Buying Real Estate With IBC
Episode 4423rd January 2022 • The Fifth Edition by Infinite Banking Authorized Practitioners • John Montoya, John D. Perrings
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Real estate investors, more than others, perhaps, have difficulty getting comfortable with the capitalization period of a whole life insurance policy.

In this episode we break this down in detail and walk through a 30-year model of buying real estate with bank cash vs buying real estate using life insurance cash value.

You can see a full video of this analysis at https://www.thefifthedition.com/44

Transcripts

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(upbeat music) - Hi everybody.

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This is John Montoya.

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- And this is John Perrings.

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- We're authorized Infinite Banking practitioners

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and hosts of 'The Fifth Edition'.

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(upbeat music)

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- In today's episode,

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we're going to dive into kind of a hot topic

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in the real estate world.

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And that's buying real estate

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with life insurance cash value.

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And more specifically,

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how can a real estate investor time their investments

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during the capitalization period

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of a life insurance policy?

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So let's jump in.

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I don't know about you John Montoya,

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but I get questions almost weekly

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from real estate people

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who learn about the infinite banking concept

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and they see the potential,

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but they wanna understand things like

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how to quote unquote "fund life insurance

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and what the process for getting money out

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of the life insurance policy to buy real estate is."

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And I'm kind of putting,

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little air quotes around

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"fund" and "getting money out".

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And that's because using life insurance cash value

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is a little bit of a different process.

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Well, it's a lot of bit of a different process

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than just putting money

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into a savings account.

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So things like funding life insurance and getting money

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out of life insurance are not really accurate terms.

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And so what we wanted to do is talk a little bit

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about that today.

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Explain why we're not really funding a policy.

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What we're doing is we're creating another layer

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and we're creating a layer of capital

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to make the real estate acquisition process

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more efficient.

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- Yeah, absolutely.

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I liken it to

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a train that goes from point A to point B

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and they do it on rails.

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And so what we're establishing are the rails

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for this financial system that helps you get

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from point A to point B,

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but do so in the most efficient manner

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that allows you to accumulate wealth

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the safest way possible.

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- So let's review whole life insurance

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and the death benefit and the cash value components

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of it. So just in a few sentences,

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by the way, in this first little part here,

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go to 'thefifthedition.com'.

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We have whole episodes on what cash value is,

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what policy loans are.

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So we're not gonna dive into deep detail on those,

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but you can get all that information

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by listening to previous ones you can easily search

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on the fifth edition.com.

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So now that said, whole life insurance, what is it?

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It's a life insurance policy

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that lasts your whole life.

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It's guaranteed to pay out a death benefit

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when you die, not if you die,

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like what you have with term insurance.

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And because there's that guaranteed future cash flow,

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we have a present value of that future value

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and that present value is the cash value.

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So since we're talking about real estate today,

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it's kind of like when you make payments

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on your house, every time you make a loan repayment,

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you build up equity in your house,

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and it's kind of working similarly.

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Where every time you make a premium payment

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in a whole life insurance policy,

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you're building up equity in that policy,

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which is really equity in that future death benefit.

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And that's what's called the cash value

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or cash surrender value.

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And that's the amount of cash

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that the insurance company will pay you

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if you decide to surrender the policy

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and that cash value is what we can use

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to buy other assets where we find arbitrage

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to buy assets.

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That's really what the infinite banking concept is all

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about is using that cash value,

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finding arbitrage and more efficiently using capital.

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- Yeah. And the way that we wanna do it,

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a really quick high-level overview,

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we wanna speed up this process of creating equity

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and these whole life policies.

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So we do that with the use

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of a paid up addition writer,

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because the more cash value that we have,

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the more opportunities we're gonna be able

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to take advantage of. So John,

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why don't you talk about the break-even period?

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Because I know that's definitely, always top of mind

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for most people getting started with IBC.

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- Yeah. And I would say it's even more top of mind

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for people who are real estate investors.

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And so what happens in the early years

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of a whole life insurance policy,

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when you pay premiums, the present value

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of that death benefit is not equal

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to the amount of premium that you've paid in.

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And so there's a slight loss of liquidity

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in the early years of the policy.

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And this is where real estate investors

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get a little hung up because they see

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they're paying a premium and they don't have all

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of the, what they paid in the premium

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and available as cash value.

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And let's say, $20,000, you might have $10,000

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of cash value in the first year,

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just using round numbers.

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It can be higher than that,

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can be lower than that based on your age

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and your health and all that stuff.

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So there's usually a break-even point

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that happens where you have as much cash value available

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on the policy as what you've paid cumulatively

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in premium over the years.

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And let's just say,

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and this is a whole thing where people argue

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about this on YouTube and stuff.

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Let's just say that takes 8 years to accomplish.

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What will often happen is real estate investors

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will look at that kind of first year of

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what they've put in and they see that they

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have maybe half or 60,

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maybe 70% available in cash value.

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So that's kind of a big loss in liquidity

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in that first year. And then they'll take a look

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at the break-even point and they'll see

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it takes 8 years to break-even.

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And they'll just kind of in their head,

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they'll be like, "Man, I'm just dumping money

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into this thing. And I don't break-even

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for 8 years."

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They view that as a lot of lost opportunity costs

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where that money could be going

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to buying real estate.

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And it's sort of true, but it's also,

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there's more to it than that.

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And it's not as bad as

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what people think at first glance.

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- From my end of the spectrum,

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thinking about mindset

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because that's always very important for me

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and how we think.

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I'll always encourage people to come

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into this thinking longterm,

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especially for real estate investors.

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Because for a lot of real estate investors,

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they're working with other people's money.

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When they have a project

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or an investment they're gonna make,

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they're oftentimes leveraging

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not their own money, but other people's money,

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maybe bank money in order to make that purchase.

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And so they're really only making a return

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by flipping that property.

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And there's really 2 ways to make money

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as a real estate investor.

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One, on the difference between what you buy

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and what you sell it at,

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but also on the financing, too.

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The long range view that any investor

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should take is to be able to profit

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from both sides.

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I think of the first home that I bought

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up in Sacramento and that house purchase was 276,000.

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And when I looked at the mortgage note

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and what I'd pay for that house over 30 years,

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what was interesting to me is

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that the bank financing that mortgage

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actually would (laughs) make well more

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than what KB brothers did

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for building that house.

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And that was a real eureka moment for me.

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And I think for anybody listening,

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real estate investors especially,

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you have to think like how bankers think.

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And they're in it for the long run.

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They're in it to make money off of money.

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And if all you're doing is

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making money from flipping a property,

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then you're missing out.

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You're leaving money on the table

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because there's additional gains

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that can be made, but it happens

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over a longer period of time.

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So when you're looking at these policies

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that are designed to maximize cash value,

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even if immediately it doesn't build up

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quite as much cash flow as what you feel

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it should have,

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if you start to look at it

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from a longer timeframe, you start to see

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how the benefits long-term really outweigh

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the short amount of lack of liquidity

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that you might see in the early years.

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- There's so much to it where

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if you can again, think long range.

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So if we go back to this idea

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of the break-even point,

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even before that break-even point,

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there's a liquidity break-even point,

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which is, maybe half that time.

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So maybe 3 or 4 years where,

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and again guys, these are all round numbers.

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It really does matter who the insured is

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in these types of conversations,

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but we're just trying to have a starting point

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for the conversation. But let's just say in 4 years,

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there was a point where every dollar

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that you pay in premium creates more

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than $1 of new cash value that's available

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for that year.

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There becomes a point

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where there's no liquidity loss in the policy.

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And so if we can think long range,

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like Nelson Nash says,

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'instead of focusing on those first 4 years,

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what about the next 30 years, right?'

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Where if you can continue

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to make that premium payment,

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you have this insane liquidity engine

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that is the cash value.

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Because again, every dollar you pay

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in premium creates more than $1

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of cash value available.

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There comes a point

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where every dollar you pay in premium,

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you'll have 4 new dollars of cash value.

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It just keeps getting better and better

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as the policy matures and becomes more powerful.

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But just quickly getting back

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to this break-even point where we're looking

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at this first 8 years.

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A lot of people see it and they just feel

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like they're dumping money into this thing,

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and it's just losing liquidity.

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But what's really happening.

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You could think of it almost as a static amount

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that is kind of going into an escrow account.

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Like you could sort of think of it that way.

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And it gets released in Year 8

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and actually, slowly gets released

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before then, but it gets better and better.

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But instead of thinking

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about liquidity as going away,

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you can think of it as a static amount

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that you just don't have access to

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for the first few years of the policy.

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A couple other things to think about is like,

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yes, there's the liquidity that you need

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to buy real estate assets,

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but there's also the liquidity that you need

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in your operating account.

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If we think about the operating account,

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there's a certain amount that we expect

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to be pretty static in there,

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but we still need it in there just in case.

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Well, what if you just switched your operating account

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and started thinking of keeping instead of

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just having money sitting in a bank,

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or it's not earning you anything,

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now it's sitting in a life insurance policy,

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earning multiples over what it can earn

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in a bank and creating a death benefit

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that starts to create value

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for your future legacy planning.

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Those are a couple things that I think about

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when talking about the early years

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of a life insurance policy.

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And it usually just comes down

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to short term thinking.

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I mean, it's pretty crazy

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how people people are so locked in

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to the first few years of that policy.

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And they just, I mean, you're just going

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to miss out over the next 20, 30, 40 years

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of all the things that you can do

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when you have that permanent life insurance death benefit,

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it's insane how much value

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that brings 20, 30, 40 years down the road.

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A couple other things that pop up

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in discussions, people will say,

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"Well, you know, I put this money

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into the life insurance policy.

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I have this kind of capitalization period

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where I don't have all the money

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that I put in there. And,

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I could be putting in that into real estate

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and getting things like depreciation

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and tax benefits and all this other stuff."

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And it comes down to the same thing

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where it's like, "Well, you could still get all that.

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You could still get that."

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It's just you're changing

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where your money is coming from

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from a cash perspective.

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That's the only thing that's changing.

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You're not changing any of the tax benefits

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of buying real estate.

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And then the last discussion point

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before we get into a model that we've created,

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one thing to think about is,

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is all your money doing something

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in partaking in areas of the market

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that will be affected during the next market correction?

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And I would say most people, the answer is yes.

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And so when we talk about buying life insurance

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and adding that into your overall strategy,

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we're also creating something

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that has guarantees and that is not correlated

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to the market. I talk to people all the time and it's like,

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they completely forgot about 2008, right?

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And they're even doing stuff where their liquidity

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for their next purchase is coming

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through lines of credit on their existing properties.

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And even worse,

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their reserves are coming through lines of credit

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on their existing properties.

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And so like all of their liquidity.

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So it's like,

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you think you have a lack of liquidity

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buying life insurance.

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Now wait until the next market correction

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and all the lines of credit dry out,

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just like we saw a little hit that happened in COVID.

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That's gonna be a real lack of liquidity.

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So will you actually have real true liquidity

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that you have access to when there's blood

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in the streets and everything's on sale?

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That's when you're really going to want

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to have some liquidity.

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So those are just a couple of discussion points.

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I don't know if you have anything you want to add

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to that, John Montoya.

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- I would only add,

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since we mentioned how IBC is the safest way you

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can leverage an asset because the collateral

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for an IBC policy is a guaranteed contract.

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So unlike any type of bank line of credit,

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which is ultimately under the control

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by the issuing bank.

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With a whole life insurance policy,

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you have the collateral that is backed

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by your life expectancy.

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And this contract guarantees

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that the underlying asset,

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that cash value is guaranteed

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to grow every single year

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for the rest of your life or out to age 121,

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whichever is longer.

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So you have

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the best form

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of credit that you can possibly get and all

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without having to verify your credit scores,

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what your income is,

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how much you have in assets.

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When you want a loan from your policy,

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the insurance company only asks you two questions.

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How much would you like from your available cash value

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and which checking account

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on record should we deposit that money into?

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That's it. We talk a lot about on the show

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about how having IBC

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is one of the most peaceful outcomes

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that we can possibly bring into our lives,

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because we don't have that risk

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or worry about a bank suddenly freezing our line of credit.

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And the reason why is

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because we control our liquidity,

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we control our capital.

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And I don't know if you can really put a value

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on that other than to say that

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that amount of peace of mind goes a long way,

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especially as a real estate investor,

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knowing that when you need access to capital,

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it's always there for you at your disposal.

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- Those are such good points.

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And you know, another way to think about that

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is when you're using lines of credit

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on your property, yes, you're getting leverage

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and you're getting the use of capital,

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but you're still just, it's all still

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in that same asset.

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When you look at using life insurance,

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you're actually creating a whole new asset

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that you can leverage.

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And it's a quote unquote, "diversified asset".

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If you want to have true diversification,

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you're not really diversified using lines of credit

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on your property. Again, there,

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it's not guaranteed

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just like John Montoya was saying.

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- Right and I think maybe the word

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that you're looking for is uncorrelated, right?

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This asset class

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of life insurance is completely uncorrelated

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to anything that's happening

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in the real estate market,

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to anything that's happening in the stock market,

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to anything that's happening in Congress.

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This is an asset class that is basically insulated

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from all those things,

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because it's basically like in a silo or in a vacuum,

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and whatever's happening in the outside world,

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completely unaffected

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because the cash value as mentioned will grow

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each and every year.

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And that's why you really want to look hard

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at making this a portion of your portfolio,

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especially for that portion of your portfolio

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that is supposed to be safe and liquid.

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There really, in my opinion, is no better place

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to park that safe money than in a contract

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on your life where you have full control over it.

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And you can start to use it as those rails

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that I described in the beginning

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to help you acquire more assets,

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more real estate assets with in the long run.

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- That's awesome.

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So one thing I do want to mention

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when it comes to buying real estate

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with IBC as your collateral,

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this is something that you should be aware of

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when making a deposit using policy loans.

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So if you're buying real estate

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and you're not paying a 100% cash,

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you're financing it, well, you have to come up

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with a down payment.

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And so what a lot of people will do

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who have established IBC whole life policies is

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they will take a policy loan for their down payment.

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And one of the things

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that I would like all the listeners

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to be aware of is that

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when it comes to sourcing that down payment,

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banks are going to ask,

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"Well, where did that money come from?"

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And this is really important to understand

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because banks don't understand

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how whole life policies work and the idea for a banker,

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a lender, your mortgage broker,

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to get through their head,

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that you can take a policy loan,

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and the repayment terms are completely unscheduled,

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it's a foreign concept to them.

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So,

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be aware when you take a policy loan

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to buy real estate and that policy loan is

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to be used for the deposit

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or for the down payment,

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just be aware that there has to be seasoning

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of the funds that happens.

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And so you want to make sure

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that you are very calculating in how you go

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about taking your policy loans to the point

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where you will take a policy loan,

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knowing that you're gonna use it for a down payment,

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let it sit in your normal bank account,

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checking account, savings account,

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whatever it is for at least 90 days,

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because those funds have to season,

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otherwise your banker, lender, mortgage broker,

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they're going to ask you,

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"Well, where did the funds come from?"

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And you might have to explain,

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"Well, this is from a policy loan."

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And then they're going to ask you,

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"Well, what are the payback terms?

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Cause we got to build that

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into your debt to income ratio."

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And when you tell them,

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"Well, I don't have to pay it back each and every month",

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they're going to scratch your head

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and ask for a copy of your contract.

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And they're not going to find anything in there either

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regarding regularly scheduled loan repayments.

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So do yourself a favor when buying real estate

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and using your IBC whole life policy

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as the source of funds for the down payment,

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make sure you season those funds

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for at least 90 days.

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- And I already know,

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the reaction people are gonna have

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to them be like, "Well, I have to,

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I'm gonna have to have my money out of there

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for 90 days just sitting there."

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And it's like, well, yeah,

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but remember in the other, the other way,

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your money is sitting there the whole time

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until you buy a property with it.

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So just little things that people kind of come up

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with that I think it's good to make clear.

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So we're gonna get into a little bit

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of a talk through not so much a walk through

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since it's audio.

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This talk, I'm about to give,

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I created a financial model that I compared.

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Just because this question came up so much,

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I decided to actually model it out and say,

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"Okay, if I start from 0

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and assuming the standard arrangement

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of borrowing 80% from a bank and coming up

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with the other 20% for a down payment.

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What if I compared $20,000 a year of income going in,

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coming into my financial system,

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and I compare taking that 20,000 putting it in a bank

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and then making a down payment to buy real estate

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over a 30 year period versus

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first taking that $20,000

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paying a life insurance premium,

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and then using policy loans

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to buy the same real estate.

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I wanted to see what that would look like,

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and I want it to prove it out

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with the math and understand what those differences are.

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And so the rest of this podcast,

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I'm gonna do my best to kind

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of talk through the highlights

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of what I came up with.

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And there's a video that

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it's about a 20 minute video

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that gives a detailed walkthrough

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and you can actually see the numbers

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and see some like a actual presentation that I made.

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And that'll be in the episode notes

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of this particular episode.

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Let me talk a little bit

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about the overall picture of what we're doing.

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So we're comparing, taking money

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that we saved in a bank and making a down payment

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to buy a real estate rental property

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and investment property, right?

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And we're gonna get income from that property.

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And we're just gonna keep saving

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and all that money just keeps getting rolled

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in to buy more, more and more properties

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or bigger and bigger properties.

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So by the end of this model, I actually start getting

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into more of the commercial space.

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Versus using a policy loan,

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so we're gonna borrow money

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from the life insurance company,

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collateralized by our cash value.

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We're going to take that money,

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buy the same property.

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The investment property now has two loans

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to pay off. So the numbers have to work out

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where the rental income

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from the investment property pays the bank loan

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and pays your policy loan.

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So the net income is going to be less during

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that period of time, which I'm accounting

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for everything in this model is net.

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And I'm going to show you if you watch the video,

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how you will come out way ahead

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using life insurance cash value.

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And so one of the things to think about is

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that capitalization period,

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what are we actually doing there?

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We're starting a new business.

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And we just talked about this in the last episode,

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we're starting the business of banking, right?

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So if you actually started your own bank,

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ignore having to get a charter and all that stuff,

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would you expect to have all your money available back

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to you and on day one?

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Of course you wouldn't,

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you're starting a new business, right?

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When we're looking at the real estate investment,

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what we're doing,

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like who is making the returns

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on your real estate investment?

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Well, number one, you're making a return

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on your down payment, through the value

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of the house and the rental income, right?

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The bank is making a return

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on the money they lend you.

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And so does anyone have a problem

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with the bank making a profit on 80%

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of the purchase price?

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And I would say that most people are probably okay

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with it because they understand

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that using other people's money

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to buy assets helps them as well.

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And if that's the case, why is anyone

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putting up their own cash for a down payment?

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Why not finance the entire thing?

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And that's kind of what we're getting into here.

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And so I am going to pull up my presentation

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and just kind of walkthrough this.

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And again, the understanding

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of the capitalization period is the biggest problem

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where we had that first year,

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where we have in round numbers, 50, 60,

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maybe 70% of the cash value to the premium

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that was paid in.

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And then we have this 8 year break-even period.

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And they just look at this 8 years

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as they're just dumping money in here

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and losing liquidity that could otherwise

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be used to buy real estate.

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And so the first thing

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to understand is the cash value

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will surpass the bank account prior

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to the break-even point,

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even though you haven't broken even in the policy yet,

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because you're getting such superior growth

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that you're actually going to surpass the bank account

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prior to breaking even in the policy.

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The second thing to understand is

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there's gonna be a liquidity break-even point

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probably around half that time,

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maybe around Year 4. Every dollar you pay

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in premium equals one or more dollars in cash value,

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even though you haven't broken even cumulatively.

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And so the challenge is getting

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over this capitalization period.

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And if we look at it more as like,

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we're gonna take, let's say out of that $20,000 a year,

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that we're talking about $9,000 is going to go

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into an escrow account.

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This isn't what is actually happening.

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I'm just kind of comparing something

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and making an analogy.

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9,000 of that first 20 is going to go

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into an escrow account and you're not going

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to have access to that $9,000

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over the next 8 years.

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But every time you pay a premium, every year,

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you pay a premium that 9,000 that's an escrow

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becomes a less percentage wise of the cumulative

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that you have in cash value.

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You still have access to all that liquid cash value,

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less that static $9,000. Okay?

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So it's not, money's not just going in there

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and being lost.

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If we just compared

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cash value to putting your money in a bank.

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Over 30 years, you would have 2 million more dollars

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in your life insurance cash value

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if you didn't spend any of, if you were just saving.

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And so you'd have 2 million more dollars compared

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to keeping your money in a bank.

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And so I'm only saying this to open your mind to,

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would it be beneficial for your operating expenses

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to sit and cash value?

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Your operating account could be life insurance cash value,

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because a lot of that's just sitting there static

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not being used. And then if you add a death benefit

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into this, we're talking about $5 million

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over 30 years that would add to your estate.

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Let's look at the first 10 years

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where we're going to compare what's happening

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between buying properties with your cash,

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using a down payment of cash versus using cash value,

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life insurance cash value as your down payment.

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There is a delay in the early years,

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and that delay happens

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with that first property that's purchased.

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We're able to make the first property acquisition

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in Year 4 that got delayed by one year,

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to Year 5 using life insurance cash value.

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But every year after that,

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we're able to buy the properties

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at the same time.

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And so what happened is we bought 5 properties

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over 30 years, we're able to buy the properties

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at the same time.

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And then the fourth and fifth properties were actually able

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to buy a year ahead of time using life insurance cash value,

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because think of it, remember, think of it

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as like a line of credit,

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but the collaterals guaranteed every time the rental income

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pays back the policy loan,

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we free up more cash value to use again.

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And that's one of the ways,

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that's one of the things

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of where the infinite banking concept comes from.

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Because every time we pay loans back,

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we free up more capital to use again.

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The end result of this model is a $600,000 gain

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just in our cash, having all the same properties.

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We only had one delay in the first property.

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And at the end of 30 years,

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I have 600,000 more dollars in my bank account

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and all the same properties that we have.

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And then when I add in the life insurance death benefit

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that we created. So if you care about legacy planning,

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I have two and a half million more dollars going to my heirs

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in the form of a tax-free life insurance death benefit

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for creating a larger estate value.

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Again, two and a half million more dollars.

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I have all the same properties.

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I have $600,000 more in cash,

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and I have a two and a half million dollar death benefit,

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or excuse me, I actually have a $4 million death benefit,

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but that puts me two and a half million dollars

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ahead of the game than I would have

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if I had just paid for these properties

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out of pocket.

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And so that's sort of the high level overview

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of this model.

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I know that that's a little bit hard to follow.

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So I just tried to keep it at the most,

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very broad strokes. And again,

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head over to 'thefifthedition.com',

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go to the episode notes for this particular episode.

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And I'll have the video in there

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that you can watch and get a little bit more of the details.

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Anything you want to add to that, John.

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- There's something I'm thinking

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about the seasoning of money when it comes to,

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taking policy loans and I'll add this,

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what is your rate of return on equity

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in a real estate property?

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Think about it. What do you earn on equity?

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The answer is 0.

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And the reason why I bring this up is

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when you pay cash for a property,

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the money that you put down for that property,

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it no longer earns anything.

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And I know cash is earning next to nothing these days,

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but you are guaranteeing yourself that money you tie up

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into a property

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is now earning nothing.

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The appreciation is going to happen

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based of market values, but your actual cash,

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your equity in the property is earning nothing.

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So to tie this back to why you would want

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to take a policy loan to use as a down payment is

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because guess what happens when you take a policy loan,

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you still have your cash value contractually guaranteed

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to grow from today to the next year and so on.

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When you leverage your whole life policy

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for that down payment,

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you are effectively allowing your down payment

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to continue to appreciate in value.

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And it essentially turns the real estate purchase

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into a 100% financing, but that's okay

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because wouldn't you rather have your equity

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earning a rate of return versus 0. I would.

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And that's really how I've made my purchases,

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including the primary residence

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that I live in now, 20% down payment borrowed

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from my whole life policies.

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And that way I have

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that cash that's working for me

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for every single year,

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for the rest of my life,

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versus sitting in the walls of my house, earning zero.

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- Those are great points.

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And,

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it gets to the idea

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that a lot of people are getting into real estate

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because they view it as

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they're buying an actual heart asset,

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which is true.

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They can get a rate of return,

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they can get a return.

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That's good.

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That's kinda what everyone's shooting for.

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And the main thing is everyone's being pushed

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into taking risk

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because cash in a bank doesn't earn anything, right.

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That's really the impetus for most people's moves today.

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And they see no lost opportunity cost

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on that cash because currently there isn't really any,

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when you keep your money in a bank.

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And so the, the question becomes,

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"Well, what if your cash did have value?

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What if it did earn something?"

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And that's exactly what's happening

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with life insurance cash value.

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And so you have to change your mindset a little bit

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to where, sorry, but some of those gurus

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out there are not correct that cash does have value

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if you know how to strategically accumulate it.

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- And like we always say,

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you'll never be in a worse position by having access

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to cash, right?

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So. - That's right.

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- Put yourself in the best position possible.

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- Would you say,

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becoming your own banker helps you do that.

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- (laughs) Well, you know my answer on that.

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So yes,

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I absolutely, that's regardless

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of whatever is happening

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in the world, in the market,

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just having that access

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to an opportunity fund so that you can go out

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and buy real estate or whatever you want to,

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whatever opportunity you want to seize upon.

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It just puts you in a better position

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with more control and peace of mind.

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And as I mentioned earlier,

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you just can't put a price on peace of mind.

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- 100% as they say in the emojis these days.

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So this was a little bit of a longer episode.

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Hope you were able to stick with us.

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And I hope this was valuable.

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Again, if you have any questions

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on how any of this pertains

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to your particular situation,

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you can head over to our brand new website,

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'thefifthedition.com'.

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You can also go to this episode's show notes

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and watch a more detailed video

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on everything we just went over.

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And you can also get access

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to our new course soup to nuts,

Speaker:

whole life course,

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fundamentals of whole life insurance.

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And you can get a 50% discount right on the front page.

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If you'd like to, if you're one of those types of people

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that likes to learn online, like I am.

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So thanks everybody. Hope you got something out of this.

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