Hi everyone, Dan Thompson here. Welcome to another wise money tools video. So we've talked a couple different videos now recently about leverage. Well, let's look at what that really means. Now there are several reasons as you know why we like to use life insurance when it comes to safe money. The plus sign in the equation and in a second here, I'm going to show you how to add leverage to a policy to accelerate it's productivity and its potential income. But first, here's a short list of why we like to use life insurance. It's an important asset to families and to businesses. First, it's very safe. It's called (Tier 1 Assets) basically means even banks can use life insurance and they do use life insurance. They put billions of dollars in it. As a tier 1 asset, what that really means it's the safest place a bank and put money. The second reason is (Guarantees). It's the only asset that can be guaranteed by the company itself. Even banks just use insurance, they don't even use the word guarantee.


The next thing is (High Predictability). With whole life policies. The company even tells you how much they're gonna pay you the coming year. The next thing is (High Stability). These things have been around since before the Civil War, some companies have never missed paying their policyholders for 150 years or more. And then we can design the policies with flexibility that can be a big benefit as you go along. Next thing is (Rate Of Return) the rate of return without using leverage is pretty decent, especially because it has some additional tax benefits. When we add leverage that can even look much better. The next thing is the number one legal domestic tax shelter. For decades, both rich and poor have utilized insurance to protect their assets and reduce their tax burden. And then we have estate planning or charitable giving. Using life insurance can protect your estate from estate taxes. And it's an amazing way to give to your favorite church, school or charity.


And finally, there's family protection. There's no better asset in the world to pass on to your family then life insurance. It's literally saved many of my clients from financial stress or even financial ruin when they've been able to pass on assets to their loved ones. Okay, so those are some of the great reasons why life insurance fits so well into many people's portfolios. But let's go on to leveraging and how do you leverage your policy to get a real good handle on this. Let's see how a bank uses leverage every single day. What I'm gonna do is pull up this very simple calculator to show you how it works. Let's take a bank making a $10,000 loan as an example. Suppose they charge 5% interest on that one year loan. As you can see that loan, they're gonna make $500 in the year, that's okay. Nothing to be too excited about right. But how does the bank really work?


Banks have a little secret sauce that allows them to leverage the loans. You know what it is? It's you and I, its depositors. Every one of us is likely to have some sort of a checking account, a savings account. Some of you may even have a CD or two. How much do we get paid when we put our money in the bank right now? Right? Not too much. Checking accounts may not earn any interest, savings maybe one, one and a half percent. A CD if you go out long enough, you might pick up another half a point. Now banks can use your money and loan it out, they can loan out 9 times the bank's money. What that means is this if the bank puts up $10,000 of their own money, so to speak into the pot. They can also grab $90,000 of depositors money and put that into the pot. So for every $10,000 the bank has, they can actually loan a $100,000 or nine to one. Now let's go back to the calculator and see how that works out. Let's say that the bank's gonna pay one and a half percent to the depositor.


Now let's add the 90,000 that they can use to loan out along with the 10,000 that they have. That means that they're gonna earn 5% right from the loan. They're gonna pay the depositor one and a half percent, which means they're gonna earn three and a half percent on the $90,000. So let's take a look. What the heck just happened there? The bank was only charging 5% for the loan, right? But because of leverage and using the OPM method, which is other people's money, they were able to turn a 5% loan into a 36.50% rate of return. Now, they still only earned 5% on their $10,000 or $500. But they earned an additional thirty one hundred and fifty dollars on the depositors money for a total of thirty six hundred fifty dollars. If we divide 36.50 into the actual money that they've invested, that's basically a 36.50% who returned. This is why the banks get excited, right? So how can you do the same thing that the bank does? Simple, we use leverage similar to the bank and this case, let me show you how this would work by actually borrowing from the bank, it might look like this.


Suppose we have $10,000 in our cash value or inside of our policy that we can access anytime. Now let's suppose that we can borrow $10,000 from the local bank using our $10,000 in our cash value as collateral. So there's gonna be a loan rate charged for us to borrow money from the bank. And because it's such a safe loan for banks, we're probably gonna get that money for around 3, 3.50%. That means that we have about a one and a half percent spread assuming inside of our insurance policy, we're gonna make about 5%. So we make 5% on our $10,000 in our cash value, which is $500. And we make an additional 1.50% on the bank's money and that gives us another $150. So that takes us to a $650 return that year or 6.50%. Now that might not seem of that exciting, but just with one simple leveraged year, we were able to turn a 5% rate of return to 6.50%. Now what if we leverage that one more time, and now we have $20,000 of the bank's money that turns the money we're making into $300.


Now our return is 8%. Not too bad. Now take a look at this graph. The orange line represents the S&P 500 over the last 35 years with using simple secure leveraging. We're now competing favorably with the S&P 500 long term average. Well, let's go one more time. leverage it up one more time. Now we're earning 9.50%. Actually beating the 35 year S&P 500 average. And if we go one more time, we get to 11%. And then one more time to 12.50%. This is all just by getting a 1.50% spread between our loan cost and our rate of return. So you can see the power of leverage. But how do you widen that spread? In other words, how do you get from 1.50 to 2.50 to 3, and so on? Well, as many of you know, seen my videos, I am not a fan of indexed universal life. In fact, I've got the indexed universal life course out there, explaining the pitfalls of IUL. These videos are extremely accurate. The agents out there don't know how to design them to start with.


They're designed with just a bunch of commission and costs and it eats up your cash value. And the older you get, the worse it is because your cost of insurance never cease. okay? However, if you build it correctly, you maximize the premiums and then you add the secret sauce of leverage, you can finally potentially make an IUL work. And we when we couple that with the whole life that can buffer the years where the IUL actually gets a zero return. It can even make the balance even more sustainable. Now remember in a zero year and an IUL, you still have the cost of insurance, you have loan costs and fees if they're still in the fee year. So it's really not a zero year. However, by using leverage, the years where you have even a reasonable return. Let's just say 7% and that spread gets to be 3% or 4%. You can get significantly ahead and get a huge buffer that can help offset any zero years.


By using leverage, you potentially take a decent return and turn it into a significantly better return. Which is what you have to have to make sure you stay ahead of IUL costs. And even if you were outside of the policy and you took massive risk, the chances of you getting these kinds of returns are pretty slim. So let me give you an example of using the bank's money to build your wealth. Let's suppose you have an apple tree, and every year it produces some delicious apples. And one day a buyer from Walmart comes to your door and says, Man, we'd sure like to buy your apples and you say well for how much. Now, not being in the apple business. I have no idea if this is accurate. Let's just say for our example he's willing to pay $5 for a bushel of apples now. I don't even know what a bushel of apples is, but roll with me on this one. You say great, happy to sell them to you.


However, you only have one tree. And even though you're making 5 bucks on a bushel, you wish you had more trees, right? So then next thing that happens is you meet up with a grower from down south and he tells you, he's got a bunch of apples to sell. He's got all kinds of trees, but he can't find a buyer. He's willing to sell you his apples for 350 a bushel. He's also a big time producer and he can get you just about as many apples as you want. So you call up Walmart and ask if they could use some more apples and they say, oh, we'll take all you can sell us. So you get with the grower and you tell them you're gonna buy a bunch of bushels from him, and you're gonna pay him 350 for each bushel and then sell them to Walmart for 5 bucks. That's how leverage works. That's how we can make a typical no-frills, decent safe policy, but turn it into a money producing machine.


Most financial advisors will tell you that risk and reward are always offsetting each other, that in order to get a high reward, you have to take significant risk. Well, Buffett, Warren Buffett's been arguing against that for decades, and he's obviously proved it. However, it's not always easy to invest the buffle way, and it takes a lot of time and effort and major patience to wait for the right time to buy. But by using leverage in one of the safest places to store your money on the planet, which is life insurance. You can potentially broach into that Warren Buffett like return with nowhere near the time and talent it would normally take to get there. Now unfortunately, the vast majority of advisors have no idea this strategy even exists. They're not taught it. I was never taught it when I went through financial planning training. Otherwise, how could any of these guys encourage you to put your money at risk when there's really no need? You wouldn't have to.


Advisors basically want you to come to their firms roll the dice ride the roller coaster. Hope it turns out okay for you and you lived in that perfect timeframe where the markets did nothing but go up for you. There's really no need to take that risk. With secured leverage. You can compete favorably with some of the best investment returns out there and sleep at night knowing your money safe. There's just really nothing like it. Well, that's it hope you get a better sense of how to use secured leverage. If you have any questions. Make sure you shoot those questions to questions at wise money tools. com. Make sure you subscribe, feel free to make comments. And if you want to have a strategy session so that you don't waste another day or lose piles of money. Click on the time trade link below and we'll setup a time to spend few minutes together. That's about it. Till next week. Take care.