Understanding the Life Insurance Death Benefit – Episode 252

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to the Prosperity Podcast. Today we’re talking about the life insurance death benefits and we’re going to try and understand what that means for you or for your family. So Kim, are you there with us? Yes. Hello, Spencer. I’m so excited to talk about this because the death benefit is often, I think, the redheaded stepchild of the family. And it’s interesting because obviously it’s life insurance, but it is life insurance. And we need to remember that. And of course, our listeners are quite well versed in using life insurance while they’re

[01:01] living. And yet, the fact is that there is a death benefit, or you could use the term face value, that’s sometimes what it’s called on statements and such, that can absolutely positively play a role in somebody’s life while they are living. Now I want to be clear, we’re not talking about term insurance death benefit because term insurance is there for a term of time. And I shouldn’t say that it can’t play a role, it does play a role. It helps the parents know that their spouse and their children are going to be taken care of if they pass on. There’s a certain peace of mind there, I think, with term insurance. But really what we’re talking about today is the whole life insurance and the presence

[01:49] of the death benefit. And okay, yes, it can benefit us again, same like term does for the peace of mind in the short term. But the presence of the death benefit in the long term. And so this is like in your 70s and 80s and 90s that we’re talking about. And many of our listeners may be aware of our special report called Permission to Spend, and a while ago we had a podcast on this and offered it to people that emailed in with a desire for that. And so let’s today just give some verbal space to that idea. So I have a question back to you, Spencer. Had you ever heard of that concept before? No, I haven’t, actually. And it’s just because it’s honestly one of those things that doesn’t pop up that often.

[02:39] Definitely not. If you go do any searching on the web for use of death benefit while living or anything like that, I think you’ll run across our material and then everything else will be about the cash value. And again, our listeners are versed in cash value. We’re versed in it. We use the cash value. And yet, for the person that can get clear about this, there is a whole nother level of benefit that the death benefit, no pun intended between those two, can do for you as an individual. And this is the easiest way to make sense of it. Is for you as an individual to memorize one sentence. And that sentence is, I’ll do it for myself. I, Kim, can use my death benefit while I’m living. What do you think of that?

[03:34] Hey, I like that. That’s pretty simple. I think our listeners can do that. Absolutely. And so there’s actually about five specific strategies that are the how part of that. But the most important thing, especially if you’re in your thirties, forties, fifties, or even sixties, the most important thing is that you just understand that you can use it. You don’t have to really worry about the strategies right now. You just think about it this way. So we have our sentence. I can spend my death benefit while I’m living. And the second part of that, if you will, is that if you’ll think about it, think about the death benefit like a guaranteed lottery ticket that’s going to pay say when you’re age 85.

[04:22] Now I’m just picking a time frame. There’s nothing magical about age 85, but I’m purposely picking a time frame that all of us can pretty reasonably think will still be alive. And yet all of us can also acknowledge that at that point, maybe we’ve used up some of our assets, some of our existing assets already. So think about it this way. If you had a guaranteed lottery ticket, you were absolutely positively at age 85 going to win this, let’s just say your death benefit’s a million dollars. And let’s say it maybe started out at less than that because we all know the death benefit grows, especially as we continue to pay premiums. So you started out with $500,000. By the time you’re 85, your death benefit’s a million.

[05:03] It’s probably going to be more than that. But we’ll just use those numbers today. You can think about your death benefit as if it were a guaranteed lottery ticket that would pay off at age 85 absolutely for sure. Now here’s my question. If you had that, do you think you’d spend your money differently, say from age 75 to age 85? How about you? I probably would, actually. I think so. Yeah. So we all have acknowledged listeners to this podcast that we should be working as long as we possibly can. So if you can work till you’re 75, as an example, that’s fabulous. And you should do that. Now let’s pretend that you’re at age 75 and you’re going to convert your assets to income. So you’re looking at this age 75 space.

[05:58] And you’re thinking, well, gosh, I mean, I could have another 25, 30 years to go. And if you don’t have whole life insurance at that point, you pretty much have to spend interest only on your assets. Because if you spend principal, then interest the next year is going to be less. And so for the person that doesn’t have the whole life death benefit on themselves to be able to do anything with their assets, they have to be very, very careful. Well, for the person that has a whole life with this, quote, lottery payout idea that we’ve shared that’s just a concept, they are able to treat their assets differently. And the biggest difference that they get to do versus the person that does not have the death benefit

[06:48] is a strategy called a pay down, P-A-Y, second word, D-O-W-N. And a pay down is essentially taking principal and interest and having it generate income. So for example, you would use the period from 75 to 85 to do a pay down. And rather than taking interest only off of your assets, you would pay down a principal and interest off your assets. And therein lies a higher income, a lower tax, because you’re spending principal, and a more effective strategy because you’re not so concerned about what that asset is actually invested in. And then at age 85, you turn to the death benefit and also at that time possibly the cash value of the life insurance to come in and play a role. So it’s a tough concept to explain verbally,

[07:54] but that’s what a pay down is called. Is that making sense so far? It does make sense so far. So that’s one strategy. Now there’s a second one. I’m explaining all these quickly just so that we can get the idea across. A second strategy is known as a reverse mortgage. And just like the pay down, it’s not that you can’t do these strategies without the presence of a death benefit. And yet the presence of a death benefit enables you to do these strategies more effectively, more efficiently, with less risk. And so a reverse mortgage, just similar to a pay down, is basically taking your home and turning it into an income stream. And the presence of the death benefit can enable that strategy to be used more confidently

[08:45] because you may still care about this home. Maybe it’s the family cabin and the kids might want it, et cetera, so you’re not wanting to leave debt on it. Well, a reverse mortgage obviously increases debt. And yet a reverse mortgage also generates tax-free income. But here’s the thing. Most advisors recommend the reverse mortgage at 62 or 65 or even 70. A reverse mortgage is going to be so much more effective if you can do it in your later years, like 75 or 80 or 85. If you will wait on the reverse mortgage and do it later and you have the presence of the death benefit, you don’t have to worry about dying and having that mortgage left around because the family is going to get that death benefit.

[09:34] And then they can choose whether they want to pay off the reverse mortgage or use that death benefit for something else. And so again, combining the pay down with the death benefit or combining the reverse mortgage with the death benefit is what enables the lower tax, the higher control, the higher income and more flexibility. Interesting. Now I’ve got a couple of questions. Why do you think most people don’t talk about this? It’s a tough concept to understand. And frankly, I think most life insurance agents do not really understand it themselves. I know it took me a long time to learn it. And it’s a difficult thing to prove numerically, like with calculators. And so that’s part of the challenge.

[10:26] And then as you’re well aware, most clients don’t understand this. And even though I’ve shared that magical sentence, I can spend my death benefit while I’m living. I’ve shared that for years and years. I’ll have somebody say, well, I’m turning 40 next year and I was wondering about spending my death benefit while I’m living. No, no, no, no, no. That’s done when you’re 80, not 40. And so I just think it’s an unusual combination of strategies, though it shouldn’t be. And it’s, like I said, tough to prove numerically and sometimes a little bit more conceptual in its design and implementation. And so consequently, it’s just not talked about. That’s a great question. I’m not even sure I have a good answer for it.

[11:13] I think when it is complicated like this, luckily you’re able to break it down into two principles, the pay down or the reverse mortgage. Now, everyone’s going to have a unique situation. And if they do have personal questions, they can reach out to you through email. Would that be the best way to do it? Absolutely. So we have a special podcast email, hello at partners number four, prosperity.com. And in addition to that, a lot of our listeners have the Live Your Life Insurance book. And the second part of the Live Your Life Insurance book covers this subject. And it also talks about a couple other strategies like charitable remainder trusts and pension maximization, which are strategies that again,

[12:00] help people use their death benefit while they’re living. And then as I’ve indicated, we also have the special report permission to spend. So if you are interested in the permission to spend report, you are welcome to, in that email, to hello at partners number four, prosperity.com, just put in the subject line, permission to spend report, and I will head that your way. And then Spencer, there’s another really important point that I want to put forth about how we spend our assets. And it has to do with the prosperity economics way, which is very, very different than the typical financial planning way. The typical financial planning way is to take a little bit off of each asset. In other words, take a little bit money from the IRA,

[12:55] maybe do a small reverse mortgage, take a little bit of money from the pension, take a little bit of money from the life insurance and create the income stream from all those little tiny pieces of each asset that a person owns. The prosperity economics way is very different. It says, let’s take the least efficient asset, which is typically the qualified retirement dollars, so like the IRA, the 401k, that kind of thing, and spend it down in its entirety. In other words, leave all the other assets alone and take that IRA or qualified retirement plan and do a pay down and spend it entirely. So again, ideally we’re working well into our 70s and then we go after at 70 and a half, as most people are aware,

[13:54] you have to start spending your IRA. So maybe we just do small required minimum distributions for five or six or 10 years, but then when we need to actually create full income, we spend that asset down in its entirety, leaving all of the others to grow. So again, it’s the least efficient asset first. Then secondly, we want to go after all of the other taxable assets. So this might be CD money, stock money that’s after tax, it might be even bridge loan money that maybe it had been kicking off income, and of course this totally depends on how much assets each person has, but anyway, we go after the taxable assets next, and then lastly, we go after the cash value of the life insurance and or the death benefit.

[14:50] And so again, depending on the person’s situation, sometimes they should go and use the cash value of the life insurance policy, sometimes they should go and use the death benefit of the life insurance policy, and of course, it doesn’t always have to just be one or the other, people like me that have lots of life insurance policies, we’re gonna do some with one of them, cash with some of them, and then death benefit with others, and basically get the benefit of both, but this idea, this prosperity economics idea of picking one asset and handling that, and then the second asset and handling that down to zero, and then the third asset and working with that down to zero, much more efficient and effective

[15:35] than trying to take a little bit off of each one. You know, it really is, even from a management perspective of knowing what’s going on in your head. So brilliant, brilliant way, that’s very clear for people to understand, and I’ll just kind of summarize those three pieces again, which is to take the least efficient assets, and then spend it down to its entirety, and then work on the next, and then go after the taxable assets, and then at that point, then you go after the cash value and death benefit, is that correct? You got it. Okay, well also for our listeners, if you do have additional questions, if you’re trying to determine, hey, which one is the asset to start with, or you want to understand the death benefit,

[16:20] or whatever those may be, reach out to Kim, hello at partnersforprosperity.com. And then there are several other books, we can put those links, and we’ll put also a link to the report inside of this podcast. Geez, there’s gonna be a bunch in the show notes today. Oh, fabulous, thank you. Thank you listeners for tuning in for another episode of the Prosperity Podcast. It’s always a pleasure having a conversation with you today. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.