Whole Life Insurance and How Your Cash Value Grows – Episode 162

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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 back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have our bestselling financial author and co-host, Kim Butler with us today. And today we’re going to be talking about whole life insurance and how your cash value grows. Again, this is something that not a lot of people think about till maybe after they’ve purchased a policy and I don’t think a lot of people truly understand the mechanics inside a life insurance policy.

[00:48] And again, may not be the most exciting subject in the world, but we do believe it’s something that you should understand. Welcome, Kim. Well, thank you, Todd. Yes, it’s so important to understand and it’s not an easy thing to understand either. And just to lend some excitement at the beginning, just to remind everybody that the whole life insurance’s cash value is the perfect emergency slash opportunity fund. And every family has emergency money. This is the best place to store it. I’m not talking about your checking account money you’re going to spend next month, but the money that you want for the next three, six months is your emergency fund. And then beyond that, the money that you want is an opportunity fund.

[01:32] Whole life insurance cash value, according to my research, has always earned two or three points above bank rates. Now I don’t mean two or three times bank rates, I mean two or three points above. So if we can just call bank rates today one percent, that’s probably being generous. In 2017, you could probably get a CD or something for one percent. And we can prove that whole life insurance cash value is around four percent. Now, when I say that, I mean some policies might be three, some might be five, but let’s just use four as a midpoint. Then this is what we’re talking about. The challenge lies in understanding the dividend that the insurance company talks about and puts on your statement compared to an interest rate,

[02:27] which is how we talk about things like cash value of growth. So if you want a little bit more information beyond the podcast in this, our brand new book, Busting the Life Insurance Lies, which is available on Amazon, has on page 228, that’s 228, in the appendix G for golf, the whole truth about whole life. And there is a transcription of me and Todd Langford, the truthconcepts.com calculator owner and programmer, going over how to calculate what we call the internal rate of return on a whole life insurance policy. And it’s particularly challenging to calculate because the definition of an internal return is essentially a cumulative return. In other words, year one plus year two plus year three plus year four.

[03:27] And then it’s at the end of year four or at the end of year ten or whatever time frame you are talking about that you then identify this internal rate of return. Now, everybody can see when you look at a life insurance illustration that you put in X dollars of premium and even if you do premium and pay to petition, your cash value the first year is negative. And so right away, people get confused with the fact that we can say, well, the internal rate of return is 4% over time or something like that. And so there’s another additional calculation that the TruthConcepts software can make that is not available on any life insurance company’s illustration system that I’m aware of. So a regular life insurance company will actually give you a column

[04:22] if you ask for it, what the internal rate of return is. And I would encourage clients to not even bother asking. It is not a helpful column. As far as agents go or advisors, it’s not something that you would want to show a client is it’s not a relevant, easily understood column. In fact, it’s horribly confusing. What is a little bit more accurate is this annual rate of return column that can be shown, but frankly, people don’t even need that. They just need the knowledge that it provides and the knowledge that it provides is this, the internal rate of return, meaning after the cost of the death benefit, after the cost of the commission and after the cost of running the company, because we all remember

[05:08] that most good whole life policies are handled by mutual insurance companies is going to be around 4%. And that’s on an average basis and on a per year basis in the year 2017. Now, if you go look at an insurance company’s website, like you go to MassMutual.com or Guardian.com or New York Life or Northwestern Mutual or Penn Mutual or Lafayette or Mutual Trust or any of these Ohio National, Ameritas, AUL, any of these good whole life companies that a lot of our listeners own whole life insurance from already. If you look at an insurance company’s website, you’re going to see a gross dividend, like if you go look at their website, you dig around a little bit, you look for the dividend for the year

[06:00] 2016 or 2017, you’re going to see a number that’s probably in the high fives, low sixes, might even be 7% today. I don’t know that there’s any out there that are saying their gross dividend is at seven, but we’ll just use the number six. So let’s say that you see on a company’s website, 6%. That’s the gross dividend. What that means is the amount of money correspondingly transferred into an interest rate that is paid before the cost of death benefit, the cost of the commissions and the cost of running the company. And so frankly, it’s an irrelevant rate, like the gross dividend rate that you find on the web is completely irrelevant. It matters not at all what it says. And there is a further challenge.

[06:48] And that is that when you look on your statement, your dividend is converted into dollars. So no wonder people don’t understand how life insurance work. And of course, the first year or two, you might not have any dividend. And then the second year, you might have a little bit of dividend, or maybe it’s the third year for your company. That’s all fine. We all understand that the first couple of years of the life insurance policy, there just isn’t that much money available because that death benefit has to get paid if somebody dies that early. And unfortunately we have had that happen. So the dividend, the dollar figure that is listed on your statement is interesting, but again, it’s not very helpful.

[07:31] It doesn’t really mean anything, especially in the early years. It’s going to seem pathetically small. So I think it’s valuable for people to know that just as a general rule of thumb in the year 2017, their cash values growing at 4% when viewed over time. And that’s the most important thing to realize is that you must analyze a life insurance policy over at least a 25, if not ideally 30 year period, even 35 or 40 would be fine. It is absolutely incorrect to analyze a life insurance policy over five or seven years. I mean, it’s fine if you only want to pay for it for five or seven years, but to actually analyze it over the first five or seven years and then leave it alone is an incorrect view of life insurance.

[08:27] It would be like analyzing a 30 year mortgage over five or seven years. I mean, it’s just, I mean, it’s interesting information, but it’s not relevant. It doesn’t help you at all. So I want people to understand that they just need to know approximately their cash value growth on a per year basis. And that we will always give people that information. And it’s not that different from one company to another. There could be one company that’s a little higher this year. And that company is going to be a little lower next year, or maybe in two or three years. And so if you just remember the rule of thumb that cash value of whole life insurance grows at two to three points above bank rates, then whatever your local bank’s CD or money market or savings

[09:14] account is going to pay your cash value is doing two or three percentage points better than that. That’s the rule of thumb that you can stick with. And frankly, none of the other information is very relevant in terms of making decisions about where we store that cash. All right. A couple of points. I just want to point out, I have pulled up mybanktracker.com again, this is January, 2017. The national CD rate average is 0.48% and the highest CD is paying 1.6%. So just so you know, you’re mentioning 4%. So I just wanted to show that the, the figures you gave are accurate. Now, my question to you is, is that, you know, eventually interest rates have to come up on these CDs, what happens to the interest on my whole life policy?

[10:14] Absolutely. Great question. So interest on the whole life policies will come up also. And what that means is that dividends will rise and consequently the corresponding interest rate that we calculate them at will rise. Now it may not rise right away and it may not rise as quickly as bank rates do because life insurance companies take so much of a longer-term view towards things, but it absolutely positively will rise and people can be confident in that information. Uh, and the one thing that, um, I don’t think that you mentioned that when I look at life insurance, yes, there’s a cost for commissions. Yes, there’s a cost to run the company. Yes, there’s a cost to issue the policy, but I’ve also purchased an asset.

[11:02] Absolutely. And that asset is usable, sellable, liquid. And so I always even get frustrated when people compare it to CDs, because CDs are technically not really liquid. Yeah, you could liquidate them any day. So I guess that’s legit, but, uh, yeah, that’s an asset and it does a lot of jobs. It provides that death benefit. It provides us a great place to store cash. It of course pays the dividend, which is the part of the interest rate that we’re talking about, but we really didn’t even get into the subject of the guaranteed cash value of life insurance and the guaranteed cash value is a guaranteed dollar figure. It’s not a guaranteed interest rate with whole life. And so that’s an additional important aspect of the growth of cash value.

[11:49] And yet we have all these other things too. We might have the pay to petition writer. We might have waiver premium. We have the ability to annuitize the policy. In other words, to turn the entire death benefit into an income stream for ourselves, um, whether we’re wanting it over our life or ours in our spouse’s life, et cetera. So yes, these are all aspects of that asset that we can use. Where, um, what would be a good place for someone who wants to try to get a better understanding of this to start looking or what would be a good resource? Well, there are lots of books out there. And of course, partners for prosperity has two of them. One is called live your life insurance, which is available on Amazon as both

[12:35] a Kindle and a regular book and an audio book. And it’s a real short read, just an introduction. Of course, we also have our busting the life insurance lies. And that’s a couple hundred pages of material and appendixes and copies of illustrations, et cetera. And that one’s got a fun storyline to it as well. So don’t be overly concerned that it’s a horribly boring. And there’s lots of other books on Amazon. It’s been interesting to watch how many life insurance agents and financial advisors have written books about life insurance. And I encourage people to read all of them if you’re that curious. And then of course, if you have questions, email us. Hello at partners, the number four prosperity.com.

[13:18] And we will happily answer your questions on the podcast. That’s hello at partners, number four prosperity.com. And we’ll happily answer questions on the podcast. Kim, before I let you go, you’ve made reference several times to some calculators that I think we need to address as well. Ah, yes. You can take a peek at those. Anybody can look at these at truth concepts.com. So the calculators are truth concepts.com. Anybody can download that software for free for 10 days. There’s also a lot of video and the blog on the truth concepts website that answer a lot of questions about all things financial, not just the life insurance, but mortgages and qualified plans, 401k plans and that type of thing.

[14:05] Other calculations of interest rates and a lot of other additional material that could be very helpful for anybody, those that are in the industry or not. Super. Well, again, this is No BS Money Guy, Todd Strobel. Again, we went kind of technical today. Hopefully we’ve maybe made you ask some questions, maybe not given you the complete answers. It’s a search you need to begin for yourself. We’ve given you some tools to help you start looking. But the most important thing is, is learning how to grow your money safely. We didn’t mention the fact that this money also grows tax free versus CDs you do have to pay taxes on. Again, look at some of our other podcasts for that. Special thanks to Kim Butler.

[14:51] This is the Prosperity Podcast. We’ll see you all again real soon. 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.