Content: Page 21 Becoming Your Own Banker Fifth Edition
At this point it is worthwhile to remember that “you finance everything that you buy,” whether you like the idea or not – you either borrow money from some other source and pay them interest or you use your own money and give up interest that you could have been earning. Some folks call this “opportunity cost.” Yet, it is amazing how many people give this idea lip service but do not put it into practice in their financial dealings.
In the September 1993 issue of FORTUNE magazine there was an article entitled, “The Real Key to Creating Wealth” by Shawn Tully. He is describing the concept of Economic Value Added (EVA) developed by Stern Stewart & Co. of New York. Tully says, “Understanding that while EVA is easily today’s leading idea in corporate finance and one of the most talked about in business, it is far from the newest. On the contrary: earning more than the cost of capital is about the oldest idea in enterprise. But, just as Greece’s glories were forgotten in the Dark Ages, to be rediscovered in the Renaissance, so the idea behind EVA has often been lost in the ever-darker muddles of accounting. Managers and investors who come upon it act as if they have seen a revelation.” We do live in a strange world!
To create your own banking system through dividend-paying whole life insurance we must understand how it all works. Tragically, there are very few people that really understand the idea. As it is with most things, it all begins with engineering. For instance, consider the automobile business. The car you drive started out being “lines on a piece of paper.” If the production workers don’t do what the engineers designed, you won’t have an automobile – but they did, and produced yours. I get the next one right off the assembly line. It is the same make, model, color, and optional equipment as yours. They are identical. Now, try to tell me that both cars will perform identically during their lifetime! There is no way that this is true because we know a number of people that can get 200,000 to 300,000 miles out of a car with no trouble. And we all know some folks that can’t get 50,000 miles out of it before they have worn it out — because of the way they drive and maintain it. Please keep this thought in mind as we look closer at the life insurance idea.
The engineers in life insurance are “actuaries.” They are dealing with a field of 10 million selected lives – persons that have been through a screening process (underwriting). And they are working with a theoretical life span of 100 years. Then they turn their information over to rate makers who determine how much to charge clients in order to be able to pay the death claims and make the whole system work over a long period of time.
Then the whole matter is turned over to lawyers who make legal and binding contracts that are offered to potential buyers through a sales force. The glue that holds this whole process together is the administrative and executive personnel. The finished product is a unilateral contract, that is, the company promises to do certain things if you meet the standards of acceptability and make premium payments. Read the contract and it will tell you very plainly that you are the owner of the contract — not the company. The Owner is the most important character in the scene.
To make the plan work the Owner must pay premiums into the contract and the Company (your hired help) must put the money to work in order to produce the benefits that are promised. Those with the responsibility of investment will do so in a number of ways in financial instruments that are fairly conservative, e.g. bonds, mortgages, etc. Look at the investment portfolio of a number of life insurance companies and you will see what I mean. One place that is speculative that some companies do invest in is in real estate developments. Some large developments of urban office buildings have been entirely financed by a single insurance company. The Golden Triangle in Pittsburgh would be an example. This can often include shopping centers.
But, upon reading the contract you will find it plainly stated that the Owner outranks every potential borrower in access to the money that must be lent! And what he can borrow is 100% of his equity in the policy (the amount that the company can lend at any one time). If this is true – which it is – then this amounts to absolute control over the investment function of the company. In essence, money can be lent to the other places only if the Owner of the policy does not exercise his option to use the money (and pay interest) instead.
We will resume this look at how life insurance works in lesson 12.