Case Study – Couple Earning $45k Each a Year – Episode 166

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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 hosts, best-selling 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 co-host and best-selling financial author, Kim Butler, and Kim is just back from an event where they went over a case study. This was a partnership meeting, if you will, between Truth Concepts, which we promote openly. TruthConcepts.com, I believe, is where you can find those calculators, download them for a free trial, if you like, so you’ll hear us mention Truth Concepts, and Partners

[00:54] for Prosperity, which is the company that Kim is currently the president of. So welcome, Kim. Thank you, Todd. Happy to be here. And this event was a fun, day-long case study of a couple that we’ll give you facts about here in a moment, and a series of seven meetings that we had with them. And it’s a hypothetical couple and just pulled from a variety of examples, but they came to us when they had just gotten married at age 24, and we’ll call them John and Jane Jones. I actually have a friend in Arizona named Joan Jones, so it does happen. So John and Jane had been each earning around $45,000 a year, and they had about $20,000 of credit card debt, and a cash value whole life policy that Jane’s parents

[01:53] bought when she was one year old. Now Jane’s parents had put quite a bit of money into this policy over time, and it had built up $37,000 of cash value. So their question to us was, should we cancel the whole life policy, cash out the $37,000, pay off our credit card, and then save the rest of that because we want to buy a house? So those are the facts. Are there any other things that you think our listeners will need to know, Todd? Are they currently making premiums on the whole life policy, or is it paid up at this point? It’s paid up, but are they voluntarily paying? Yeah, good question. It could be paid up, but her parents asked that she continue the premium and the pay to petition, which were $100 a month.

[02:50] So again, this was policy that was bought when she was one year old for $100 a month, and so their intention was to either cancel it or to keep it, and that’s part of the subject matter for the meeting. They wanted to cancel it, but she knew that her parents wanted her to keep it and wanted her to keep paying the premium slash PUA of $100 a month. Well, I mean, from a practical standpoint, it’s not replaceable either from the standpoint of she’ll never be one again. That’s correct. You are right. There’s a lot of value in that policy, and yet it’s also very understandable why they wouldn’t understand themselves, why they should keep it. So the first thing that we did was kind of interesting.

[03:37] They thought that they had about $20,000 of credit card debt, and we just did a quick look up at it was a 22% credit card, and they had been paying $370 a month. And it looked like there was about 280 months or so on it left over. However, when we got into the details, we found out that it was $20,155 of credit card debt. And at that 370 a month and the 22% payoff, the timeframe was 364 months. And it’s why it’s so important, and by the way, 364 instead of about 280. That’s why it’s so important that people have access to financial calculators, because this is a time value of money calculation, and it’s not an easy thing to do. In fact, I would borderline say it’s impossible to do with a regular calculator.

[04:43] And the Truth Concepts app, which is available on Android or iPhone, is a way to get a financial calculator. Of course, many, many other apps, they’re all free, but a financial calculator can really help you get a handle on some of your finances around things like time value of money that are not so easily demonstrated on just regular calculators. And it’s amazing how many people that I have sat in front of that will be in this exact situation and taking out a 15 year mortgage. Yes. And as we indicated, they did want to start to save for a house. So that was an important estimation of what it would take in order to do that. So the other thing that we did with their whole life insurance illustration is we asked

[05:34] them to get an enforce illustration. So the word is enforce, I-N-F-O-R-C-E. So prior to the meeting, they had gotten an enforce illustration from that policy that was now 24 years old, 23 years old, actually. And they had that for us ahead of time so that we were able to upload it into the Truth Concepts software. And as Todd mentioned at the beginning, anybody can get that software for 10 days for free. It’s truthconcepts.com. You can go into the support section and download the software. And you can literally just copy and paste an enforce illustration into the software in order to calculate the internal rate of return that this policy was earning. And I don’t remember the exact numbers. It was three and a half percent range, just like we know that insurance cash value

[06:31] is growing here in the year 2017. But that was a big surprise to them because there are so many times that people are told the whole life insurance cash value has a bad rate of return. And the challenge is they’re often trying to compare it to investments. And as we know, the typical definition of an investment is the stock market. And the typical rate of return that is talked about when people bring up the stock market is usually somewhere between 8 or 10 percent. And so people want to compare this cash value of life insurance to the 8 or 10 percent, quote unquote, that they’re supposed to get in the stock market. However, we also know that people don’t get 8 or 10 percent in their stock market

[07:18] account. But more importantly, that the cash value of life insurance should never be compared to an investment because it’s not. Cash value of life insurance is a liquid account. And because of that, it should be compared to savings and savings account rates, bank money market account rates or brokerage house money market account rates, even like something like a muni bond fund, any of those types of liquid assets. You could even argue maybe CDs, although they’re not that liquid. All of those interest rates, as we know today in 2017, are less than one half of one percent. Oh, and by the way, they’re taxable. So here we were able to show this young couple that they already had an asset that was earning in the mid threes without taxes.

[08:06] And if they truly wanted a place to be able to continue to save for a down payment on a home, there was no better place than this existing policy that they already had. And they needed to just pick up that hundred dollar a month premium and pay to petition combination contribution and keep right on going. One thing that I haven’t asked is what is the death benefit? The death benefit on this policy is grown to about three hundred and seventy thousand. So, I mean, you know, and I just want to clarify just for our listeners out there, that three and a half percent is net after subtracting the cost of insurance fees and everything else, correct? That’s correct. It’s after the cost of the insurance, after the cost of the commission,

[09:02] which, of course, was a long time ago and after the cost of running the company, because this was with a mutual company, meaning a life insurance company owned by the policyholders as opposed to one owned by outside external stock holders. So I just there’s multiple sources of value here. Yes, there’s cash value. But yes, there’s also three hundred and seventy thousand dollars worth of death benefit. That’s incredible. Absolutely. So after showing them the enforce illustration, which, by the way, is done on the life insurance values tool inside the truth concept software, then we showed them the funding calculator. And what the funding calculator does is show them the grossed up rate of return that they would have to earn in a taxable account in order to

[09:53] equal, not get better, but equal that cash value projection in the future. And it was somewhere in the five percent range. Of course, that’s going to depend on your tax rates, etc. But it just helped them see the value of this cash value. And then, yes, thank you so much for bringing up the death benefit. You know, on a side note, Partners for Prosperity actually had a death claim occur last week. And so, of course, our good thoughts to that family. But that does happen. This person is in the middle stage of life and the death was a surprise. And I think as it often is, but they certainly were not what you’d consider elderly. So, yes, death benefits important. Awesome. And I just want to I want to bring up another term that you

[10:41] use that we use a lot. And I just want to explain it a little bit. And that’s the term in force illustration. When you purchase a life insurance policy, that illustration is basically worthless. It’s an estimate of an estimate of what might happen. Is that the best way to describe it? That’s very well said, yes. So at different periods of time, if you have any type of life insurance, well, I guess term insurance wouldn’t matter. But you can request an in force illustration to show you exactly what’s going on inside your policy, where your money is coming in, where money is going out and how it’s growing. And I would encourage you, you know, to get one of those. And there’s probably a lot of stuff on there that you won’t understand.

[11:33] But, you know, you can certainly sit down with your agent or a prosperity economics advisor and let them show you what the different terms mean, because that’s real. The ones that you get in the beginning, no policy ever performs the way it was set up. Sometimes it’s a little better, sometimes it’s a little worse, but nobody knows what the future is going to be. So very well said. And if you’re curious about looking at this funding calculator that I mentioned, our newest book, Busting the Life Insurance Lies, in the back, Table G for golf, has a picture of this calculator and what it looks like and the various pages and pieces of information that are shown on it. It’s actually a transcript of a conversation that Todd Lingford and I

[12:22] went through in a separate presentation. So if anybody’s curious about seeing that, that’s in Busting the Life Insurance Lies. And that’s one of those books that I would probably recommend you getting the actual physical book with because it is going to be more helpful to look at that table. There is, however, an audio book coming. We actually had this one professionally done, and we’re looking forward to hearing, listening to how that turned out. And maybe not part of the intended discussion today, but parents think of how easy it would be just to set aside $100 a month now and look what it adds up to quickly. Absolutely. In fact, for John and Jane, it is the beginning of a very strong financial foundation

[13:15] that we were able to build for them. And we’ll have fun continuing this on in our next podcast as we take you further into their lives. Super. Again, this is Partners for Prosperity, and we welcome your comments at Hello at Partners, the number four, Prosperity.com. And Kim, I think you’ve got a gift for our listeners as well. Absolutely. The book Financial Planning has failed, has some great information in it about using whole life insurance and ways that it can help build that financial foundation for families. And so I encourage people to grab it. There’s an audio version as well as a physical book, and it’s only available at Partners, number four, Prosperity.com slash ebook. Super. Well, this is No BS Money Guy Todd Strobel.

[14:06] Special thanks to Kim Butler. Special thanks to our listeners. Keep sending in your questions and we’ll get you answers as quick as we possibly can. Thanks so much and take care. 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.