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CHAPTER 7: PROTECTION AGAINST LOSS  

When building a traditional house, you need to start with a solid foundation. The same holds true when building your house of wealth. Start with a firm foundation that’s unmovable—a foundation that includes protection for your income and protection against loss.  

 

It’s likely that your grandparents and great-grandparents were all about storing for the future. In their case, it often was as simple as storing wealth in the form of food for the future. Granted, they didn’t have the modern conveniences of refrigeration. They smoked meat. They canned vegetables and fruit. They put aside stores of staples such as flour, sugar, and salt. Back then, they couldn’t go down the street and buy food and other supplies at a nearby grocery store. 

 

Many were farmers, either full- or part-time. They raised their own beef, chickens, and eggs. They grew their own gardens. They harvested fruit and vegetables as they ripened during the growing season. As my grandpa used to say, “We eat what we can, and what we can’t, we can.” So they had weeks’ and perhaps months’ worth of food supplies in storage. That’s not a bad idea, even for a modern-day family. Crises can happen. Power can go out. Weather conditions such as snow and tornadoes can isolate you from the usual sources of food, clothing, and shelter. Having a food supply of two weeks—maybe even six months to a year or more—is certainly an idea that’s worth considering in your TrueWealth planning process. My own family regularly has an extra three to six months’ supply of food on the shelf for emergencies.  

 

Back in the early 1900s, many people owned a whole life insurance policy, and they used the cash value in that policy to fund their farms’ operating expenses. When harvest rolled around, they’d simply pay back the loans they had taken from the insurance company. That was the cycle every year; it was a little like privatized banking. 

 

Most families back then didn’t have a thirty-year mortgage on their home or property. They kept their accounts very short, and they dealt a lot in cash. In fact, gold and silver, either as coins or as the monetary backing of paper currency, were most commonly used. 

 

Then, in 1913, the Federal Reserve System was set up. There’s a very interesting book on the creation of the Federal Reserve (the centralized banking system): The Creature from Jekyll Island, by G. Edward Griffin. By the way, it should not go unnoticed: 1913 was the same year our federal government began collecting individual Federal income tax on a permanent basis (contrary to the original intent of our founding documents). Coincidence? Maybe not. 

 

Many Austrian economists (keenly aware of how government regulation affects our economy) believe that it was the establishment of the Federal Reserve centralized banking system that eventually caused the currency crisis that became the Great Depression of the late 1920s and early 1930s. The government then stepped in to “solve” the problem it had created and to shore up people’s confidence in the banking system. Their solution was to establish the Federal Deposit Insurance Corporation (FDIC) in June 1933, a year before the SEC was established. That was followed in 1970 by the establishment of the National Credit Union Share Insurance Fund (or NCUSIF—like the FDIC but for credit unions).  

 

The government began stepping in to regulate and control our economy with the objective of protecting consumers. The reality is that in a free society, we each must establish our own protection and, through that general welfare, protect the others around us.  

 

This concept (of free people cooperating for their own collective benefit) is what mutual life insurance is all about. Automobile insurance, health insurance, disability insurance, and liability insurance all have their place in protecting your wealth. But mutual life insurance not only protects your family by replacing your future income, it can also function as a privatized banking system (PBS) to finance your lifestyle and grow your wealth, guaranteed and tax-free. These are all strategies and financial products that must be included in a solid foundation for your financial house. We also encourage people to have other “basement” strategies in place, including the following:  

-money market funds 

-cash alternative maximizer—single-premium indexed universal life (IUL) 

-bank CDs 

-fixed index annuities (FIAs) 

-multiyear guaranteed annuity (MYGA) 

-Treasury Inflation-Protected Securities (TIPS) 

-Infinite Banking Concept (IBC), Bank On Yourself (BOY), Privatized Banking System (PBS), Family Cash-flow Banking, or 770 Account (from IRS tax code 7702) 

-term life insurance, participating whole life insurance from a mutual company, and maximum-funded IUL insurance  

-other insurance: auto (liability and casualty), home, health, disability, and umbrella liability  

-physical gold and silver coins 

-food storage 

-fresh water storage and/or water filtration system 

 

All of these strategies are designed to help you save, store, and protect your wealth. I’ll discuss some of these underutilized strategies in more detail in the next chapter.

 

The 10-10-10 Rule  

Back in the time of our grandparents, there was a common rule of thumb that still works today: “The 10-10-10 Rule.” It meant that you should save 10 percent, invest 10 percent, and donate 10 percent of your gross income. Nowadays, most people barely invest 10 percent, let alone do any saving or giving. But you really should start by saving 10 percent, and then only after charitably giving away 10 percent of your wealth should you begin investing a full 10 percent of your gross income.  

 

Many people feel the tithe should come first, then the savings, and then the investing. That principle actually makes sense when you think about giving with an open hand. If your hand is closed, nothing gets out—but nothing gets in either. When you give with an open hand, more can be placed in that hand to continue to give. True wealth comes from true abundance that in turn comes from a heart of charitable giving. In fact, it is the belief of many today that the government has taken over what we should have, as a society, done for our fellow citizens through charitable giving. The government doesn’t do that charitable work nearly as efficiently as nonprofit organizations such as Union Gospel Mission, Catholic Charities, and other fine organizations that help our poor and needy.  One of my favorite charities is the Gideons International.  Then people give for the distribution of Bibles worldwide, nearly 100% of their gift is used to print, ship, and distribute scriptures. 

 

Protecting Against Loss 

Insurance is designed to help you protect against loss. You should have—in fact, a lender will require you to have—automobile liability insurance and homeowner’s insurance. Even though you may never experience a life-changing disaster, it’s wise to protect against losses that could literally bankrupt you. Historically, many people have experienced bankruptcy because they did not buy health insurance. 

 

CHAPTER 8: STRATEGIES FOR STORAGE

 

CDs and CDs Alternatives:

Bank CDs are safe, but they have a very low rate of return. What if you could get a compounded rate of anywhere from 2.25 to 3.25 percent for a sixty-month, alternative, CD-like savings strategy? Plus, you could withdraw simple interest during that five years or leave the interest in this financial vehicle to compound. At the end of sixty months, you would get back both the principal and the interest gain, and you would not have to pay taxes on the gain until the end of that sixty-month period.1  

 

This is a description of what the insurance industry calls a MYGA or Multi-Year Guaranteed Annuity. We call it a CD alternative because it works just like a bank CD. Take note that it’s offered by an insurance company, so it’s not covered by the FDIC or the NCUSIF.  However, it is guaranteed by the claims paying ability of a legal reserve life insurance company.  Unlike members of the centralized banking system, a legal reserve life insurance company must keep more than 100 cents in reserve for every dollar they have at risk.  By contrast, banks typically have between 0% and 10% in reserves. 

 

Many people who have a considerable amount of wealth stored in a traditional bank certificate of deposit have quickly moved a good portion of those funds into MYGAs. Some investors are even using the approximately 3 percent interest from their $1 million worth of MYGA contributions to fund daily living expenses. CDs, on the other hand, do not distribute interest until the end of the contract period, even though the gain is taxed on a yearly basis.  

 

Single-premium IUL:

Another way to “store” cash is by utilizing a single-premium IUL (by the way IUL stands for Indexed Universal Life Insurance policy). Only a few companies offer this unique strategy. Here’s how it works. You pay one big payment into a specially designed, cash-value universal life insurance policy. This is not a typical or standard cash-value insurance design. If you request it, the insurance company guarantees to give you back all the money you paid in that single premium. Some companies also include a feature that is similar to LTC insurance. Because of the indexed feature, your money can capture the upside of the market with a cap of about 10 to 12 percent while also having a floor of zero (or maybe up to 1.5 percent). So your money is being stored in the protective care of a highly rated legal reserve life insurance company, and you have access (in case of an emergency, for instance) to all the money you paid in that single premium. No additional payments are required.  

 

It’s important to remember that the single premium will “MEC” the policy. MEC means Modified Endowment Contract. Basically, this refers to any life insurance contract where government regulation has determined that you put “too much cash” into the policy for the small face value (death benefit) you have purchased and if you remove the cash, you’ll have to pay ordinary income tax on the gain. That’s just like paying deferred tax on an annuity, IRA, bank CD, or many other financial tools. So MEC isn’t evil; it simply means you’ll have to pay a little tax to have an insurance company protect your cash. By the way, the death benefit will be paid free of federal income tax. That alone is a huge benefit to the surviving spouse or other beneficiary. 

 

Fixed annuities and FIAs:

I’ll talk more about indexing strategies in chapter 12, “Creative Alternatives.” But for now, let me briefly explain these two strategies. FIAs are like savings accounts held at an insurance company. (Please note: these plans aren’t covered by FDIC insurance.)  

 

Annuities are somewhat illiquid, although you typically have access to a penalty-free withdrawal of 5 to 10 percent of your contract value and, in the case of a LTC disability, the full amount of your contract value can usually be disbursed without penalty.2  

 

One type of fixed annuity is the FIA. While earnings on a fixed annuity include a minimum interest rate guaranteed by the issuer (an insurance company), return on an FIA is the greater of either an annual minimum rate or a stock market index return (subject to a cap). The owner of the FIA retains their principal investment (minus any withdrawals). There is a minimum period specified for holding the fixed annuity or FIA contract.3 There are penalties for early withdrawal, and gains are future-taxed. FIAs can be placed in your traditional or Roth IRA. As with all investment vehicles in a traditional IRA, the entire amount (not just the gain) will be taxed as ordinary income. In a Roth, neither the investment nor the gain will be taxed. But in either plan, you would be subject to a 10 percent early withdrawal free prior to age fifty-nine and a half. 

 

LTC insurance:

While I highly encourage people to purchase LTC insurance, there are different ways to achieve the protection that you need for an extended stay in a care center or under the care of a health-care provider in your own home.  

 

If you have a high net worth, it might make more sense to simply self-insure by parking a large sum of money into one of the basement strategies I’m sharing in this book, such as a fixed-indexed annuity, whole life insurance policy, a maximum-funded IUL policy (Non MEC), or a single-premium IUL (MEC). These insurance products may have a LTC rider that potentially could be less expensive than a standalone LTC insurance policy. Plus you can use your access to cash from these strategies to pay for anything. You’re not limited to using your cash only for LTC. If you wanted to give gifts to the grandkids or take a last world tour with your money, there is no restriction. 

 

Specially designed life insurance (SDLI):

There are two basic strategies considered to be an SDLI. One is maximum-funded IUL insurance (primarily designed for passive retirement cash flow). The other is whole life insurance (primarily built on a chassis designed for accumulation and to capture investment opportunities). Whole life insurance also allows you to take a loan and invest it in something else, like a piece of real estate or other form of income-producing property. You could, for instance, store profits from the sale of your stock portfolio in an SDLI and then redeploy your cash (via a policy loan from the insurance company’s general fund) to purchase back into the stock market when you think it has finally hit a low after a crash.4 

Some people balk at “having to pay interest on my own money.” To clarify, no money is removed from you total cash values.  Those continue to grow in full force.  But you use those cash values as collateral for a loan directly from the insurance company’s general fund.  The mutual company is required to put you first in line in front of any other investment opportunities in the general fund.  Others might say, “I don’t have to pay interest to take my money out my bank savings account so why is Privatized Banking a better deal?”  True, you don’t pay interest to get at your bank savings but when you withdraw that money you also wipeout your cash reserve and any gain you could have made.  By contrast, if you had $100,000 of guaranteed life insurance cash values and you wanted to access $10,000 for an emergency, you would take a lone for $10,000 from the general fund and pay about 5% interest.  But you would also be earning about 5% (let’s say) on the whole $100,000.  That is called a “Zero Wash Loan.”  You have the potential to make a more using this strategy than you if you kept your money locked up in a bank CD or other bank savings account. 

 

IBC, BOY, 770 Account, and Family Banking System are just a few of the names under which this strategy has been marketed. These are a whole life insurance product from a participating, dividend-paying mutual life insurance company. It is uniquely designed to have high cash value and a low death benefit. The agent selling the product must be knowledgeable about how to design it correctly and must be willing to spend the extra time needed to educate the consumer about this strategy. With the way IBC or BOY policies are designed, the agent is paid half or less of the commission as on a “traditionally designed insurance product.” It is a rare agent indeed who is willing to take extra time and get paid less for the sale. But there are agents who have made this commitment to the current and future financial success of their clients. 

 

Gold and silver:

“You can never get enough of what you don’t need.” That’s a quote by David Morgan, known as “The Silver Guru,” from his book, The Silver Manifesto, coauthored with Christopher Marchese. Morgan has been a guest speaker on our SmartWealth Radio show, and he was featured in a movie The Four Horsemen 

 

Gold and silver have been the currency worldwide for thousands of years. Then in 1971, US President Richard Nixon suspended the convertibility of the US dollar into gold, which established “petro dollars.” Since then, the US dollar has been essentially backed by oil instead of gold—the Saudi and other Middle East governments were promised military protection by the United States if they only accepted our dollars for the purchase of oil. This created an increased demand for the US dollar that enabled our economy to flourish for decades. Other countries were obliged to sell products to the United States in exchange for our dollars, which they could then use to purchase petroleum products from the Middle East. We were sold high quality but inexpensive goods and services from Japan, India, Brazil, and other countries, and the result was that the US dollar became the de facto currency for the world. This in turn established a free-floating fiat currency that remains in existence to the present day. 

 

Physical gold or silver is always going to have monetary value. Metals might be another cash equivalent to consider for your foundational, basement storage strategies. Silver will continue to be what David Morgan calls “the people’s currency.” During a currency crisis, purchases can be made using silver coins, and gold can be used to settle large debts. Merchants will quickly figure out how to accept these alternative (traditional) forms of currency should the need arise.  

 

In addition to cash, I personally own a lot of silver coins, nicknamed “junk silver.” Junk silver is 90 percent silver, and the coins are pre-1965 dimes, quarters, half dollars, and dollars. I also own a large quantity of one-ounce silver rounds, which are 0.9999 in purity, and I have a few fifty-gram gold bars about the size of a credit card (but thicker); by breaking off a one-gram piece of a gold bar, I can still make relatively small purchases during a crisis. And, if I never have to use my gold and silver to transact purchases, I will still own something of value. See my point? 

 

Cash:

It’s a good idea to store cash even though it is fiat money (paper money that is made legal tender only by a government decree and not now backed by a physical commodity such as gold or silver). Please note that storing your precious metals plus cash and other collectibles will require the purchase of a solidly built safe. Don’t scrimp on quality.  

 

Money market accounts and money market deposit accounts are nonfinancial accounts that pay interest based on current money market rates. It is an interest-bearing account that often returns higher interest than a bank savings account and may even offer the account holder limited check-writing options. 

 

A money market is likely to require a higher balance than a savings account, and like other bank deposits, the money is FDIC insured. Money markets can act as “temporary storage units” for people who want to take money out of the risky stock market and set it aside to use later, after the market crashes. Money market accounts are available in traditional brokerage accounts and can be used in qualified accounts such as an IRA or 401(k). 

 

DO YOU AGREE?  

Do you agree that the basement of your financial house is a more likely place to start safely accumulating and protecting your wealth? Isn’t it time to ask yourself a serious question: Why are you throwing your wealth onto the green, felt-covered tables of the Wall Street casino instead of safely storing and protecting your retirement nest egg in foundational basement strategies?