Most business owners are independent thinkers. They’re hardworking, risk taking, tax paying employers, and they are the backbone of this great country we are blessed to live in. It seems like there’s hardly a day that goes by where the Government or some regulatory agency isn’t creating new restrictions, requirements, mandates and laws that make it increasingly more difficult to run your business and make a profit.
Business owners deserve better. They’re responsible for generating the huge majority of the jobs in this country yet they seem too often to be treated like bad-guys. One of many problems business owners face today is the difficulty of obtaining credit and bank loans. Ever since the banking crisis, banks have over reacted and put a strangle-hold on lending. As you know, availability of funds is the lifeblood of any business yet it is still a big challenge with today’s lending environment.
I’m sure at some time you’ve most likely had the experience of trying to obtain funding from a bank, right? This has got to be everyone’s most hated experience. The banker starts out by requiring you to fill out an endless amount of forms. They survey your credit with an electron microscope and find things you’ve never imagined. You provide countless financial statements, tax returns, bank statements, reports, ledgers and endless requests for yet more information.
Then the bureaucratic hassles really begin. They finally send your loan package upstairs. Then it goes to the loan committee, then back and forth like a tennis match in a never- ending game of survivor. They might as well start off by telling you to get down on your hands and knees and beg and grovel. Then, to add insult to injury, if you’re lucky, they come back and tell you they will loan you money up to the amount of collateral you put up.
The Barefoot Retirement Plan is the best retirement plan you will find, and it’s also an absolute God-Send to business owners. The humble little IUL program can be your answer to a ready source of capital that your business needs. And, the great part is, getting the funds is easy as pie.
Did you know that back in 1953 when Walt Disney was trying to start Disney Land, no bank would touch such a crazy idea? Lucky for Walt, he had a form of permanent life insurance that he was able to borrow against to make his dreams come true and change the world. J.C. Penny experienced a similar situation. He needed capital to keep his business going in the early days, and the banks would not step up. He was forced to turn to his life insurance policy to borrow the funds and without that, it’s likely none of us would have ever heard of J.C. Penny.
Additionally, Ray Kroc, (McDonald’s founder), and Doris Christopher (Pampered Chef founder) turned to their life insurance policies when no one else believed in them nor would lend them any money. Had it not been for their life insurance policies, we may have never heard of these businesses. These are just some of the most famous individuals to point to. There are countless other business owners who have relied on their life insurance policies to sustain them and help them to succeed.
We could devote an entire book to the many ways you can use this program in conjunction with your business but for the sake of brevity here, I will just point out the key benefits and usages of this program in your business.
The simplest way to look at it is; your IUL is the bank, and you’re the owner of the bank. Imagine how great it would be to finally be able to fire your banker and put yourself in charge. Pretty good, right? You would be a one-man loan committee, and you get to approve all of your own loans. Sweet!
Step 1: Work with an experienced and knowledgeable IUL advisor that will take the time to evaluate your unique personal and business needs and structure the IUL that perfectly suits your needs. Set up one or more individual policies.
Step 2: Fund your IUL to the capital levels that work best for you.
Step 3: Allow the cash value of your account to build over time.
Step 4: When you need funds for your business or investment opportunities that come up, have a meeting with yourself and borrow the funds from your policy as needed.
Here is an example of how the meeting with yourself could go. You say to yourself, “Self, I need to borrow some money from my IUL account for a great investment opportunity or to use in my business. Okay. Is it a good opportunity and does it make good business sense to do? Well yes. It is a great opportunity, and I have every confidence in the world that it will work out. Okay then. That’s sounds good to me. I approve you being able to borrow the funds.”
That truly is about as hard as it is once you have the base of funds in your account. Not a bad meeting, right?
Let’s say you own a machine shop, and you need a piece of equipment to expand and grow your business. You know you could generate more profits if you had that new piece of equipment.
(A new way of looking at it.)
If you had the money, you could simply write a check and buy the machine. If you don’t have the money, you can go back to your friendly banker and get back on your hands and knees.
First set up and fund your IUL. (If you need the equipment right away, you can purchase a policy rider that will allow you to borrow the majority of the funds out within the first month.)
Then simply borrow the majority of the funds you put into your IUL and use those funds to buy the machine. All of the funds you put into the IUL are NOW working for you and earning between 0% to 17% tax-free per year (even though you borrowed against the policy), AND you also now have your new machine to expand and grow your business.
That’s smart leverage.
If you use option A, you have your new piece of equipment, and that’s it.
If you use option B, you have your new piece of equipment, AND you also now have a retirement fund or, in a sense, your own bank that you can continue to use going forward.
(Where I come from, we call this a “No-Brainer”.)
It’s like having your cake and eating it too.
We could review an endless number of scenarios with this. If you have a medical practice of any type, you most likely have an endless need for new equipment. Why not use this same method with all of your business needs?
• Financing business equipment, computer systems, tools, materials, office buildings, expansion, supplies, technology, etc.
• Financing your cars, trucks, business vehicles, planes, boats, etc.
• Funding a new business start-up, opening another practice, etc.
• Purchasing other companies, franchises, mergers, acquisitions, etc.
• Funding new key employee acquisition or employee expansion, etc.
• Offer IULs to partners and/or to attract and retain key employees
• Estate planning, partnership buy/sell agreements, etc.
• Fund a war-chest for the next economic downturn or unexpected emergency
• Use to bridge your receivables, tax bills
• Receive discounted prices for paying with cash
I’m sure you’ve already thought of other uses in your business for this amazing program. The value of having this option should not be underestimated. If/when we have another banking crisis again in this country and capital availability dries up, this could very well be your only predictable source of funds for a good period of time.
As you know, we’ve been in a low interest rate environment for quite a long time. As sure as the sun is going to come up tomorrow, you know that at some point, interest rates will rise again. The market is cyclical and the only thing we know for sure is that things will change. (I remember getting an 18.5% car loan back in the 1980s. That was nuts.)
How great would it be when that day does come, and rates are sky high, to have your own bank in place, in the form of your own IUL. Instead of having trot down to your local bank, get on your hands and knees and beg to pay them their exorbitant rates, you simply have another meeting with yourself.
You decide to borrow the funds from yourself, at much, much lower rates. Heck, if you want, you don’t even have to pay the loan back, much less the interest (if structured correctly). How’s that for a friendly banker? Just knowing that you have that flexibility and these options, is so liberating.
If you’re like many business owners, at some point down the road, there’s a good chance you would love to sell your business and enjoy the fruits of your labors. However, most business owners are so busy building their businesses that they’ve spent little time thinking about what they will actually do with the profits they receive when they sell it.
One thing you do know. You’re going to have to pay a big chunk of your profits to Uncle Sam when you sell your business. So let’s use an example. Let’s say you sold your business, paid all the capital gains taxes on the proceeds of the sale, and are now left with a cool million dollars. What are you going to do with that money?
After you just gave all of that hard-earned money to Uncle Sam, there’s a good chance that you’re going to think about doing something with it that’s taxed advantaged or tax exempt. You will want to keep as much of it as you can without giving your favorite uncle even more of your earnings. The problem is, there are no-good options out there for putting a lump sum of money like that into a tax-free program. So you are kind-of stuck here.
The good news is, there is a solution, if you plan ahead. Let’s take a quick, high-level look at two different options. Let’s say Bill is our business owner. His plan is to build his business for another 25 years, and then sell it and ride off into the sunset.
Bill talks with his financial advisor and decides to go with a qualified plan. Let’s be generous and say he chooses a qualified plan that allows him to contribute up to $50,000 a year. The only problem is, in the early years, Bill’s business needs cash. Lots of cash to keep things going. He would like to contribute the entire 50k per year, but he’s only able to contribute $10,000 a year due to the cash demands of his business.
The problem is, qualified plans have a Use-it-or-lose-it provision. So in year 1, if Bill contributes $10,000 to his plan, the unused $40,000 of his contribution limit DOES NOT carry over to the next year. Not at all. You can clearly see how this strategy does not help Bill at all with his plan to preserve his profits when he sells his business.
Over the 25 years, Bill would have put $250,000 dollars into his qualified program. ($10,000 a year for 25 years.) He would have most likely invested them into equities and been subject to the up and down swings of the market place. Then, when he starts pulling the money out of his qualified plans, he will have to pay income taxes on every single penny he pulls out of the program. All of it. Can you even imagine what tax rates will be in 25 years?
Plus, after Bill sells his business, he still has to figure out what to do with his million-dollar net profit. In all likelihood, he will have to put it into a taxable investment and pay taxes on those funds again at some point. Sure seems like a rigged system doesn’t it?
Bill talks with his Barefoot Retirement Plan advisor and decided to set up an IUL. One of the great features of an IUL is that, if it is set up correctly, it allows for very flexible premiums. (We will use a high-level, general example here to explain how this concept works.) Let’s say Bill’s IUL allowed for a maximum contribution per year of $50,000. However, Bill is still in the same cash position, so he can only contribute $10,000 a year to his IUL. That leaves an unused contribution amount of $40,000 a year.
Here is the BIG difference! The IUL allows Bill to CARRY OVER ANY UNUSED CONTRIBUTION AMOUNT. Here’s the really cool part. It carries over FOREVER. It’s true. So let’s say Bill built his business for 25 more years and during each of those 25 years, he only contributed $10,000 a year to his IUL. He has 40k of unused contribution amounts for 25 years. $40,000 x 25 = $1,000,000 of missed premiums.
(Note, IUL policies vary from company to company. Some policies accommodate all the missed premiums, and others accommodate most, but not the full amount. If you are interested in a program like this, we will need to carefully and strategically plan for it in advance, so you will be able to take full advantage of it in the future.)
So now Bill can take the 1 million dollars he netted from the sale of his business and put it into his IUL to make up for the missed premiums. Wow! That million dollars is now put into his policy and when he borrows against it to pull the money out, it will ALL be completely, 100% TAX-FREE!
Now I ask you… where else can you do that? I’ll tell you where. No where!
Plus, Bill put in the 10k a year for the 25 years. Over the 25 years, he would have earned between 0% and 17% per year (depending on the blended index performance) on those funds. He would have NEVER suffered a decline in value due to market performance. So he would have the value of these funds working for him in his IUL PLUS the 1 million dollars he just added to it. Plus, if he chose to, he could have borrowed funds from IUL at any time, and invested them into his business, or any other investment, to double dip on his returns.
There is not another option on the planet that will allow you to put large chunks of money into accounts where you can borrow all the money out tax-free like this. Can you imagine how much tax savings this strategy will save Bill? He’s much better off. His family is much better off. It’s a total win, win, win for Bill and his family. This just shows you the power that the IUL offers to business owners.
If you would like to see what this strategy would look like for you and your business, contact us, and we’ll be happy to discuss this strategy with you and put together a custom plan that shows you how this can work for you.
