The Insurance Rebuttal Part 1 – Episode 010

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[00:01] 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 and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host and bestselling financial author, Kim Butler with us today and always appreciate when she can be with us. How are you, Kim? Wonderful, Todd. Happy to share our conversation today and we’ve got some good information. I’m looking forward to it. Super. Well, we have in the past talked about how to use a combination of term insurance, preferably convertible term insurance, along with permanent insurance and the permanent

[00:49] insurance we prefer is whole life versus, say, universal life and we’ve talked about that as well. But today we’re going to really dive into using whole life insurance versus term insurance. And again, I guess in a perfect world you would have a combination of both, but there’s still a big outcry in the community to say, hey, let’s just buy term insurance and there’s a lot of financial advisors on this bandwagon with the invest the difference mentality. I guess the first thing I’d like to point out is insurance companies themselves don’t really mind the rush to term insurance, do they? No, they sure don’t. It is a huge profit maker for them, which is great. There’s absolutely nothing wrong with term insurance and we’ve talked numerous times

[01:41] about that. But the challenge becomes when it’s done in place of whole life insurance or permanent insurance for a family that has the capability to get the permanent insurance. And you just got to look at the language for a minute. Term is temporary. Permanent is, well, permanent, right? So we’re going to talk about this in a way that acknowledges that term insurance is great and has its role to play. But if your family has an opportunity to save a little bit of extra money, then needs to get looked at. And that’s where the advisors that sell only term insurance, I think, do a disservice. They just don’t provide the client as complete of a picture as could be if the client was exposed to permanent insurance as well.

[02:33] Super. Well, we’re going to specifically reference the website Partners, the number four Prosperity dot com. Again, that’s Partners for Prosperity dot com. A blog post that was posted on there about someone who had sent you a letter. And I want to just kind of read the letter and then address some of the concerns in here, because I think the letter in its own way just hit some perfect points. So I came across a website was trying to find information on why UL, which is universal life and whole life policies, are not recommended products for middle income families. Get some basics and simple facts about whole life. And again, this person is pro term, obviously. You pay for two, get one in return.

[03:16] Whole life provides this false savings or money pool that clients are fooled into thinking is actually theirs. Upon death, the policy will only pay out the face amount and not the cash value. So I think we’ll just go paragraph by paragraph. Why don’t you kind of invest that or address that pay for two and only get one concept? Sure. So the beauty of whole life is that you pay for one and get two. He’s got it just a little backwards there. In fact, I would even vote for you pay for one and get three or four. But let’s just keep it simple. And that is that you absolutely without question get something called cash value that you, the insured, the owner of the policy own and control and can use for whatever you want.

[04:09] And I think where this person is coming from is they believe that the only way to have access to that cash value is by borrowing against it. And many people do not understand the term against. You do not borrow your cash value. You borrow against your cash value or you use your cash value as a collateral for a lien from the mortgage company. The cash that you get in your hands, sorry, mortgage company from the insurance company, the cash that you get in your hands is the insurance company’s cash. And I guess the reason I had mortgage in my mind is that it is like a mortgage. If you have a home with a mortgage on it, you’re not borrowing your money. You’re borrowing the bank’s money. Well, the cash value of life insurance works no differently.

[05:04] You have your cash value and you’re borrowing the insurance company money. Now you can also withdraw your money. You do not have to borrow against it. The reason we typically recommend that you borrow against it is that gives you the ability to pay it back. And of course, term insurance does not have any cash value at all. Super. All right. Let’s just kind of keep moving on here because there’s several points that we want to try to get to. The now savings that is within the cash value is held with the insurance company. And if the client actually needs to use their own money, the funds we may be taking out as a loan, which we’ve kind of addressed, why on earth would you pay the insurance company interest to use your own money?

[05:50] We’ve kind of addressed that. When you read the policy, you will note that between the first two to six years, sometimes longer, as I have seen nine years, the cash value is zero. A client is better off putting the overpayment in premiums under their pillow and they will still have more money. Not to mention the cost to cover a hundred K is far too expensive for the middle income or young family. OK, so let’s address this zero cash value thing. I have never seen a whole life policy with zero cash value in any other time than maybe the first year. And most of them even have a little bit of cash value the first year, but good heavens up to the ninth year. I’ve never, ever seen that. My guess is that he is looking at either some kind of hybrid policy

[06:42] that’s not truly her whole life, or he’s looking at some of the, quote, no load whole life products out there. No load, meaning no sales charge, also meaning no cash, obviously. And that’s not what we’re talking about. A typical whole life policy is going to have cash value in the second year. They’re going to have plenty of cash value third, fourth, fifth year, and they can have even more cash value if you add something called a paid up additions writer that’s paid up additions writer. And that is something that’s been around for a long, long time. And it’s just simply the ability to have more cash. And we always put that writer on our policies. Some clients fund that very minimally, literally like a hundred

[07:26] bucks a year. Some of them do something called a maximum paid up additions writer, which it can be about as much as the premium. And I also want to address the idea of the death benefit growing, whereas he states the face amount or the death benefit stays flat. I have never, ever seen that either. Every whole life policy I’ve ever looked at the death benefit or the face amount grows. So let’s put some examples on here. You start out with a $500,000 policy, kind of a mid range, middle of the road, middle class. If we want to use that term, death benefit that one might buy could be smaller, it could be a hundred thousand. Doesn’t matter. Let’s just start with a $500,000 policy. The first year, you’re right.

[08:12] There is not going to be a lot of cash value, but there’s some. And immediately at the end of that first year, the death benefit is going to be $500,000 and maybe a thousand dollars more. So it’d be $501,000 if the person died that year, then the cash value grows the second year, the death benefit grows the second year. Cash value grows the third year, death benefit grows the third year. And literally by 20 or so years out, the death benefit can be double what it originally was. In other words, that death benefit can reach a million dollars. And by 30 and 40 years out, it can even triple and it would be then a million five. And that’s an increasing death benefit. That’s always common with whole life.

[08:59] Got it. And just kind of keeping in your same example and to show the other side of this of what the, what I believe this person is trying to express is let’s say if you pay into a whole life insurance policy for 10 years, you’ve accumulated a $200,000 cash value, which is certainly possible with the paid up additions writer, the way that you mentioned, and let’s say you have a $1 million cash value. I believe the argument that he’s trying to make is that the insurance company should actually be paying you $1.2 million, not just the $1 million death benefit. I think that’s the argument he wants to make is that that $200,000 is in some way being taken by the insurance company in exchange for that million dollar death benefit.

[09:49] Right. And that’s not accurate. If you had a million dollar policy that you started with, so this is a million dollar death benefit. And over the course of 10 years, you built up $200,000 of cash value. Then at, if the death occurred at the 10th year, you would be paid probably about a million, one 80. I’d have to look at exact numbers, but you’re clearly not going to get everything. These insurance companies are in business to make a profit. They make a profit every single year. We know that we want them to make a profit. If they don’t make a profit, they go out of business. That’s not good for anybody. So it is in no way true that they keep your cash value. That cash value is what makes that death benefit rise.

[10:39] So if you have 200,000, your beneficiaries are probably going to get, I would say 80% of that cash value paid at death. In the form of a death benefit. That’s the most important thing that million one 80 in our example is going to be paid as a tax-free death benefit. If it was truly just cash value given back, then that participant, that beneficiary would be potentially subject to taxes. Now, maybe not. It depends on how much they put in to get that 200,000, but it’s very common to be taxed upon growth. We all know that. And in a life insurance policy, that does not happen. And it doesn’t happen whether somebody’s living or upon death, upon death, it is a tax-free death benefit. So we want that million one 80 in this example to be paid as a death

[11:35] benefit. Got it. And I, and I think from any investment standpoint, being able to protect the million dollars worth of your life and to be able to have that million dollars paid, um, instead of the 200,000 or in addition to the 200,000 is still a pretty incredible rate of return on the money. Absolutely. And yet we also all know that the chances of dying are very, very slim and that’s why this product is called life insurance. It’s not called death insurance, but in actuality term insurance should be called death insurance. And I differentiate those two because life insurance that’s whole life you can use while you’re living term insurance. That is not, you only can benefit upon death. The beneficiaries, of course, are the benefits upon death.

[12:30] So again, there’s nothing wrong with term insurance, but term insurance is only going to exist for a term of time. And so you have that period of time, 10 years, 20 years, 30 years, whatever your term of time is. And then it no longer exists. And since we know that most term insurance does not pay out because most people do not die in the 10 or 20 or 30 year period of time that we’re talking about, then that money is lost to the client. They’ve spent all the money for premiums and they get nothing back. Super. Well, let’s address one of the other concerns is here is that the cost to cover a hundred K, which in this case is referring to a hundred thousand dollar death benefit is far too expensive for the middle

[13:18] income or young family. They need cheap protection and a lot of coverage in the event that the income earner dies. So I would agree they do need a lot of coverage and I would absolutely agree that they should buy some term insurance. We’ve said that all along. It should be whole life and term insurance. But to only buy term insurance and to try to quote, invest the difference or to save the difference is less effective. And here’s why. And I use the term savings on purpose to us, whole life insurance is the perfect place to save money. Every client, no matter how little money they make should try to save money and whole life insurance is the best place to do that. I don’t call whole life an investment, but I know a lot of people do.

[14:07] The reason I don’t feel that it is is because it is completely liquid and it earns right now in today’s marketplace, four or 5%, that to me is a savings vehicle investments in my mind are typically not as liquid and should earn double digit returns. So you have an environment where a middle income family needs to save. And if they can save even a hundred bucks a month, then they should be able to buy a small whole life policy and a large term policy, get the best of all worlds by doing that. All right. Again, that’s going to pretty much take up our time. We’re going to move on to a second edition of this. It’ll have a little more information because we have a few more questions to cover. We’ve been referencing a blog post on partners for number four

[14:56] prosperity.com partners for prosperity.com. Again, the blog post is called the whole life versus term insurance debate. We invite you to check out more information on that. This is no BS money guy, Todd Strobel for the prosperity podcast. Once again, thanking our special guest and co-host Kim Butler, and we will see you all on the next episode. Take care of everybody. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.