I. CREATING AND RETAINING VALUE
The single biggest problem for most company owners is their inability to extract and retain money distributed from their company. In the good times, they often take out significant bonuses and dividend distributions, but when the economy tightens they usually have to put it back in out of necessity. It is a known fact that nearly 80% of the net worth of most business owners is locked up in their business. So even though the company continues to increase in value (by increasing the retained earnings of the company), the net result is the reduced personal liquidity.
I call this lack of liquidity – margin. Lack of margin is not a good situation because there is no margin for error. If and when the economy tightens or if interest rates rise before the liquidity is restored, what happens? Where do you go for money? The loss of margin means that despite success, owners often live on the edge of economic disaster and ruin. We must remember there really is a difference between profit and financial independence.
What are some ways to resolve this problem? Besides cash distributions that are invested in an investment portfolio, there are two commonly used strategies for increasing wealth: 1) a well funded retirement plan and 2) a split-funded investment grade life insurance program. Both are tax efficient and provide a systematic way to transfer wealth from the company to the owner’s pocket. In looking back at several severe business cycles, the primary asset to sustain value throughout the convulsions is not bonds, not large cap value stocks, not commodities or real estate – but cash values in life insurance and annuities.
This is not meant to be a sales pitch, but rather a fact. While insurance companies in the past have failed, not one policyholder has lost money.
Let’s look at these two remarkable plans.
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