The Impact Of NOT Paying Policy Interest When It Is Due – Episode 340

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[00:01] Welcome to the Prosperity Podcast. Welcome to another episode of the Prosperity Podcast. This episode, we’re doing a little bit different because we actually have our video cameras on. Now, if you’d like to see what that looks like, one of the best things you can do is go to wholelifecourse.com. And this is one of the modules, one of the lessons that we’re teaching in there. And the reason why we’re teaching it is because it’s a listener and student question. So what that helps you understand is information is evolving, some of it’s constant, like the principles that we share, but there’s other pieces of information that need to be updated. And that’s why you’re getting clued in almost like a bonus today.

[00:48] So there’s me setting up the stage. Kim, will you tell our listeners a little bit, just a teaser about what that course is, how it helps people, and then I’m going to ask the question. Absolutely. And I’m so excited that everybody basically gets to meet you now. They’ve heard Spencer’s voice for so long. And now they get to say hi, and I get to say hi to all of our people that choose to watch. So for the listeners, you’ll get all that you need to get. The video is literally just Spencer and Kim talking heads, but if you want it, it’s there. So the course was created because very similar to literally almost, I want to say 15, 20 years ago when I wrote my Live Your Life Insurance book, we’re getting so many questions now from owners of whole life. And that’s super exciting to

[01:36] me because an owner has very different questions than a potential client, a potential buyer, if you will. Once you get into the ownership stage and you’ve had a policy for two, three, 10, 20 years, you need different information. And so the course is designed to take people to a certain degree back to the beginning to help them remember why they bought the policy, but then also to really dive deep into how do you read a status report? What is an enforce illustration? How do I get one? What should I be looking for? What am I doing with my policy? How am I applying the seven principles of prosperity to it? And all of the other aspects of the use of a whole life policy for the life of a person to help them

[02:24] with their emergencies and their opportunities and all the things that we talk about. And the course gives examples and shows pictures of sample information that comes from the insurance companies. A couple other videos have the truth concepts calculators being used, where the screen is being shared on a calculator that’s proving a particular aspect of the whole life policy. And this is just a continuation of that. It’s a little deeper dive into paid expeditions and loans and dividends and interest rates, et cetera. And we’re really grateful to Jody who emailed this question in. Perfect. That sets the stage. Well, for listeners that want to check out the entire course, go to wholelifecourse.com. But let’s jump into that listener question.

[03:07] And here it is. So, again, this is a person that’s familiar with the product, they’re using it, but now they want follow up. And that is what happens and what’s the impact of not paying policy interest when it’s due? And then we’re going to dive into the sub-questions from there. Fabulous. Such a great question. So, as we all know, interest is charged from the insurance company to the owner of the policy on an annual basis. And if you get your loan at some time, other than your anniversary date, there’s a partial year. But let’s just deal with the annual. It’s easier. That date is your policy date. It doesn’t have anything to do with calendar. So you could almost think of it like a fiscal year. And when that interest

[03:54] is charged and when it is paid, and I know the question is what happens if you don’t pay it? But I just want to get us all real clear on this. When it is paid, it is money that goes from the owner back to the insurance company. There’s a lot of agents out there that talk about borrowing from yourself. And we could argue that that’s accurate information, but I think it’s only partially accurate and it’s very confusing. Let’s get clear. You’re borrowing from the insurance company. When you pay interest, you’re paying it back to the insurance company. Your cash value keeps on growing unaffected by the loan. That’s why those two things often get put together and confuse people, but they’re two totally separate transactions. When you don’t pay

[04:36] the interest, it must be paid in some way. And so what the insurance company does after probably 30 days, some insurance companies might do a little sooner or a little later, they are going to increase the loan by the amount of interest. So let’s say you have a $10,000 loan and I’m just going to use easy math. Let’s say you have a $700 interest payment. If you don’t pay it, now you have a $10,700 loan. That’s a really easy way to explain it. And their follow-up question was this. Let’s say I owe 4,000 in interest policy loan and it’s now due and also have an outstanding credit card balance with a higher interest rate. Would it make more sense to pay down the credit card balance and borrow from the policy to pay the interest payment right now?

[05:23] And the answer is yes. I’m only going to change the words borrow from, because if we’re talking about the policy, we’re borrowing against it. I know that Jodie knows this, but just for clarity for the rest of us, if we want to use the word borrow from, we’re talking about the insurance company. Either way, it’s accurate, but it must be borrowed from the insurance company, borrow against the policy. Yes, take that $400. That’s how much the interest rate? $4,000. $4,000. Thank you. Knew something wasn’t quite right there. Got a zero off. That $4,000 of interest can be used to increase the loan at the life insurance company at 6%, 7%, 8% where you then take your money and go pay down or off the credit card at 10,

[06:11] 11, 12, 13, 14, 15, 16%. That’s absolutely the better thing to do in that space of time. Now, you don’t want to keep doing that. Clearly, you want to get yourself situated so that you can get that life insurance loan paid off. But always, always, always, we need to be paying attention to interest rates. And though we sometimes may choose to override pure financial efficiency and accurate math because of peace of mind or because of other external circumstances, we still want to acknowledge that the interest rate that has the highest rate is the most expensive loan, and we want to go after it first. Perfect. That explains it very well. So the follow-up question from that is, what is the impact on dividends when there is an outstanding loan?

[07:01] Absolutely none. Now, there is a small, tiny exception to that. But really, people need to understand that the impact on dividends is that there isn’t one. Now, here’s the tiny exception. And I’m going to dig into the weeds. I’m going to go as fast as I can, but I do want to be accurate for everybody. And that is this issue of direct recognition. So if you have a company that directly recognizes your loan, that means that the dividend may be impacted. Impact does not always mean negative. It could mean positive impact. So the dividend may be impacted by the loan. And so, yes, that is true. It is literally, so if you can see in the camera, there is no space between my fingers. It is this big. It is tiny, tiny, tiny, tiny impact. And not something even to spend

[07:53] two seconds thinking about. But I wouldn’t ever want anybody to say, that was an accurate information. Of course, it’s impacted. So I will share with people that actually right now, a lot of the impact of a direct recognition loan is a positive impact. It’s actually improving your dividend by a small, tiny little bit because of where interest rates are and where dividend rates are. And that is a really deep dive, which I probably won’t get into. We’ll see where we are time-wise. But that is just something that we need to know that it has a tiny impact, can be positive or negative. And it’s so small, it is not worth even worrying about discussing or making changes to your behavior because of it.

[08:34] If you have a non-direct recognition loan, then there is truly no impact at all because, as the term implies, not that direct recognition is something that we understand. But as I’ve finally learned and figured it all out with Todd’s help, because of the truth concepts calculators, if you have a non-direct recognition loan, then your loan is not directly recognized as it relates to your policy and everybody else’s, etc. So there is no impact. So it’s a negligible amount. So it doesn’t really matter. And again, just as a person mentions and uses the word consequence, people typically think that means negative, but a consequence can be good. Yeah. Perfect. Well said. So then a follow-up question, which is going to be tied to that is, what is the impact of paying premiums

[09:16] monthly versus annually? And does this impact dividends that are paid out? It’s a great question. So the impact of paying premiums monthly incurs a slight additional finance charge, just like when your car insurance or any other type of structure enables you to pay monthly. So at most life insurance companies, the cost, so a finance charge can be equated to interest is usually around five to six percent. I’ve seen it as high as 10 or 11 for the whole life type companies. We’re not talking term insurance. We’re not talking any of the other types of insurance. So it’s small, but it’s not inconsequential. And so with good behavior, good habits, some foresight, if you can get to a place where you’re paying your premiums annually, that’s awesome. However, I will admit I still pay some

[10:15] of mine monthly. I mean, sometimes the annual bill comes. Maybe I paid it annual last year, but I don’t have the money this year. And so I’ll switch it to monthly. Sometimes I switch it back when I can. Sometimes I don’t worry about it. So there is a small impact of paying monthly. But there was a second part to the question. So the answer is no, it doesn’t impact the dividend. So the way that the insurance companies make all players equal because a life insurance company by law has to treat a particular block of policyholders all the same. And they come in big blocks. Sometimes they may shift a policy design, but that block will move on and it’ll all be treated the same. And then the new policy design people have it. The way that they

[11:00] are able to treat them all the same with this issue that we’re talking about is to charge that slight finance charge for monthly premium payments. Thereby, the dividend does not get impacted at all. And I want to address something real quick here. When you hear the insurance companies say, oh, we have a dividend rate of 6%, that’s a gross dividend rate. And so for most people in their, let’s call it 30 to say, 55, 60 age range, that’s going to net down to around 4%. If you’re a little older, it’ll be a little bit less. If you’re a little younger, it might be a little bit more, but not a real big difference. So we just need to remember when the insurance companies say dividends at 6%, it’s netting down by a couple percentage points. And so we can listen to that.

[11:50] Okay. Let’s say that my internal rate of return on my growth of my cash value with the dividend is at say 4% and I have a 6% monthly cost. Well, clearly if I can switch to annually, then I get a better deal over here. And yet we have to deal with cashflow. And so what’s way more important because there are other aspects to the policy and the death benefit and the growth of it, et cetera, et cetera. What’s way more important is that you pay your premiums. If you can only pay them monthly, then pay them monthly and don’t worry about it. The dividend is not going to be affected no matter what you do. Yeah. You took the words exactly out of my mouth. It comes down to cashflow. And I think for any of us that are in the tech industries, what you have to realize is

[12:35] that people are penalized for inefficiencies. It’s creating more work for other people. And so because of that, there’s a premium to pay. Well said. All right. So follow-up question is, does it matter when you pay either the premium or the paid-up addition? And then we’ll get to the second part of that question. So does it matter when? So back to cashflow, it doesn’t really matter for the policy. Again, yes, it’s a little more efficient if you can pay it annually, but it’s not critical. On the premium, on the paid-up addition, I do not believe there are finance charges at all. At most companies, there may be a few. Now, there is a charge in the paid-up addition. People get really hung up on this sometimes. Oh my gosh, it’s a 5% charge or 6% or 4% or whatever. Yeah,

[13:19] that’s for the additional death benefit that gets bought. It’s called a sales charge. That has nothing to do with what we’re talking about. So your premiums, yes, they have a slight finance charge if you pay them monthly. I would either do it monthly or annually. Don’t do it quarterly. That actually has a higher finance charge for most companies because they have to send a physical bill. And then on the paid-up addition, same deal, just do it based on cashflow. It really doesn’t matter. Your dividend is going to come into your policy on your anniversary date. If you pay a little paid-up addition along the way versus a big paid-up addition at the end or at the beginning or whatever, not a huge impact long

[13:55] term. There’s one, again, super nuanced difference to that. And just exactly like we would expect, if you put your paid-up addition in at the beginning of your year, then of course, you have that money in there that entire year. And so your policy is going to grow a little bit bigger because the money has been in there all along the way. But again, just do it based for yourself on your cashflow. And I do mine all over the board. Sometimes I pay my paid-up additions monthly. Sometimes I pay them lump sum. Sometimes I pay a little now, a little later. The biggest opportunity is right around your anniversary date, usually 30 days before and 30 days after. And again, your dividend is paid based on what the cash value is on your anniversary

[14:42] date. However, if for the 12 months prior you’ve put in your maximum paid-up addition, you can’t go put in more paid-up addition a day before your anniversary date in hopes of getting dividends on a larger value because there’s no more room. So you have to pay your paid-up addition for the, quote, next year. And that’s fine. And then it will be awesome because that paid-up addition will be in there earning and working and being available for you all during those 12 months when that dividend gets paid. So these are good questions. But in the end, they’re heavily detailed, almost overthought. Again, good questions. I’m so happy to answer them. But these are things that we think make a big difference and they

[15:27] really don’t. Well, it’s actually really nice to hear that, that it’s, you know, these little pieces aren’t trumping the overall principles of it, which is one final question from the listener. And then I have a final question as a follow-up, which is, when is the policy considered paid up? And that’s a great question. So there are a couple different ways that it can be paid up. Typically what paid up means is that no more premiums or paid-up additions are required and the policy will exist until the person dies, which is way out to 120 without any additional contributions. You can make them manually paid up, which is mean where we have to go in and do some manual things to them. Typically around

[16:10] the fifth to seventh year, if maximum paid-up additions have been made all along the way religiously, they can become naturally paid up. Meaning we don’t have to do anything. We just hit the button and it goes that direction. More like the 10th to 12th year. If paid-up additions have been made all along the way, if paid-up additions have not been made, then that paid-up status is more into the 20th year and can even be longer depending on, again, pace of amount of money when you got it in, et cetera, whether paid-up additions have been made at all, et cetera. I always encourage people to pay their premiums and pay their paid-up additions as long as they possibly can. I know it’s nice to know the paid-up status

[17:00] because it’s a peace of mind thing. Like, oh whew, okay, this is fine. I don’t have to add any more to it. Yet you should and you should want to. So please keep going even though you know you can stop. So the follow-up question is, I think most of us are going to understand and already know what the answer is, but I want it spelled out pretty clearly. And it’s this, if a person knows when they’re, one, the policy and they’re deciding to pay annually or monthly, however that may be, and then they’re doing their paid-up additions, anniversary date comes up, they’ve maximized their paid-up additions, they’ve gone through, how are they going to leverage and get more out of it? So there really isn’t anything else that they need to do at that point, which is awesome,

[17:42] other than keep doing it every year, maximum premiums and paid-up additions. And potentially, if appropriate, and if they can find good investments, then they want to be borrowing against it for those investments. Yet I cannot reiterate enough that there’s nothing magical to the borrowing. You don’t have to borrow against your policy to let it do a good job for you, especially when we remember that the number one job of the policy is to be your emergency opportunity fund. Well, if you’re constantly borrowing against it, let’s say you’re only borrowing against it for opportunities, you still have your emergency cash value protected, but you’re borrowing against it for opportunities all the time, that’s fine.

[18:19] A lot of clients do that and they just go down to that emergency number all the time, but that’s assuming that they’re finding good investments, they’re making those investments work, they’re paying the loans back or keeping the money invested. And it’s at an interest rate that is higher than the loan. If you cannot find that type of investment, please just leave the cash value there. It’s growing at today’s rates, 4% give or take. That’s awesome. Might be three and a half, might be four and a half. For liquid money, that’s a fabulous rate and that’s not taxed. So it is totally fine to just leave the money there. I always try to keep a couple hundred thousand dollars of cash value just sitting there

[18:57] because it’s my peace of mind, it’s my sleep of night, it’s my emergency money. And the bigger our companies get and the more stuff Todd and I take on, the bigger I want that number to be. Yes, we do borrow against ours for investments because we do have investments that earn those higher rates return. And if you’re an accredited investor, we can provide those to you as well. I will blatantly say that for a non-accredited investor, these days meaning under net worth of one million or income of under two to three hundred thousand, it’s very, very difficult to find an investment that is going to earn more than your cost of your loan. And so you’re better off just leaving the cash value sitting there and growing.

[19:37] Absolutely. Echo that. On top of that, I think that at the point where you’ve managed your cash flow properly and you’ve maximized your paid up additions, that is a perfect signal that it’s time to start another policy. I’m glad you said that, not me. It would sound like I was just trying to sell more life insurance to everybody, which I do on a daily basis. Sure. But Spencer, yes, that’s so well said. I mean, that is why Todd and I have over 20 policies. And at times we’ve had over 30, sometimes converting terms, switching. We’ve had those cancel policies because we just got in over our heads at times. So yes, absolutely. You want to start a second and a third and a fourth and a tenth policy

[20:15] as your cash flow and capability to save increases. Yeah, I find that there’s often two scenarios and I call them two extremes. One is that they understand a person gets into whole life and they finally understand what it does and they try and go too big too fast. Or they don’t quite understand what it is and they wait too long until they start to multiply and they wish that they would have. And so now understanding where those signals may be and how you’re going to approach it, it’s going to help you maximize them. That’s really well said. I really encourage people when they start a policy, get into the third year. Get those first two years under your belt and then start another one and get another two, three years down the road, maybe four,

[20:57] and then start another one and then another one. And you literally should just be starting one every two or three years until your premiums are a good 20% of your income. And as your income grows, then you start even more policies and they can be on yourself. Of course, they can be on spouses, they can be on children and also on business partners and key employees. And then one last point for listeners, if you happen to be on the edge and you can’t quite manage the cash flow that you’re able to start those new policies, one of the things that you can do is you can start with a term, then convert it to whole later on if it’s for cash flow purposes. But that’s a conversation to have with you if people have that question.

[21:35] Well said. Perfect. All right. That was a wonderful listener question and also a video. So for any of you that have already dipped your toe and you understand this world and you want to learn more, go to the whole life, whole life course.com and you can get access to this and 20 other videos. But for the listeners on the podcast, we really want to thank you for spending the time and learning more about how this can help you and your family. 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.