Case Study – Part 2: Couple Earning $45k Each a Year – Episode 167

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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 co-host and the president of Partners for Prosperity, Kim Butler with us. And we’re going to be talking about John and Jane Jones 1.5. We started a discussion on this and we went a little bit long. We basically have a married couple earning $45,000 a year. Jane has a whole life insurance policy that her parents bought for her at age one. They’ve been making $100 a month payments on it.

[00:51] It now has a $37,000 cash value, a $370,000 month death benefit. So that’s a nice asset for a young couple to start off with, but they’ve managed to accumulate $20,000 worth of credit card debt that they’re currently paying $370 a month. They have income of $45,000 a piece per year. And they basically have come in and said, you know, what’s our best options? I mean, think of it at age 24 now, their life insurance companies are illustrating the policies out to what, 121. I mean, there’s a lot of life to think about here. Yep, absolutely. Well, I thought it would be fun for our listeners to hear what else we did with John and Jane as we progressed in that first meeting with them. And that is that we showed them the borrowing strategies calculator, because one

[01:50] of the things that it’s tough for people to get their arms around is the ability to borrow against a whole life insurance policy and not affect its growth. So they did not understand how whole life works and they didn’t believe that you could actually borrow against it and not impact it. Now, one could argue that with direct recognition, there might be a small impact, but I always want to remind people direct recognition can have either a positive or a negative impact. People automatically assume it’s a negative impact, but sometimes it’s actually a positive impact. However, it is so minor that in our opinion, it’s not even really worth discussing, but I bring it up for those that are aware of it, just so

[02:35] they don’t get sidetracked with it. So what we did is we showed the borrowing strategies calculator to John and Jane so that they could see how they could borrow against their $37,000 of cash value of whole life insurance to pay off the $20,155 of credit card debt, and then they used the same payment that they had been making, which was 370 a month, but now instead of having to pay a 22% credit card debt, they were paying a 6% life insurance loan. So of course that’s going to make that loan get paid off much faster. In fact, instead of the 365 months that it had been, we shrunk that down to just under 60 months. I mean, it was just over, I think it was 61 months. And so that is going to make a big, big difference for them.

[03:30] And then of course, we also recommended that they continue to keep paying the $100 a month premium slash PUA contribution so that their policy could continue to build up because they wanted to be starting to save for down payment on a home. A couple other things that we helped them with is there’s a fun calculator called maximum potential and what it does is it takes anybody and shows how much money will run through their hands in their lifetime. And it’s shocking, you know, this is a $45,000 each. It was, they were each earning $45,000 a year couple and without any work at all, three to $4 million runs through their hands. And so it’s just instructive for people to see that kind of number. And then we also had fun with an app that everybody has on their

[04:33] smartphone and it’s an aging app. And Todd, I don’t know if you’ve heard about this. The one that I grabbed on mine is called aging booth. Are you familiar with these? Oh yeah. So, so tell everybody what they do. They actually, you photograph yourself and then you put it through the different screens or I’m not sure exactly how to explain it, but it will give you an age enhanced version of yourself, correct? Or anybody, or anybody you take a picture of, doesn’t have to be you. Right, right. So it’s something that I found out about at abundance 360, the Peter G. Amanda’s event that I went to and I’d heard about it before because I’d heard that bank of America and also Merrill Lynch, same company were having

[05:21] good results in getting people to save more money by showing them what they looked like when they were older. So, you know, whether that does any good for you or not, you can make your own decision, but you might have fun with the aging booth app. And I have to admit, I didn’t like how I looked when I was a lot older, but, oh, well, so we used it though, to help John and Jane Jones get real focused on saving a little bit more. And then something else that we encouraged them to do is to go ahead and buy a term insurance policy. You know, so often people get all caught up in this discussion of whether they should buy terminivus the difference or buy whole life insurance, and that’s not really where the focus should be.

[06:08] The focus should be on getting both. You want to have your whole life insurance for the good cash value it will continue to build, and you want to have your term insurance because that’s going to give you that large amount of protection that is available when and if death occurs. So the term insurance, of course, is only going to be good for 20 or 30 years, but especially, you know, this was a younger couple, they’re probably going to have kids, et cetera. So we each had them get a million dollars of term insurance while they were continuing to build their wealth with the existing whole life insurance that they had. And then we shared with them a fun story that I’ll just read to our listeners quickly so that they can get the benefit as well.

[06:53] And it’s on actually a very elderly, now passed on life insurance agent that helped people all over his small little town in Ohio. And his name is Ben Feldman, and he had a great line. And it is that when you walk out of life, your insurance money walks in. And it helps people understand the, I guess you could even say moral obligation that we have to our families. If you walk out of life or when you walk out of life, your insurance money walks in. And Ben was actually in the hospital for something that he needed to deal with. And he’d been working for the life insurance industry for 50 years. And in honor of him, they had a sales contest for the month of February. And this has been, I don’t know, maybe 15 years ago or so.

[07:53] And so all the sales agents were going to try to hit these big numbers. And Ben ended up winning his own contest because from his hospital bed, he called on all of his clients and got them to buy additional insurance that they wanted for when they walked out of life to have this money walk in. And so even though, and he was with a big company, I’ll let the company remain nameless. Many people know who it is anyway, but it was funny. He won his own contest. So that was kind of the wrap-up for John and Jane. Now, of course, we also recommended that they get their will done. So a will, or maybe even going as far as a living trust, always something that we’re recommending that our clients do. And so for our listeners, if you need help in this area, we have a

[08:49] attorney that does living trust work nationwide over the phone and the web. So like you’re used to meeting with us, let us know if you’d like that contact information, they have a fabulous process that enables you to get a will and a living trust done efficiently and effectively. And then more importantly, they help you fund the living trust, because if you don’t have that document funded, it’s not going to do the good work that it needs to do. Additionally, we had John and Jane get a liability umbrella. So this is a very inexpensive policy that you most often get from your car and home insurance agent. The liability umbrella is, as the term implies, designed to protect a lot of different areas, and it’s in addition to your car and home

[09:38] insurance, but then what it often enables you to do is raise your deductible on your car and home. So because they had good savings, the cash value of life insurance, they were able to have a higher deductible on their car insurance and a higher deductible on their home insurance. And then that enabled them without any additional out-of-pocket costs to them at all, the ability to get a liability umbrella. So the umbrellas are usually million dollars or $2 million. I would say average cost is in the maybe $350 a year range, and it’s a very beneficial additional piece of coverage that you can have that will help against any kind of liability. Quick technical question. Are in this particular situation, these folks are savings for a house.

[10:31] Would you still recommend the umbrella policy? Yeah, that’s a good question. Yes, because I think even as renters, it’s a wise thing to have. And that way they already have it. And when they buy their house, it’ll just be something that they can continue with. I think you could argue that maybe it’s not necessary at this point, but to me, it’s an inexpensive way to protect. And if you should ever cause major damage with your car, as an example, you would want to have that liability protection over and above your regular car insurance. And then the other thing is we talked about the fact that we were going to be paying off the debt at $370 a month. We have a hundred dollars a month going to life insurance.

[11:18] We have basically $200 a month. If you break their term insurance down from an annual basis to a monthly basis going for insurance, we’ve got $90,000 coming in. What would be your strategy for savings, investing, buying the house? Where would you go on that? Excellent. So in the next meeting, we’ll cover the house issue in particular. But at this point, I would encourage that couple to get their savings ramped up to closer to the 20% level of their income. And that may take a little bit of doing, but if they’ll continue to pay the life insurance premium and the debt payoff, as you’ve indicated, that debt is going to be reduced to zero in five years. And that was the timeframe that they had given us for wanting to buy the house,

[12:14] at least in their initial set of goals. And then I would also encourage them to continue to save money just in a regular savings account and build up additional dollars that they could use either to jumpstart another life insurance policy with, or potentially to use as down payment money on their house, which, like I said, will cover the house discussion in the next podcast. And so this couple was going to do that. And then as we progressed with them, there was also a qualified plan or a 401k plan that came up as part of the discussion as well. Not to say surely I’d want to max out my 401k. Well, that is the typical language that’s out there, that’s for sure. And so we’ll get into that discussion in another podcast, but just as a quick

[13:07] tip for those of you that are super curious about it, we recommend that instead of M-A-X-ing it out, that’s the qualified plan, 401k arena, you M-A-T-C-H it, so match instead of max. And we can actually prove that you can get a higher rate of return on your 401k money if you only fund to the match level, M-A-T-C-H, as opposed to the M-A-X level, you can get a higher rate of return on the money that’s in there. And so that was something that we took a look at from a calculator standpoint with this couple as well. And just as a quick way to end this, what is the amount of risk that you have in your 401k? Last time I checked, I think it’s 100 percent. Think about that 100 percent. You could potentially, you know, people talk about how risky investments

[14:12] are. There are a lot of people who are just now breaking even from 2008. Wouldn’t you say that’s about true? Yes, absolutely. I see it all the time. Super. Well, anything else you want to add before we wrap up? Always gratitude for our listeners. I just am hearing more and more that people are benefiting from our podcast, so I’m so grateful for that. And to continue to reach out to us with questions and comments that you’d like us to cover, hello at partners number four, prosperity dot com. And also, we will have some new things. We’re probably going to have some video around this particular case study. And we haven’t decided how we’re going to use it, but we hope to make it available to our listeners.

[14:56] And we’re also going to be expanding our YouTube channel with some money myths. So you might be on the lookout for those as well. We’ll alert you when they’re there. Super. Well, keep in mind, this is your podcast. So we’re here to answer your questions. And we’d love when our listeners suggest the topic. So we were there is pretty much no financial topic off limits. If you want to disagree with us, we will gladly even have that discussion. Thanks so much to Kim Butler. This is no BS money guy, Todd Strobel for the Prosperity Podcast. Say and take care, everybody. 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.

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