Fifteen Doors: Rethinking Financial Freedom

We’d rather learn from doers who have done and are doing than thinkers who plan and conspire. And part of learning from doers who have done, is that the doing can sometimes diverge from the done.

For every door to a single-family home, there’s a dozen metaphorical doors along the path. If you’re the kind of person who can silence the sound, you may have no problem walking past every door between you and your objective, but the rest of us stop periodically to assess our situation and ask if a detour might benefit us.

The Unconventional Road

Raise your hand if you’ve heard OPM or Other People’s Money. Now laugh at yourself if you actually rose your hand because you’re reading this on a computer screen in a coffee shop and the barista is casting a nervous look your way because she just quit her job teaching and your raised hand is giving her flashbacks.

What if I told you OPM was more similar to fossil fuel than renewable energy?

If you want freedom, do you want to depend on other people?

I’m betting you’ve never heard of anyone drilling a personal oil well so they could go off-grid. That’s because if you deal in fossil fuels, you depend on other people’s equipment, expertise, storage capacity, and more.

No! When people go off-grid, they dig a water well, buy a windmill, a cistern, solar panels, and batteries. They plant a garden, dig a cellar, build a greenhouse, and fence many acres to feed livestock.

It takes time and money to get the off-grid system running, but once it’s operational, the off-gridder has everything needed to live forever without disruption (disregard politics, eminent domain, and the like).

Now, you won’t find me pursuing an off-grid lifestyle, but I will learn from the mindset, and I hope you will too.

Bank on Yourself

Wells Fargo holds more BOLI (Bank Owned Life Insurance) than real estate. That’s not by accident. High Cash Value Whole Life Insurance Policies can be designed as a warehouse for your money, and used to fund your investments. In themselves, Whole Life Insurance Policies are not investments, but they do serve as the ideal holdings for your money.

How Banking on Yourself Works

Like a bank branch, a life insurance policy is a place you put money. Unlike a bank branch, life insurance pays around 4% for the money you put in your account. Like a bank, life insurance companies will lend you money; unlike a bank, life insurance companies will issue you a loan against your cash value, meaning you don’t have to withdraw your cash and disrupt compounding.

Like a bank, you can buy houses with these loans; unlike a bank there’s no limit to how many notes you can hold with your own bank. Like a bank, you have to repay your loans to a life insurance company; unlike a bank, you set the terms and payback schedule.

Like a bank, your money is guaranteed. Unlike a bank, your money is guaranteed beyond $250,000—infinitely, in fact. There is no limit to how much money you can hold in Life Insurance and retain the guarantee.

Drawbacks to Banking on Yourself

It starts slow. It stays slow for years. It creates an awkward side-payment until it’s adequately funded. It requires diligence in moving cash.

Benefits to Banking on Yourself

If you start in your mid-thirties with a $25,000 policy, and keep the policy in force into your eighties, you’ll leave a tax-free legacy of over 1.6 million dollars to your children or the charities of your choice. That’s the power of compound interest.

Throughout the ten-year funding period, you’ll have roughly five thousand dollars of financial headwind as you continue to blend traditional banking and life insurance investing. To fund a 401k or IRA for similar outcomes you’d have significantly more headwind, without the opportunity for recapture until retirement age.

Try This on For Size

Our detour has brought us to fifteen doors with a life insurance policy as our main source of funding. We now have the problem of how to best capitalize on the holdings we’ve accumulated. If a bank held the houses instead of your life insurance policies, you’d simply ask for a refinance on the home. The bank would happily accommodate.

They’d charge perhaps ten thousand dollars in loan origination fees and other associated costs. Then they’d charge you amortized interest for fifteen years.

Instead of paying the bank to live on loans, take loans from the policy. Assume all your properties are worth $150,000. Take the loan from your policy, and live on that money for a year. Let the income from all fifteen properties repay the insurance loan. You will have no fees of any kind.

Recap

We set up a policy for $25,000. By overfunding, we’re able to pull $18,000 out of the policy as a loan in year-one. We use that eighteen thousand and other savings to purchase an investment property structured on a 30-year loan. We pay the monthly mortgage to the bank and repay the life insurance with the excess. That money is yours and available for emergencies by pulling a loan if needed.

In year-two, we pay another $25,000 into the policy, but we can pull $20,000 against the policy to purchase another property. Repeat year-one steps throughout year-two.

Repeat year-two steps throughout the first seven years of the policy, which will then be funded to $175,000 at which point the cash value of the policy will be greater than the sum you’ve invested.

Continue to pull loans against the policy and repay it until you reach fifteen doors at which point you’ll have enough income generated from tenants to quit your job—we’ll say you’re 50 years old at this point just as the first property is repaid.

Pull a fee-free, tax free $150,000 loan for your annual income and set up a 15-year repayment schedule to your policy. Repeat this process every year for the rest of your life, ensuring you pace inflation, market rent prices, and appreciation.

Even with capital expenses, vacancy, and the dreaded occasional eviction, you’ll be netting well over $300,000 annually by standard retirement age. Anyone who can’t live a comfortable, meaningful life at that annual wage is incapable of living a meaningful life at any wage.