The Multiple Uses of Life Insurance Premiums – Episode 113

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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 best-selling author Kim DH 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 I have my co-host and continuing to be a bigger best-seller financial author every single day With the more books that are out there and we certainly appreciate her and we appreciate all of you who are buying those books as well today we’re going to be talking about multiple uses of paying premiums on life insurance, so we have a lot of people that are They’ve got a limited amount of funds

[00:50] They’re trying to do the best thing that they can with them and we want to make sure that everybody fully Understands this ability to get multiple jobs done with each of those dollars so that it’s flowing through that account Not just stuck there. Did I do that? Right Kim? That is perfect through not to are the most valuable Verbs when we think about our whole life insurance premium and this came up because a client asked the question When can I stop paying my premium and they’re in their mid 40s, they’ve got good income They’ve had their policies for I don’t remember seven to ten years So the answer is because they have contributed also maximum paid-up additions They could stop pretty much any time now if they hadn’t contributed maximum paid-up additions

[01:46] They wouldn’t be able to stop paying their premium maybe for another ten years but Having the ability to stop is very very different from is that the best thing to do to stop? And so that’s what I want to talk about. It’s the challenge that the word premium still is in our minds a cost and That’s normal because our insurance premium is a cost home insurance premium is a cost and as we know There are many other things where we use the word premium that’s a cost But we also know that we use the word premium to mean awesome good things like premium gas or the premium program or You know premium cut of beef or whatever it is. And so when we’re thinking about Premium as it relates to whole life insurance. We need to go with that second definition

[02:45] So let’s talk about what happens when you pay your premium and I want to focus on all Of the things that happen now We’ve had other podcasts where we talked about how many jobs a dollar does or a premium dollar does when we run it through a life insurance policy and We can focus on that today as well But I really want to get clear on this concept of the word Through that you brought up not to so your premium has the ability to run through your policy and also get clear on the capability that that provides you that the Paying of a premium does so many good things for the policy So let’s jump in and let’s just identify that every time we pay a premium we are contributing to cash value and when you are

[03:50] about seven years into a policy, especially again if you’ve put in maximum pay the petitions a Single premium going in on a particular year now, I’m talking just to not the through part Is going to Approximately increase your cash value that single year by Around double the premium now, of course It’s not because of that single premium the single premium doesn’t double the cash value It’s all of the other years But that single premium is causing in that particular year a doubling of the cash value Is that making sense or is that getting confusing? No, I think you’re making sense. I would like to just clarify though dear 45 year old person in the example Wanted what we asked you about stopping their premiums

[04:44] Also has the need of a good place to store their cash to correct Exactly, and that’s the beauty of paying a premium is it forces an increased storage of cash and my question back was If you don’t pay the premium where are you going to put your cash? Because what I have found is that every family as they get older and this doesn’t ever stop It doesn’t matter whether it’s 40 to 50 60 70 or 90 to 100 every family wants to have more liquid cash and When we think about the pain of a premium as the increasing of our liquid cash Then of course we want to pay those premiums and back to the seven-year time frame people always look at When am I breaking even on my life insurance policy and there’s two answers to that. There’s a

[05:44] Cumulative break even in other words your one plus your two plus your three plus your four. How many Dollars does that equal? Compared to my total cash value and again maximum pay to petition That cumulative break even is About the seventh year no maximum pay to petition that cumulative break even is more like the 18th or maybe 17th year But there’s also an annual break even in other words If I don’t consider all the years in the past however many years one year two year five year doesn’t matter I just look at this single individual year just your three by itself just your seven by itself just your 10 by itself We can again with maximum pay to petition show an annual break even usually around the second year

[06:39] If there’s not paid up additions, then we can show a break even around the fourth or the fifth year So you’ll notice in both examples that the paid-up addition roughly halved H-a-l-v-e-d the time frame or you could say it this way if you don’t pay a pay to petition it roughly doubles the time frame So we’ve got to remember that paying a premium builds cash value And yes, it does a variety of other things, too We’ll talk about here in a minute, but the more and more cash that you want Cash that you and let’s use our little clue acronym that we have in our live your life insurance book Cash that you control cash that’s liquid cash that you can use for whatever you want and Cash that acts like equity meaning you’ve got the ability to borrow against it while it keeps growing

[07:35] So that’s clue clue control liquidity use and equity The more cash that we have the more control we have the more liquidity we have the more Capability we have the more things we can do with that money and there were just we only have $25,000 of cash value. Well, we could borrow against it to buy a car but if we have $25,000 in cash value we could borrow against it to do a Bridge alone. We’ll talk about that in a little bit if we have $250,000 we could borrow against it to do down payment on a real estate deal So we want more cash and premium builds cash Premium also builds additional life insurance, too it does every time you pay a premium and every time you pay a pay-to-pedition either or Build the death benefit and that is a very misunderstood piece of whole life. I’ll hear

[08:41] Experts quote-unquote talk about oh you don’t get both your cash and your death benefit And the answer is of course the insurance company keeps some of that. I mean they have to make a profit but you do get your cash in the form of an Increased death benefit a million dollar death benefit is not a million dollars ever again because of two things one there’s a guaranteed increase in cash value and that causes that death benefit to rise and then to If a dividend is paid and we know that in most cases whole life insurance companies have paid dividends for well over a hundred years That also Causes that death benefit to rise now We do want to make clear that if there’s a loan on the policy That the loan will be paid off before the rest of the death benefit is paid to the family

[09:41] But a million dollar death benefit without any pay-to-peditions Typically triples Over a 30-year period and if there’s pay-to-peditions it can go even higher than that So that Rising of a death benefit is a very very important point Now there’s some other things the premium does help me remember All right. I just you know one more thing on the death benefit That’s money that you don’t ever have to qualify for either correct That is correct boy. That’s a huge point in that if you start out your life with a death benefit that is Especially on the whole life side not going to be equal to your human life value human life values 10 to 15 times income so we want to have let’s say we have a person earning

[10:35] $100,000 a year and they want to have a million five of total death benefit because that’s your human life value but they’re only going to pay for maybe half a million dollars of whole life insurance and then they’ll have a million dollars of term insurance and Let’s say their income never rises Well over time that half a million dollar whole life policy will actually grow to a million five of death benefit that As you said so well, they never have to qualify for it. They never have to buy another policy They never have to pay any more of a premium Let’s just say that their premium was $10,000 a year and let’s just forget pay-to-peditions for a minute They wouldn’t ever have to increase their premium and yet over time their death benefit would triple that is incredible

[11:27] That’s one additional Benefit that we get by just continuing to pay the premium I think it’s important to talk about the minimum paid-up additions and maximum paid-up additions and the flexibility that’s created Sure, so most insurance companies have a minimum pay-to-pedition of either $100 or $120 don’t ask me what the magic is around 120 that just seems to be where a lot of them sit is one of those two numbers and so we’ve got a situation where the minimum payment of let’s just call it a hundred bucks is a minimum like literal per year that you absolutely want to Pay and your maximum is going to be Approximately one to two times your premium now that maximum number So let’s just put an example

[12:29] Let’s say you’ve got a $10,000 annual premium and let’s say we calculate your maximum and you’ll pay the petition Dollar figure on top of the premium for $12,000 That maximum moves around based on age and also based on the dividend scale because the modified endowment contract Which is what determines the maximum paid-up addition is based on a lot of different things that gets tested every year So it’s a number we have to give you every year, but let’s just for now say it’s 12 grand Well, then your minimum is a thousand. Sorry a hundred and your maximum is 12,000 and you could pay 6,000 or 2,000 or 8,000 or any other number in between now there are some Subsequent rules that are going to impact your maximum and it totally depends on the company

[13:22] But essentially without getting too complicated for the block for our podcast here that goes on a blog got confused there We want to identify that literally you have between $100 and $12,000 every single year to choose How much you’re going to pay your paid-up addition again? There’s some rules that might limit that a pad but for the most part those are the facts I think a lot of our listeners are self-employed and you know, it’s not the same paycheck every year So that that is a tremendous flexibility when you can sit down at the end of the year And these are the conversations I love to have where the people are saying, okay How much can we put in because right now in today’s environment? That’s the safest

[14:09] most liquid place that’s earning a decent rate of return Absolutely, and we can actually put a calculator to that rate of return and for most of our clients today It’s going to fall in the four to four and a half percent range If you’re in the maybe 60 70 age range and the life insurance is on yourself It’s going to be a little bit lower than that but that is Amazing and we want to re identify that this is not an investment Well life insurance is your controllable liquid usable act like equity cash liquid cash we need to be comparing that to the bank savings account rates of 0.2 percent or whatever they are taxable by the way and life insurance growth is not taxed and that is an Incredible difference. So it’s very very important for people to realize that value that they have in

[15:08] storing liquid cash by paying a premium in their Existing whole life insurance policy again doesn’t matter whether they own it on themselves or own it on somebody else The pain of that premium literally should go on and tell they the owner the payer of premium are No longer earning an income Which means if you work until you’re 70 or 80 you truly want to pay your premiums until you’re 70 and 80 I will readily admit that I don’t like it myself when my premium bill shows up I know how sometimes frustrating disappointing scary that is because I’ve been in Years when I didn’t have the money to pay the premium I’ve been in years when I had the money to pay the premium, but I would really rather buy patio furniture

[16:02] You can do both as long as you then pay the loan back from the use of that Patio furniture you can do both now if you don’t have the money We’ve got a variety of blog posts and podcasts on what to do if you don’t have the money to pay the premium but Just view your premium bill as your annual reminder to save money And if you have more than one policy view your premium bill as your monthly reminder to save money Of course, some of our clients are contributing monthly on an automatic basis anyway, which is fabulous that’s a great way to do it and Some of my policies are on annual some of them are on monthly But I pay my premium bill some way somehow Every single year slash month because that builds my savings and the more I build my controlled

[16:53] Liquid usable act like equity savings that cash value that acts like savings the more peace of mind I have around my overall financial situation You mentioned peace of mind and I think that’s another thing that we haven’t yet talked about is the fact that you know Maybe you would feel comfortable Having a larger mortgage or a nicer home because you know that you have that emergency Policy in there to pay off if your relatives needed to if something happened to you Yes, that’s correct and now you’re talking pay off in the event of death or pay off While you’re still living but you have problems either way the answer is yes And as we’ve shared before, you know, we like to think of our household as a house of both

[17:47] Like I gave the example earlier we’ve literally borrowed against our cash value to get patio furniture and then paid it back within a year or two and Of course, we brought against our cash value to pay our premiums when we were not doing very well But if we have extra cash it goes to pay the premium if we have extra extra cash it goes to pay the loan it should always be in that order get your premiums paid and Then the loan and then your third spot for extra cash is the paid up additions writer Super but we’ve been going on here for a little while now Kim, do you want to make our usual offer to our listeners? Absolutely, we have a fabulous ebook. It’s called financial planning has failed if you haven’t read it or listened to it in a while

[18:33] It’s worth another grab. So that is partners number four Prosperity calm slash ebook It’s available as about a 60 page PDF or an audiobook and we are working on some additional books We want to do a quick. Thank you to everybody that Downloaded the books when we had them free on Kindle They’re available on Amazon and we’ll have another one out in a couple months or so Super well, once again, this is the prosperity podcast. No BS many guy Todd Strobel Thanks so much Kim Butler and we still encourage questions We like questions keep sending them in and asking questions. Take care Kim 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 comm if you liked this episode, make sure you subscribe and leave a review