 Ever wondered what financial institutions like banks and credit unions actually do that makes them billions of dollars in profits each year? They employ a financial concept called “arbitrage,” which simply involves borrowing money at one rate and lending it out at a higher rate, thereby turning a profit (i.e., the difference, if you haven’t already figured it out).
The next time you visit your bank or credit union, pay close attention to the fact that they advertize two sets of rates: a lower set for your deposits, say 2 percent, and always a higher set, say 4.5 percent, for the loans they make to you. In other words, they borrow money at 2 percent and lend it out earning 4.5 percent, thereby creating a 2.5 percent arbitrage in this example.
Anytime the opportunity exists for an arbitrage, financial institutions are willing to “borrow” as much as the public will allow them, and are even willing to lure people with such things as gift cards, $100 cash, toasters and coffeemakers – because it does not cost them a penny of their own money. They are simply using money that belongs to others to amass billions, year after year.
Several savvy businesses and wealthy individuals use this same principle to accumulate a tremendous amount of wealth. Below is an example of how you can use arbitrage to create wealth without actually spending a penny of your own money in the final analysis. Before we get into that, however, please note that this scenario can be structured on a larger or smaller scale than this example. Of course, the results are bound to differ, given variables such as the client’s gender, age, health, and net worth, as well as fluctuating interest rates.
Also, such a plan requires consultation with extremely competent financial, accounting and legal professionals. Instances have occurred where incompetent professionals tried to implement this strategy without proper training and/or adequate consultations and ended up creating disasters, rather than success stories.
A Life Insurance Trust Is Created
The Trust borrows $8 million from a lender. We are assuming a LIBOR-plus interest rate (totaling approximately 4.5 percent). The loan is open until death, with interest-only payments required, and is collateralized by a life insurance policy and an annuity.
The trust purchases a $10 million life insurance policy using $600,000 of the loan proceeds to pay for the initial premium payment.
Using the remaining loan proceeds of $7.4 million, the trust purchases a single premium immediate annuity that generates a lifetime annual income of $1,036,000. (Assuming the insured/annuitant is an 80-year-old female).
The annual annuity distribution services the lender ($400,000 per year assuming a 5 percent interest rate) and the life insurance policy (with annual premiums of $380,000).
The difference between the annual annuity distributions of $1,036,000 and the sum of the annual interest payment and life insurance premium ($400,000 + $380,000), results in a positive cash flow annual income in the amount of $256,000.
The taxable portion of the annuity payouts – after exclusion – is $227,920 per year. This would result in an annual tax liability of approximately $91,168 (assuming a 40 percent marginal tax rate) during the first 10 years of the annuity’s payout.
After paying the annual tax liability, a net annual income of $164,832 (positive cash-flow of $256,000, les $91,168 in taxes) would come to the family or charity without requiring any personal cash investment or outlay by the client.
For this concept to work best, the life insurance premiums need to be aggressively priced, the single premium immediate annuity needs to not be aggressively priced, and of course, a favorable borrowing interest rate must be obtained.
To see how you might benefit by employing the concept of arbitrage and leave a legacy to your loved ones, please call (301) 949-4449 or visit www.laserFG.com to schedule your no-obligation consultation today!
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