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This is WHY Business Owners & Corporations Use Whole Life Insurance | IBC Global - YouTube
Channel: Insurance Business Concepts (IBC) Global
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Today
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we are going to go through
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how small businesses
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and corporations
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use cash value life insurance
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because this has been something
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that has been used by corporations
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for a very long time
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north of 100 years.
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And it's extremely effective
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but the question
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that always comes up is
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how and why?
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How are companies
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using life insurance?
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I'll begin with a story
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that will relate directly
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to what I'm about to show you.
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Early on in my career
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I was modeling a policy
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for a construction company
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so they were looking at policies
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on their executives
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the company would own the policies
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and the owner of the company
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made a comment.
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He had owned
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about 7 whole life insurance products
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for north of 30 years.
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And he said,
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you know
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other than the interest in my business
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the company that I own
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my whole life insurance policies
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have been my best
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performing assets.
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I make a payment into 1 of them
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of $12,000
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and the growth this year
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is north of $40,000.
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Through 2008 that was consistent
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it just keeps going up
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I don't even have to think about it.
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That was a major driver
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to him
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purchasing policies
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for the company
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to own on the executives.
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So let's look at exactly
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how companies
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use these products
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it's going to be some neat stuff
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and hopefully
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you can benefit from it as well.
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So,
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how corporations
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typically set these plans up?
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Is the company
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let's say it's ABC incorporated,
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ABC incorporated
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takes out policies
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on their employees
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typically the executives
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but the company
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can take those policies out
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on whoever they choose.
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Let's say we take policies out
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on Alex, John, and Liz
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they are the insureds.
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Meaning the company
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is going to own the policies
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the life insurance piece
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goes on these 3.
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So they may have to go through
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a medical exam
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they have to sign off on paperwork
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saying yes
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the insurance is on me
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if they die
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what happens?
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A life insurance
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death benefit is paid out.
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The contribution
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of these policies
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is made by the company.
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The company may elect
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to pay in $50,000 per year
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$1,000,000 per year
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it really depends on
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how much the company
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wants to allocate
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toward these policies.
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The cash value
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that builds up
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in the products
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is an asset
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on the company's balance sheet
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they have access
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to that cash value
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anytime they want.
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These policies
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are always designed
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where you have very rich cash values
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right off the bat.
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The death benefit
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in the event
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1 of the employees dies
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the death benefit
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flows back to the corporation
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ABC incorporated in this example
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income tax-free
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so sounds good
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thus far for the company.
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Let me ask this,
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if you are Alex
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or if you're Liz
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you're 1 of the executives
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and I say to you hey,
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I'm going to take this policy out on you
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it's going to benefit the company
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I'm going to fund it
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so you don't have to pay anything
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but we're going to have cash value
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in our balance sheet
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we're going to continue to grow
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with our growth mindset
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sounds great.
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Hey, but if you die
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we get the death benefit too.
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What are you going to think?
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That sounds great for the company
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what's in it for me though?
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Like, are you going to kill me off
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or something like that?
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There's only a benefit for the company.
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Here's the thing
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I would say to you
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if you're Alex,
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John, or Liz
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if you stay with me
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for the vesting period
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which could be 10 years
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maybe it's age 65
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perhaps it's performance-based
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the company has complete control
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of setting the terms
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of this vesting period.
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If you stay with me John
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what's going to happen?
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I'm going to pay you
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a retirement benefit
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and this benefit
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is going to be $100,000 per year.
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The benefit could be
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any dollar amount
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again this is determined by the company
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and also the size of the policy
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when we first started.
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But I'm going to pay you
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$100,000 per year
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when you retire
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let's assume age 65
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until you die
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or until age 90.
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But this is a benefit
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almost like a pension
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if we want to use that word
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that you're going to receive
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for the rest of your life
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after you retire, okay.
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How's that sound?
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Sounds good
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sign me up.
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Here's the catch though,
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John if you leave the company
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or if you do not meet
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that vesting period
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you don't get that
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$100,000 per year
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it's out the window.
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So this creates
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what we call in the industry
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golden handcuffs
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it locks the key employees in
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and makes it very difficult
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for them to leave
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really it's a retention
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and then reward strategy.
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If you stay with me
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at the company
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and help us continue to grow
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because as an executive
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I don't want you to leave
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because you're really driving
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revenue for the company.
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That's the advantage to me
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as the business owner
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as I look at key people
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in my company for example
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we want to retain them
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but then at the same time
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for the time
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and effort they put in
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yes, they get bonuses
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pay increases
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all that good stuff
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but here is an additional reward
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at the end
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because you're committing
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to stay with me
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for the rest of your working years.
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If you leave
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to go work for the competition
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to start your own business
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whatever it might be
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you walk away
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from that retirement benefit.
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And the older they become
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the more experienced they become
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the more likely it is
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they can make it on their own
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as they gain experience with time
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it becomes more and more challenging
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to walk away from that benefit
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because they get
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closer to retirement.
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So a great retention
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and reward strategy
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to build some additional
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awareness though
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here are some questions
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that often come up.
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(1) The cash value
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as a business owner
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or corporation
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am I just feeding these policies
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and letting it sit there
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and eventually going to use it to
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pay retirement benefit?
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That's the primary purpose
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however,
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the cash value is an asset
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on the company's balance sheet.
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Meaning the company
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can access that cash value
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can assign it as collateral
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with a bank or a lender
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to obtain a line of credit
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that money can be used
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to continue to grow
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the business over time
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opportunity cost
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that's the most valuable thing
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for a business owner
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small or large business,
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company, whatever.
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So the cash value
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is accessible all the way through
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to the policy owner
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which is the company.
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Retirement benefit
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John retires
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when he retires
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he's no longer driving revenue
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for the company.
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Do I want to pay him
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from company profits
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or company revenue?
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Ideally not
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because he's no longer
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producing income
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for the company.
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So typically,
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how a benefit is paid here
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is paid from the cash value.
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So I've built up
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this big bucket of cash value
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and specifically
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what the corporation will do here
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is they will take a distribution
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from the cash value
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to pay the retired executive
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John in this case.
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So,
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when that distribution
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is taken from the cash value
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to the company
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that can be a withdrawal or loan
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not taxable to the company
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but when they pay that retired executive
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John in this case
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it is booked
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as a compensation expense
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which does trigger
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some tax deductions there
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which is a nice feature.
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Now the contributions however
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are not tax-deductible
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I do want to
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be very clear on that.
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But when that benefit is paid
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that is paid from the cash value.
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The death benefit
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always paid out tax-free
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and these plans are always set up
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where we do not
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drain the death benefit.
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So when we are taking income
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from the cash value
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to pay that retired executive
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John in this case
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Alex, Liz, whoever,
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I always,
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always want to make sure
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that a death benefit is left intact.
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So let's say John kicks the bucket
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at age 90
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right, he makes it all the way to 90.
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I'm going to make sure
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that a death benefit is set up
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to recover all costs.
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What that means
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is that the company paid
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$100,000 per year
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for 10 years
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how much is that?
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$1,000,000 total.
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Now granted
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they had access to the $1,000,000
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all the way through and a lot more
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because the cash value built up
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but I wanted to make sure that
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that full $1,000,000
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is paid back to the company
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through the form of a death benefit
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which is tax-free
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and I also want to account for inflation
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typically 3% to 4%
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is achievable
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based on companies
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present dividend rates
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even a conservative dividend rate.
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But I do want to
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factor in inflation because
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we're thinking long-range
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with the eventual death benefit
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coming back to the company.
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And then 1 last question here
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that comes up
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what if John leaves?
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What if he gets the vesting period
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maybe it's until age 65
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but he leaves at 55
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because he says you know what,
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I'm fed up
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I'm going to go start my own company
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or I'm gonna go work for a competitor
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and I don't care
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about the retirement benefit
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because this happens.
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So in a case like this
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a company would (A)
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have the option to
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keep the policy on John
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eventually when he dies
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the death benefit
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still comes back to the company.
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But option (B)
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a lot of people aren't aware of this
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it's a really neat trick
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it's not really a trick
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when John is replaced
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another executive takes over his role
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we can actually
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transfer that policy
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to the new executive.
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So for example,
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if the new executive
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is going to be Joe
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Joe replaces John
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because John leaves
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let's say he leaves 10 years
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after I start the policy
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we can take that 10-year-old policy
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and transfer it to Joe.
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The cash value
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10 years old
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compounding
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is transferred over to Joe.
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Same thing with the
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life insurance benefit
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Joe has to go through
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underwriting at that point in time
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but we are not starting brand new
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and we do not need to go through the
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initial underwriting again
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insurance expenses
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none of that stuff.
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I'm sorry we do need to go through
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the underwriting
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but not the initial
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insurance expenses.
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This is actually something
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this transfer of insured Rider
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is exercised with corporations
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you see it done a lot
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with professional ball clubs,
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professional sports teams.
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When they're trading players
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when they trade a veteran
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and they get a new rookie in
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they can take a new policy out.
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But what's the worst part
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about any whole life insurance policy?
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The 1st year.
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Even with these policies
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if we make a payment
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if it's $100,000
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I might see
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90% to 95% of that payment
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in the 1st year
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but that's still a negative hit
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on my balance sheet
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no matter how I slice it.
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What's the best part
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about a whole life policy?
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Every year after the 1st year
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I get more
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and more money back each year
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relative to my premium
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and PUA [Paid-up additions] payments
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it's compounding between 3% to 5%
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tax-free if you do it right too.
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So I am much much better off
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taking if he leaves
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if John leaves
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taking that 10-year-old policy
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or however old it is
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and transferring it over to Joe
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now I don't lose time
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and I can keep things moving forward.
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So I hope you enjoyed that one
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I hope you found it valuable.
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If you enjoyed it please
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hit the like button
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subscribe for more
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and we'll talk to you soon.
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I hope this helps.
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Hey guys Steve Parisi here.
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If you enjoyed the content you just saw
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please subscribe,
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like,
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and hit the notification bell for future videos.
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If you'd like more information
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or to see some custom policies for yourself
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feel free to call
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or email our offices
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at the contact information below.
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