far better outcome. And that is by actually implementing the process as it relates to your needs. And we describe in the chapter, we go through the foundation and we refer to that as the base policy and we actually provide a supporting diagram to depict what we mean. When you have a strong foundation that you can actually build upon versus a weaker foundation, which you can't really build much on top of, otherwise it won't stand for very long.

So in other words, you know, you, you know, you know, we've got an image of a house on sticks that's obviously ready to kind of fall over versus having that concrete foundation underneath. And one of the things that's, that's important when you think about whether it's your system or even an individual policy, you want to make sure that your, the, the base of that policy, the foundation of what you're building is strong enough that there's room for you to build more onto it. What that means is, you know, you want to add a room when you do a renovation, you want to be able to increase the size, you want to add a second floor, you want to, you want to continue stacking on top of the foundation that's there versus having to go necessarily pour a new one as an example. So that's part of where, where coaching comes in. And, and then we, we shift into another visual looking at the, the paid up additions. So the base policy is the foundation. It's the, it's the minimum required, it's the original starting death benefit of whole life. And, and the, and the components that are built in there. It's a, has a minimum required premium amount, has a commitment that you need to make to ensure that you've got this strength underneath everything you want to build on top of it. And then the second component of a policy is the flexible premium or the paid up additions premium or Nelson would say the paid up additions rider. And what that does, there's a lot of confusion about the understanding of what that does. And so the paid up edition riders, you can see in our image here, it depicts adding on additional building blocks or layers of additional death benefit. Those are all stacking on top of the foundation. So you have the base policy and every paid up addition is an added layer. It's like another floor on the house. It's like another room being built that increases your capacity to house your family, you know, to help protect in them and so forth. And as you build up these blocks and these layers, well that, that forces a secondary thing to happen. And that's the cash value which is your equity in the contract. These additional layers of foundation plus the new stacking components, it forces the insurance company's hand to accumulate more and more cash value because the cash has to pile up to equal the death benefit at age 100, 121 in the United States. So whatever age you're at, we've got Jack here at age 35, he's putting a little bit of money in there. And then of course, Jack at age 100 is pulling out a whole bunch of money out of his mailbox because that cash must continue to grow and accumulate to equal that future death benefit. That's really the core of cash. Following the leader. The leader is the death benefit and the paid up additions that are accumulating because of your behavior. The paid up addition won't happen unless you do something first. You have to pay a premium, the base premium. And then you can amplify the paid up addition that you get by adding an additional premium. That amplification happens in two ways. Number one, through your, your direct effort. And then number two, the impact of the dividend that you're entitled to receive from the Life company is also impacted. So the more of your behavior that you use to, to fund these premiums, the greater the impact of the result of what the Life company does in reference to your policy. So you have two policies side by side. Even if they have the same foundation or base, it's the same person, same individual, same age, they have the same minimum required premium. The behavior of one person will outperform the behavior of another. Just like if you had two cars that came off the assembly line. You know, Jason and I, we each get whatever, two cars off the assembly. What is it like a Nissan Altima or something? What do you got going on there, Jay?

Yeah, very fuel efficient vehicle. Thank you guys.

Jason, Jason loves the fuel efficient vehicles. I also like them because I don't go anywhere. And so we each, we each pull one of these things off the assembly line or same color, same make and model, made the same day. I can guarantee you that my driving of that vehicle is going to be very different than Jason's. And probability is mine's going to have more dings and bent, you know, and, and dents and, and more speeding tickets associated with it than Jason's will. Right, but so if we looked at those vehicles 10 years later, they are going to look different even though they came off the assembly line as identical vehicles. The same thing applies to a policy. That's why we stress in the book and what we learned from Nelson is the importance of the policy owner's behavior. So if we can't get the behavior right, you're not going to get the same results even if you had the exact same policy.

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Yeah, it's very true. And that's why, you know, the emphasis that is placed upon the, the tool versus the process. While you should use this tool and it should only be designed in this fashion, otherwise, you know, all the noise that you hear out there, all the advisor cares about is his or her commission. All that the advisor cares about is just insert whatever you want there.

At the end of the day, it is the policy owner's behavior that's far more critical than the behavior of the life insurance company. And the advisor hopefully is providing support and coaching that the policy owner needs not, not.

To be responsible for the policy owner, but to be responsible to the policy owner. And all that noise and nonsense out there.

It'S just, it just has no bearing.

Like.

I don't walk up to the manager of the grocery store and say, I need to know how much money you're earning in order for me to decide whether or not I'm going to do business at your grocery store. Like, if it's, if the pricing is good and the service is exceptional and it's a great destination and they always have the bread, butter, eggs and, and food that I need, that's where I'm going to do business. And.

I don't know if we, if we apply that same logic to anything else that we do in our lives.

And yet it seems to be this, this, this point of you've got to.

You have to design it this way, otherwise you've got another agenda.

I think once you develop a deep under, deeper understanding of what the policy owner's behavior is going to be, you can design a policy accordingly.

And that is not a cookie cutter approach to every single person. And when we talk about cash follows the leader, the leader is the permanent death benefit. You can design a policy that has a very large temporary death benefit and the cash ain't following that portion of it anywhere.

I like that. That's really good.

And so it's, it's just, it's just a fact. And it's not to say that, hey, that type of policy may be great for people, hey, knock yourself out, whatever type of policy you want.

But the advisor, who is a real purist as it relates to the implementation of the process, is really going to want to have a deep understanding of what the policy owner's behavior is going to be, because that's far more critical. Rich, you said it best. We could literally put the very same contract in the hands of two different people and we can shout from the rooftops, there's only one way to design this contract. So you're both getting the very same one. One policy owner's outcome is going to be different than the others, and the administration of the contract is going to happen by the insurance company regardless.

The same way.

But one policy owner's outcome is going to be different than the other. Guaranteed.

Yep. How much paid up addition premium did they fund? When did they fund it in the year? Did they ever make changes to their dividend election? How many wholesale loans did they take and did they pay back? In which case, what did they do with the excess that they paid themselves? If they're following Nelson's guidance and rules. Yeah. And. And how did that get implemented in their system? May not be implemented in that one policy. It might have to be implemented in an additional policy they create in their system, which then creates an aggregate overall effect over the long term for all of their financial advantage. It reminds me of something that's in the forward of the book. Jason. Forward again. Shout out to Ryan Griggs. We appreciate Ryan Grids of Griggs Capital Strategies. Very smart guy. Has been on a podcast before. Great episodes. Go check him out. He says no banker ever started a bank with the expectation of only contributing to and accumulating capital for as little time as possible.

I mean, just think it'd be so silly to do that. And so you want to be in a position where you always have the contractual right to be able to pay premium because premium is what grows cash and what, what pays for death benefit. You can't have cash without death benefit. In fact, the death benefit is the thing that forces cash to accumulate. This is where. This is part of the reason why.

Permanent death benefit.

The permanent death benefit. Thank you. This is one of the reasons why we actually wrote this book is because there is a fundamental lack of understanding of the elements by which cash value, not cash, cash value accumulates. And, and there's a lot of people who are pontificating out there in the social media, slash the Tic Tacs and the tweeters and the, and the tubers and all the stuff that's out there. And they're saying things like, oh, yeah, you pay this and it goes straight to the cash. I'm like, no, that's a bunch of bs. Nothing goes straight to the cash, the only thing that a premium does is, is it buys a death benefit. And a death benefit, once established of whole life forces a secondary chain of events which is the accumulation of cash value. You cannot create cash value without first creating death benefit. The sequence of operation is critically important. And the, and the world out in the sphere of the quote unquote education space seems to have misinterpreted that and it causes unnecessary confusion for the consumer, which shouldn't be the case. Cash value is a direct representation of a death benefit that was created. No death benefit created ain't no going to be no cash value. So you have to have the one before the other.

Yeah, it's when the death benefit is established the.

Current cash value, which it increases day in and day out. But the current cash value is the net present value of the future payment of a death benefit. That's why they're correlated in the sense that the total cash value is contractually guaranteed to match the total death benefit by age 100 of the life insured in Canada and age 121 of the life insured in the United States. And so understanding what's really happening and understanding the attributes of this tool are just so important for a person to understand.

That look, if all you did was purchase this tool and you had no intention of implementing the process, the insurance company is going to administer that contractual guarantee.

Without any loan activity, without any implementation of a process.

But to implement a new process, you have to change your behavior.

And once you do that and you follow Nelson's golden rules, you will create a much better outcome.

That's chapter two.

And you know, just, just to give like an example, I just, I happen to have an, an illustration over beside me here where I was, you know, meeting with someone, a 30 year, 38 year old individual, a smoker, and you know, they're looking at putting a policy together for their corporation holding company that's around $60,000 of annual premium. That's what they can put in, but the minimum is like, I don't know, it's around 18 or something. That includes some other, just some riders or some other pieces in there. So that means that the, the flexible portion of the premium is around 40 grand. I'll just kind of round round it around 40,000. Well, when they put that in, by the end of that first year they will have accumulated about $158,000 of new paid up additions. So they have a starting whole life death benefit and they're, because of their behavior, they're going to Increase and amplify that total death benefit to the tune of about $158,000. So they make it, they make a voluntary transaction to fund premium, premium purchases, 150 grand of paid up insurance which is now locked in with the Life company. And they've, what they've done is they forced the Life companies hand to some degree, contractually that requires them to grow that cash from the age of 38 now to equal the new $158,000 number in this case is Canadian policy. So by age 100, which means every future day that that person is alive, whether they're smoking or not, there's going to be an increase in the cash because it's got to chase after that. So they traded today's dollar for a guaranteed outcome of a much higher future dollar that is constantly in accumulation.

Ask yourself this question. Just think about the human condition.

What, what would you prefer to pay? The minimum amount required.

Or the maximum allowable?

Just think about this just without introducing anything else into your thinking.

The natural way, the natural human condition is to want to pay what the most or the least?

I think we were conditioned that we want to pay the least in things in life. Right.

Think about that.

Take all the time you need.

Because the, the policies that I see.

Because as you can imagine, we're, we have, we're omnipresent all over social media, we're omnipresent in the marketplace. People tell us that we see and hear you everywhere.

And they, they show us, you know, policies in some instances that have been enforced for a while, they had a maximum allowable and a very low minimum. And guess what? They reverted to very quickly paying the minimum.

Two, two, three or four years have.

Gone by and they've done nothing to increase or amplify their results.

Yep.

And the impact of that decision making and behavior. Yeah. Is that they've killed future potential 20, 10, 20, 25 years, 50 years down the line because of their poor behavior. And I'll go so far to say is lack of coaching in that first period of time because you'll never get that time back. You can't, you, you can never, you can never build anything.

You can never build anything again that's more efficient because you don't have a time machine to go back there. And it is so vital that because we, this is again just a, it's an interesting discussion. Thank goodness. It's rare. It comes up very rare. But.

To suggest that one way of designing the policy is the only way for everyone. Otherwise you as the advisor have a different agenda is absolutely ridiculous.

Because you're completely discounting and disregarding the policy owner's behavior.

Nelson says in the book here, and I'm trying to remember where it is. It's somewhere around page 45 when he talks about the twin sisters example in his book. And I'm looking forward here, I can't find the exact space in the book, but essentially he says, show me someone. Because the example used in, in Nelson's book is a. Is about two twin sisters that both are going to self finance self finance cars and that they're going to be an honest banker, they're going to build up some capital, pay cash for cars, and they're going to return an equivalent car payment back to their life. That's effectively the scenario. And he says, show me someone who will put money, commit to putting a certain amount of money away every single year for seven years without touching it with the intention of doing something impactful that will help every future thing for the rest of their life. And I'll show you someone who's conquered Parkinson's Law. Yeah, he, he wasn't saying that you can't use anything for seven years. He was saying that if you exercise a level of patience and you recognize you need to build up a reservoir of capital to do important, fundamental things that require money to accomplish throughout your life, you can never do that effectively unless you first habitually learn to conquer Parkinson's Law. There you go.

There you have it. Another chapter. Another chapter summarized cash follows the leader, just like we expressed in the first chapter summary. If you don't yet have a copy.

Of the book, you can go to cashfollows.com and put a little information. Boom. There you go. You're gonna get some. You're gonna get that book in like no time flat. So with that being said, take a look down below. Boom. New video right there. Check it out. That's some good stuff. Go listen to it and can't wait to do this again. Jay. Thanks, man. All right, thanks for listening to the Wealth Without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies and the mindsets that maximize your wealth.