The Safety of Cash Value Whole Life Insurance – Episode 355

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[00:02] Hey Kim, you have an exciting topic for us today. So let’s get into it. It’s the safety of cash value of whole life insurance. I have never been more honored, more pleased, more grateful for the product that we work with. And so this is cash value of whole life insurance from mutual companies. These companies have been around most of them 150 to 180 years. That’s kind of the sweet spot space. And yet this industry, depending on when you pick its starting point, has been between two and 600 years old. And it has been through these unbelievable times before, including times when the word pandemic has been used. I really prefer to just focus on the word unbelievable because it can be interpreted positively or negatively. So let’s dig into this cash value. This is the liquid

[01:07] emergency slash opportunity fund that we have been talking about. And at mutual companies, mutual life insurance companies, it is backed up dollar for dollar. Life insurance industry and the companies are older than the banks. They’re more highly rated than the banks when you think about like Standard & Poor’s and Moody’s and Duff and Phelps and those types of rating agencies. And again, because they’re backed up dollar for dollar, that is a more certain position than any other source of cash and liquidity. Okay. Well, maybe let’s do this. Let’s jump all the way back to the principle and understand what that picture looks like. So it’s backed up dollar for dollar. Can you help listeners and unpack what does the life insurance do with those premiums

[02:01] internally so that we can understand their financial principles? Yes. So a life insurance company’s job, and most of them are not in the property and casualty business. And it’s funny, today we’re not as concerned about that. But a few years ago when there were hurricanes and storms and that type of thing, I got that question a lot. Like, well, are my cash values affected by the storms? And the answer is no, because most life insurance companies do not do property and casualty business, car and home and that kind of thing. They just do life insurance, maybe a little bit of disability insurance, maybe a little bit of health insurance. And so we’ll do a whole other podcast on the concerns around that space and death claims. But the fact is that

[02:47] life insurance companies business model is to collect premiums and pay claims. And then the most important part is the mutual companies are sharing their profits by law with their policyholders. So that’s a little bit of a sidetrack that we can come back to, but to more directly answer your question, the ability for a life insurance company to back up that cash value dollar for dollars because of their business model, which again is collecting premiums and paying claims carefully. And by law, they are known as a 100% legal reserve style of company. Most people have become aware of this, especially our listeners, banks only reserve their dollars by about seven to 10 cents. So they have what you could call a 7%, not 70. I made that mistake on a video recently,

[03:52] a 7% reserve level. If you have a dollar at a bank, they literally may only have 7 cents to back up that dollar. In the life insurance industry, they cannot do that by law. If you have a dollar of cash value life insurance, they have a dollar to back it. And so that again is a certain space for our money. It is the most important asset on our balance sheet right now because of that dollar for dollar backing. Now, has it always been this way? Because I know America, we used to be a country that actually had a gold standard, no longer like that. We’re just trying to understand the actual solvency of these companies and then solvency of people. So I’ll unpack that. In America, when we were on the gold standard

[04:45] and banks operated a little differently, then those dollars at banks could be more certain. The life insurance industry has always been the way that it has. The dollars in America in banks has definitely changed, but it’s less of a gold standard issue than it is a federal reserve and central bank issue. So while you might have a little extra time on your hands these days, if you’d like a deep dive into this federal reserve and central bank issue, it is the book Jekyll Island. Do I have the title right? You know what I’m talking about. Absolutely. I know what you’re talking about. In fact, the person that introduced me to that book was Patrick Donahoe and it’s called The Creature from Jekyll Island.

[05:36] Thanks. We’ll put a link to that in the show notes and it is a valuable read. And if by chance you’re not up for it’s a biggie, six, 700 pages or so, you can find some summaries on the web. Okay. So that helps our listeners and really the reason for this conversation is because when we’re in unbelievable times, we saw that banks were bailed out and then you have mainstream media that’s talking more in lines with banks, but they don’t really understand how this insurance world works. And so we’re just trying to show their actual models. Now, what else would you like to cover so we can help address listener questions? I think it’s always critical to be clear on what we can do at unbelievable times. We must

[06:27] be continuing to take action and that action is to pay our premiums. And in a way it’s unfortunate that the word and the verb and the act is called a premium because we tend to think that premium equals cost, but in mutual whole life insurance policies, as our listeners know, premiums build cash value. And we have paid up additions, which are extra dollars that can build even more cash value and are optional to pay. So at this time, if you continue your premiums, your cash value is going to continue to grow even if you don’t do your paid up additions. And yet it’s so, so critical that we be saving as a verb the act of putting money away consistently and continually. And so paying your premiums and your paid up

[07:24] additions does that job. And that is what you can do. And if you have friends, family members, other people that you care about, obviously the death benefit plays a role as well. More importantly, help them also learn about this environment that you’re right, Wall Street and Main Street and the press just do not talk about. I read article after article after article about where you can store your cash. And now with the interest rates going even lower, everybody’s looking for a place to store cash and liquidity. They get all excited when a bank pays 1.2% or something like that. Cash value of life insurance in this year, 2020, is growing at about three and a half to four percent, depending on your age.

[08:13] And that’s after all the expenses and without taxes. That is an amazing difference from any money market, CD or bank savings account rate out there. Yeah, absolutely. And one of the things that you touched on a few minutes ago, and I want to circle back to, which is a part where the insurance companies are required by law to share the profits because that actually affects the principal that you have, correct? Yes, it does. And so this is the mutual aspect of the insurance company and it is shared via dividends. And we may cross a time in the future, like years 2021 and 2022, where they don’t pay dividends. I don’t think so only because I know that they have paid dividends for well over 100 years through many other times of economic

[09:12] and political and health oriented turmoil. Yet they may not. And so there is still a guaranteed increase in cash value, even if no dividends are paid. So your actual cash value is guaranteed and it’s guaranteed to increase. That’s two separate things. Now, if they do pay a dividend, then there is a third level of that guarantee because once a dividend gets paid, it becomes a part of the guaranteed cash value. So while the dividends are not guaranteed to be paid, once they get paid, they become a part of the guaranteed cash value because dividends, while we talk about them as interest rates, we say, oh, the growth of the cash value, including dividends right now is 3.5% because our minds want to convert anything into an

[10:12] interest rate. Dividends are actually dollars. They are stated as dollar figures. It is dollars that are guaranteed. It is dollars that are increased. And so just like with the dividend, we want to reflect it back to an interest rate. We want to reflect the guarantee back to an interest rate and we can. What is actually guaranteed is a dollar figure. So if you have your dollars that are dividends added to your guaranteed cash value and then that guaranteed cash value has a guaranteed increase, that is a substantially certain aspect of this cash value. And I keep using the word certain or certainty because I’m avoiding the use of the word secure or security because as we know, that then leads us into the stock market and securities.

[11:05] Holy cow. What a misnomer, right? I mean, that’s the worst-named product in the world. It’s so true. The language that we use is critically important. I think one of the things our listeners realize is the language you use between the words typical and traditional. And so this episode, for me, as we are starting to wrap up, I’ve realized this may be the episode for listeners that are new or for listeners that may have a family member or a friend that are trying to understand it. Because I know when I first set up my policies, I didn’t understand all the details and I was so excited that I wanted to tell people, but I didn’t really understand enough to explain it properly. And this seems to break down a lot of those principles and the foundations. So you look at it and say,

[11:57] well, this actually isn’t something new. And this is something that’s been around for hundreds and hundreds of years and you’ve unpacked it beautifully. So now all of us understand. Well, thank you. It’s a joy to do and I can do it only because I’ve worked with the product for 30 years. And I’ve had Todd Langford of Truth Concepts help with his calculators unpacking the numerical and mathematical aspects of the product. And while it oftentimes can get thrown whole life insurance kind of into a black box of confusing items and aspects, it is a very simple, very straightforward product. Absolutely. Thank you for taking the time to explain this. Listeners, if this is an episode that you feel will help out your friends, family members, even your kids in our current

[12:46] environments, this is one to share with them. Let them know. Hit that share button on your device or on your computer. That way they can listen to it. And we will prepare another episode for you shortly. 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.