COOL CARS AND THE POWER OF CASH VALUE LIFE INSURANCE
My name is John Boyd and I’m known as The Cool Car Guy. I’ve been helping people buy, sell, trade, lease and finance vehicles for almost nineteen years. I have clients around the country who utilize my services. I own CoolCarGuy.com which is a licensed car dealership in Colorado.
I’ve helped people finance vehicles using a number of different financing strategies. Some people will borrow against their home and get a second mortgage, others will borrow against a 401k at their work. However, one of the best financing strategies that I’ve seen to purchase vehicles is using a policy loan against a cash value life insurance policy. Why do I think this is a good strategy? I have a number of clients who are estate planning attorney’s who turned me on to this strategy. As I will explain in detail on this website, it’s a very cool way to finance vehicles or really any major purchase. I do not sell life insurance. This is my opinion about the benefits of owning life insurance for policy loans. This article is for informational purposes only and not to give anyone reading it financial advice.
The vast majority of people finance their vehicle purchases. Americans currently owe more than $1 trillion on their cars and the average car loan debt is over $26,000 and growing. That’s a huge figure and the cost of vehicles continues to increase. Consumers pay over $5,500 in interest alone over the life of their loans according to Edmunds.
While everyone is focused on the best price for a vehicle, they are getting whacked with interest payments on the back-end. If you’re a typical American, you can take the price of your vehicle and add over $5,500 in interest payments to the lender. How your purchase and loan was structured is far more important than the price of the vehicle.
If you read the book called Becoming Your Own Banker, by R. Nelson Nash, you will discover this interesting fact about how much of your money is going toward interest. The book has a section that caught my attention that states the following:
“34.5 cents of every disposable dollar paid out is interest.” – Becoming Your Own Banker, R.Nelson Nash
For every after tax dollar you earn, if you are a typical American, you are paying 34.5 cents to a bank, mortgage company, finance company, credit card company or some other lending institution for getting access to their money. Which is why I wrote this article and setup CoolCarsForLife to introduce you to a better way to finance cars or anything.
MONEY MANAGEMENT IS A PROBLEM FOR MOST PEOPLE
There is no shortage of people who are horrible at managing their money, which is why people like Suzie Orman and Dave Ramsey are rich. They have earned a fortune telling Americans how to manage their finances and cut back their expenses. What if you could create a way to finance everything you purchase differently and save all that interest? You can do this by over funding a dividend paying whole life insurance contract that you own and control.
Life insurance is the contract that a number of financial experts will tell you is not a good investment and convince you to buy term and invest the difference. The same term insurance that insurance companies used to sell exclusively and the public was angry because only about 2% to 3% of those contracts ever paid out.
People would get old and couldn’t afford the premiums on their one year renewable term, so the policies would lapse and nobody would get paid anything on the policy at death. It was a windfall for the insurance companies and it still is today. Most term insurance policies never get paid out, but 100% of people die. Which is why whole life insurance was created that built-up a cash value and had guarantees built in for the owner. Guarantees that could be accessed.
Many people believe that the commissions are too high to the salespeople and the interest rate you earn on your money isn’t going to be enough compared to investing elsewhere. It’s true that there is an expense involved, but it’s mostly in the first year of the policy. Try starting a business and you will discover that it costs you more in the first year. There are administrative and sales costs involved initially with anything that has a real benefit. In the meantime, people are losing about 34.5 cents on every dollar by borrowing money from the same Wall Street Bankers getting them to focus only on a rate of return.
The light bulb went on for me when I realized that in 1987 Uncle Sam, with the help of the banking and Wall Street lobbyist, changed the tax laws so that if you bought a single premium life insurance contract it would be considered a MEC (modified endowment contract). You already paid taxes on your money and you are supposed to only have to pay taxes once, but if you paid for a whole life insurance contract with your own after-tax money with a single premium the law was changed. It will now become a MEC and treated like a qualified retirement plan!
Why would they do this? They knew the power of a heavily funded life insurance contract that you own and control. It was just too good of a deal! The politicians sold the public that this was for their own benefit. Even though life insurance has been around for over 200 years, which is longer than the IRS that started taking part of your income on an annual basis back in 1912. Now the premiums have to be made over time (along with other qualifications) to take advantage of the full benefits of life insurance.
How did this work in the real world that they wanted to change the law? People with money before the 1987 tax law change could dump $100,000 or $1,000,000 into a life insurance contract and then be able to immediately borrow against the policy to buy cars, rental properties, fund a business, etc. They would pay back the loan at say 4.5%, while the cash value in their policy was earning 5.5%. That’s not a good deal for bankers who were not getting those loans. They could also pull out the premiums that they had already paid taxes on tax free! It was like creating your own private bank account using life insurance.
We can surmise that these same bankers hired and trained all of their experts to run around and tell people that whole life insurance was a bad investment. If it’s such a bad thing to own why did they change the tax code, so that you can’t buy a whole life insurance contract with a single premium without major tax consequences? You can still utilize this same strategy today though. You just can’t fund it with a single premium. Now you have to spread out the payment and ratio of death benefit to cash value over several years.
Is it easy to setup this strategy using cash value life insurance? Not necessarily. There are a few challenges you have to overcome to create the right structured policy that you can use to purchase vehicles or anything else using policy loans. If you’re going to own a policy on yourself or someone else there are a number of qualifications that need to be met. The insurance company needs to make sure that you’re not going to pay in $5,000 and they have to write a check for $100,000 to someone you name as a beneficiary should the insured die prematurely.
There is underwriting with a life insurance application, blood, urine and a physical to make sure you’re healthy or if you’re buying a policy on someone else that you have an insured interest and that they are healthy. You can own a policy on a son, daughter, grandchild or someone you have an insured interest in. Which means if your health is terrible, you can still fund and own a life insurance policy on another person and you can control the funds.
After the 1987 tax code change, it’s now going to take time to build-up the cash value of your policy without it becoming a MEC. You can typically have a fully funded policy with adequate cash value in as few as seven years using a reduced paid-up insurance contract. You can actually buy a 10 year paid up life insurance policy and have the insurance paid up and never make another premium payment, while having a death benefit and a pool of cash to borrow against to purchase your vehicles or whatever you want to use the funds for.
You’re also not limited to just owning one policy, but you can have multiple policies that you can have paid up and access to cash for purchasing your vehicles going forward. Which is why I called this article and website Cool Cars For Life.
Everyone’s situation, income, credit, health and personal needs are different and life insurance companies are different as well. For example, does the insurance company use a non-direct method, so the cash value is unaffected by any loans against the cash value or is it the direct method where the dividends or interest being paid to the policy are reduced with a loan? If you borrow $50,000 for example and your cash value is $100,000 does the $100,000 continue to earn interest and get paid dividends or only $50,000? In other words, not all insurance companies and insurance policies are created equal.
Life insurance companies are also different in their corporate structure. There are mutual insurance companies owned by the policy holders and stock held companies owned by investors. There are stock held companies that manage mutual insurance companies. If you’re going to take advantage of the Cool Cars For Life strategy you want to do it using a properly structured life insurance policy with the right company.
If you pay cash using the CoolCarsForLife strategy, you can get the title to your vehicle immediately. Your paid off vehicle can become an asset for you instead of a liability. There is no credit check to borrow against the cash value, it’s an unstructured loan that you can control the payments on rather than a bank, you have a guaranteed interest rate on your cash value and a guaranteed loan rate, plus a death benefit and much more.
Before I finish this article, let me explain the real cost of borrowing money the traditional way. If you own a business you can at least get some tax benefits for miles driven or depreciating the vehicle, but for most people it’s a different story that looks more like the following.
THE REAL COST OF BORROWING MONEY THE TRADITIONAL WAY
A $30,000 LOAN WITH A 6% APR: If you borrow $30,000 for 72 months for a vehicle at an APR of 6% with a payment of $497.19 you will pay $5,797.44 in interest over the term of that loan. If you divide $5,797.44 into $30,000 you will discover that you didn’t really pay 6% for that loan, but 19.32% in interest over the six years you had the loan. A 6% Annual Percentage Rate though is how it’s sold by the lender and the car dealership.
What if you could finance your vehicle and pay an effective interest rate of near zero percent using the Cool Cars For Life strategy? You won’t hear this from your financial planner or any other car dealer that I know.
How Many Cars Will You Own In Your Lifetime: I’ve seen people pay 15% – 21% interest rates with bad credit to purchase a vehicle. What do you think their actual cost of borrowing money to purchase a vehicle is? How many vehicles will you purchase in your lifetime and finance for a long term? If you only purchase five vehicles over the next thirty years and you pay an average of $5,000 in interest that is $25,000 that you gave to a lender to use their money. That’s like someone giving you a free car.
Many people have two or more vehicles in their family that they are financing, so $25,000 is more like $50,000 or even $75,000 on $5,000 in interest payments. That’s a great deal of wealth being transferred. This system can even work for people with bad credit, if they’re willing to stop following the traditional way of losing money and can save.
WHAT ARE THE FINANCIAL BENEFITS OF CASH VALUE LIFE INSURANCE FOR PURCHASING VEHICLES
Obtain A Lower Net Interest Rate: If you have $100,000 in a whole life insurance policy earning a guaranteed 4% and you borrow $40,000 to purchase a vehicle at 4.6% you will still earn 4% on $60,000 or with some life insurance companies you could earn 4% on the full $100,000. Which is why I said it depends on the life insurance company and the terms of the policy. That’s a net 0.6% policy loan rate based on the guaranteed interest rate.
However, if you earn a guaranteed 4% on $100,000 that’s $4,000 the first year compounding for six years during your car loan. If you’re paying 4.6% to borrow $40,000 against your $100,000 cash value policy that you are paying back over 6 years that’s $5,849.73 in total interest. If your $100,000 grew to over $126,000 minus the $5,849.73 in total interest on your personal car loan that’s a great deal. Which is why I said you can be having a zero net cost to finance your vehicles, if you borrow money correctly.
Very few people will be financially disciplined enough to leverage this cash value life insurance strategy and realize its benefits. I use it as a way to access quick cash when I need it for my business or to buy a cool vehicle and flip it for a quick profit. It works.
No Credit Check Or Application Required: You don’t need to fill out a credit application, obtain credit approval, or even put money down. Borrowing money against a life insurance policy is similar to borrowing against the equity in a home, only you don’t have to qualify.
You can usually obtain a loan against a policy with a simple phone call or filling out a few forms. You can’t do this with real estate because your equity in real estate is tied up. Home equity loans and car loans are all based on your credit, your income and your ability to pay back the loan. This is not the case with life insurance. You can use your cash value as collateral for the loan with the insurance company. Most people are not aware of this as a strategy for financing a vehicle, starting a business, getting access to cash, etc.
Death Benefit Pays Off The Loan: In the event a person passes away, with an outstanding loan, the loan will be paid off by the death benefit. The heirs would get the title to the vehicle with a reduction in the death benefit.
Why Everyone Doesn’t Use This Strategy: This strategy for using cash value life insurance as collateral is a great way to purchase vehicles. Pay off the loan and you can use it again when you need it without the need to qualify for a loan. As I mentioned earlier, the real challenge for many people is that it can take time to build up the cash value in a policy.
CHASING DOLLARS WHILE LOSING THOUSANDS
Most people focus on the purchase price of a vehicle rather than the overall structure. There are millions of people paying high interest, like 21% which is $12,464 in interest on a $20,000 vehicle. They are worried about the price of the vehicle and not the loan interest they are paying.
In many cases when a person passes away their obligation on a lease or purchase may continue for the estate or a co-signer. I am often called to help sell a vehicle or buy out a lease by people who have lost a loved one and it can be a difficult situation for them. The obligation doesn’t just disappear.
Many people tell me that they can’t afford to own cash value life insurance, but most can’t afford not to. What if you started putting away just $3,000 or $5,000 a year and purchased a 10 year paid up for life policy? Over the course of 10 years that is $30,000 to $50,000 in premiums that can be providing a long term tax free death benefit, along with cash value in the policy that is guaranteed and can continue to grow. You don’t have to be rich to utilize this strategy. There are certainly other ways to purchase vehicles, but cash value life insurance offers some unique advantages.
THE LONG TERM BENEFIT OF CREATING A COOL CARS FOR LIFE STRATEGY
Very few people are actually taking full advantage of the benefits available with life insurance. It has been reported that the top 1% control 22% of all the cash value life insurance in force. This doesn’t surprise me. I recently heard about a billionaire buying $1.2 million a month in cash value life insurance. What do these people with massive amounts of wealth know that most people don’t?
Cash value life insurance has been around for centuries. It dates back to the late 1700’s and policy loans against life insurance have been used by many successful people, including a number of my clients. Having access to quick money with a phone call or a few forms can be extremely beneficial. Pay back the loan and you have your money available as collateral when you need it again, so you’re not paying 34.5 cents of every after tax dollar you earn to utilize money.
COOL CARS FOR LIFE IS AN IDEA AND A STRATEGY THAT I HAVE USED PERSONALLY OVER THE YEARS TO PURCHASE VEHICLES
There are certain parameters and requirements that need to be met to obtain a cash value life insurance policy of your own and a licensed life insurance agent can assist you with details.
If you want to contact me about purchasing or leasing a vehicle using one of the more traditional financing or leasing methods you can find me at CoolCarGuy.com. I do those types of loans and financing on a weekly basis, so I’m happy to help you get your next vehicle regardless of how you choose to finance it. You can pay cash, but why give up the interest you could be earning if you have your own way to finance a major purchase?
THE DISCLAIMER
John Boyd is licensed to sell cars. Cash value life insurance guarantees vary by insurance carrier and are based on the claims paying ability of the insurer. Dividends paid by a mutual insurance company are not guaranteed. Products, product features and riders vary by state. Some issuers are not available in all states.
All material in this article and on this website is for general use with the public and is not intended to provide investment, insurance or tax advice for any individual. By using this website for informational purposes you agree that you are responsible for doing your own investigation of the material being presented and Cool Car Guy, Inc., John Boyd, CoolCarGuy.com and Cool Cars For Life will not be held liable for sharing the opinions and/or your personal use of the information being provided here.
