Why Overfund Whole Life Policies – Episode 482

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re going to be going from a high level and then we’ll dive into the pieces for overfunding your life insurance policy. So if you’ve had any questions, we’re going to cover the A to Z with a few details. This is such a fun subject and I know that it’s kind of hilarious that I’m so excited about it, but it’s so effective. So whole life insurance, a product that’s been around two to 300 years, four to maybe 600 years, kind of depending on what you choose as its starting point, comes from mutual life insurance companies, which are owned by the policyholders, meaning they’re not public companies. You cannot buy stock in them.

[00:53] And it is such an effective, efficient, boring product that just absolutely works. And so what I really want our conversation to be about today is why do we buy it? We can explain the product. We have lots of podcasts that explain the product and the dividends and the loans and the overfunding. And we’ll definitely get into that in some detail today. But I want to start with the why. Why on earth would you buy it? And Spencer, you go first. You’re a purchaser of this product. So am I. I want to hear why you buy it and I will share why I buy it. Yeah, absolutely. So I’ll set the stage. My first relationship with it was on the term side of things. And if I actually zoom back and I go really far back to one of my first

[01:48] relationships, it was when I first got into business and I was in my 20s. I was a real estate agent at like 21, 22 years old. And you probably remember, and I’m sure our listeners can relate to that time in your 20s where you put in a lot of effort to network and to meet people and relationships. And someone invited me to a meeting about financial services. And I went and it was one of these big companies that had a ton of agents. And I can’t even remember what they were called anymore, but they had some type of life insurance policy. And I didn’t really understand it. All I knew was like that you could create this life insurance that wasn’t just about a death benefit, but you could actually use the money.

[02:37] And that was one of my first relationships. My first committed relationship was on the term. And then starting the policy is like, wait, this is bigger than just a death piece. This is an entire lifestyle piece. And this is a legacy component, meaning it’s not just going to be a chunk of cash, but it’s going to be a vehicle that my children can use. And that’s the aha moment I had. That’s so cool. And it is interesting, you know, death is a guaranteed event. And yet our society here in America, and I would include Canadians, because I have lots of friends up there too. We just don’t like talking about it. And the product that we’re speaking about is not called death insurance, it’s actually called life insurance. And it’s

[03:32] unfortunate because term insurance really shouldn’t be called death insurance. It pays when you die. And it’s only good for the term of time that you have ownership there. And it’s an expense. And all of those are good things, just like car insurance is a good thing, and home insurance is a good thing. And yet I find that people in America, and I know this is true statistically, are woefully underinsured for when they die. Interestingly enough, whole life insurance is an asset. It is not an expense. It builds something called cash value. And it also has a guaranteed death benefit, just like term insurance has. The difference is that the whole life product is designed to be there for your whole life. That’s literally why it’s called that. And so because

[04:25] death is a guaranteed event, we absolutely positively know it’s going to happen at some point in the future, it would be nice if we could structure our life insurance so that we absolutely positively knew that we had it. And that’s why whole life was put forth. The additional reason that the product is so effective while we are living is it has a secondary account, if you will. So it has an account for death, and it has an account for life. And it’s called cash value. And so your whole life insurance cash value is the asset that exists today that you use while you’re living. And my single sentence, and I say it literally hundreds of times every day, is that the cash value of whole life insurance helps you

[05:15] solve emergencies and take advantage of opportunities. Solve emergencies and take advantage of opportunities. And this is why I bought it when I was 24 years old. I, like you, didn’t really understand what I was doing, but I knew enough or trusted the person enough to take a step in the direction of purchasing a whole life insurance policy. And then I repeated that action every three or four years, literally my entire adult life. And I’m to people like, what, you could have more than one policy? Absolutely. People build policies, and we think of them as portfolios of policies, just like you would build a portfolio of real estate or a portfolio of stocks or portfolio of crypto or a myriad of other things.

[06:05] And so again, circling back, the asset called cash value, of which I have numerous policies with cash value in them, that I added to my portfolio as my income increased. And not only did I pay the premium, which builds cash value. So that’s a really important distinction. Premium with whole life builds the asset. Premium with all of our other insurances just pays for the insurance. But I paid more than the premium. And this is the overfunding that you brought to the conversation early on by paying more than the premium by overfunding the policy, I get to build my cash value even faster, just like I would if I put more money in a savings account. And then there are also tax benefits that go along with that.

[06:54] There’s liquidity that goes along with that. There is the ability to solve emergencies and take advantage of opportunities. And these are the reasons why I buy whole life. Why I have bought whole life. Why my children buy whole life in their early 20s. Why I buy insurance, whole life specifically, on my older generation. So my father, my father-in-law, I own insurance on both of them. I own insurance on key employees. I own insurance on my own children still. And I still contribute or pay the premium. And I still overfund as I can the ability, it’s called a paid-up addition rider, to build more cash is why I keep funding them, even though I actually bought the policies many, many years ago.

[07:46] So for you, you’ve been stacking this for a number of years. But what was it and when was it that caused you to really open your eyes and understand and get serious momentum? I think that’s a great question. So as I mentioned, I bought my first policy at 24. I don’t really think I understood it until I was about three years into it. And I find that this is kind of a common timeframe for clients as well, is finally around the third year, it actually starts to build more cash value than what you’re putting in. In the early years, you’re paying for the commissions. You’re paying for the cost of the death benefit. You’re paying to run the mutual company that you are now part owner of. But by about that third or

[08:30] fourth year, every premium dollar and every paid-up addition dollar, which is the overfunding part, are going dollar for dollar to build cash value, more cash value. And you all of a sudden start to really see that ramp up. So I was in my thinking about around the early 90s when I was 24. And somewhere in the middle of the 90s, 94, 95 is when I hit that three-year mark. It was also right around then that I believe we had a big stock market bobble, really is the better word, where it took a dive and crashed or corrected or whatever word you want to use. And it was very interesting because I was in the habit of every year measuring all of my accounts. And so I looked at my stock market account and it was down.

[09:19] And I looked at my whole life insurance policy and it was up. And it didn’t take a whole lot of time to have that sink in while the stock market on an average basis may earn more than the whole life. That’s an investment. And there are good and bad things that go with investments. Like they go up and down. My whole life, however, is a savings equivalent. And it goes up absolutely every single year, no matter what is going on in the economy, no matter what is going on the stock market, no matter what is going on the real estate market, my whole life insurance cash value goes up. And that year was a big eye-opener for me. Okay, that’s interesting. And I’m asking these questions because I think of terms to

[10:08] investing in the stock market or investing in real estate, because often I remember I bought my first stocks when I was 18. I walked into the Merrill Lynch office, because this is pre-internet days. And it’s like, hey, here are the stocks that I want to buy. And they’re like, you’re an 18-year-old kid, but I did it. And that’s how it was. And I remember our first rental houses. But it wasn’t really until I had a little bit of time walking in a little bit of light, not in complete darkness, until I actually understood the wealth piece of that. So for you, it took that three-year period. You saw the difference between what was happening in the stock market. You saw what was happening with your policy. I’ve noticed, and here’s a wealth question. I’ve noticed wealthy people,

[11:00] they’re able to defer the gratification or to defer the results for a longer period of time, whereas opportunity seekers, that window is shorter. Have you found the same? Very true. And there’s nothing wrong with having some short-term ambition, as well as some long-term goals, or even a long-term vision, which I would separate from a goal. And yes, us Americans, and again, Canadians, just as guilty, we are very short-term in our perspective, and it is hard to look long-term. And yet, thankfully, life insurance is not as long-term as real estate. Life insurance is not as long-term as a 401k plan or a Roth IRA or a 403b plan, where you’re locking money up to 59.5. So if we can get people over that three- to four-year hump and get that momentum where

[11:56] they can actually see the increases every single year, then I know that that product will serve them the rest of their lives. And this is interesting. I have clients that are in their 20s that start brand new. I have clients that are in their 50s start brand new. I have clients that are in their 70s that start brand new. Because a healthy 70-year-old today has 30 to 40 years to live. That’s a long time. And building that savings equivalent, because the life insurance is a better, more efficient place to store cash, because the life insurance goes without tax, and because the life insurance can be borrowed against and paid back and continually funded, so it acts as a control of the human behavior

[12:44] part of building and keeping wealth, because there’s a loan and there’s an interest rate and there’s a payback suggestion. It’s actually completely controlled by you, the owner. Nevertheless, that entire structure I find is very, very beneficial for our clients, be included, because we are human beings and we don’t want to long term and we don’t want to just save money. But if we build a system that can support a habit, then we will get results. Absolutely. So as we’ve covered a lot of the why, and I feel like the why is important, because depending on how much information a person needs, or on being able to have the conversation inside the head, at least for me, this is how it happens, I learn something and

[13:33] I have to have a conversation with myself and think it through, and then often I’ll have a conversation with my wife. I’ll teach her something new that I’ve learned, and then she’ll ask questions and then that has me go through some more. So hopefully for all of you listening right now, you’ve had a few questions arise. For any of those specifics, if you don’t have the answer, go to hello at ProsperityThinkers.com and you can get those specific questions answered. You don’t have to read through all of the books. That’s a great way to skip ahead of the line. But as we talk about the overfunding, let’s dive into one piece that you mentioned, which is you’ve had multiple policies on yourself, on your children,

[14:19] on employees and others, and then you’re overfunding those. Can you give us a snapshot? Because I want to have a clear path of understanding for listeners. Absolutely. So it really starts with your ability to save. So if you’re young and you can save 100 a month, awesome. If you’re older, it’s 500 a month, awesome. If you are wealthy and it’s 8,000 a month or 80,000 a month, I mean, the zeros really are irrelevant. You take your ability to save monthly or even annually and you start there. And that is a function of premium. And again, premium builds cash value and pay to petition right, which is the overfunding part. You start where you are. You start where you can. Then as your income rises, you purchase

[15:07] additional policies because that raises the amount of money that you can and will contribute. We have a whole podcast about the premium shows up like a bill, and that’s what gets paid. If our savings account had a bill that showed up, we would actually save money as a verb, but it doesn’t. And so us human beings don’t save. But because the premium and the pay to petition show up as a bill, and you just keep layering that on. Now, I’m like any normal American. I’ve had years where my business has faltered and we haven’t had the income we were used to and we’ve had to deal with solving emergencies and all of our cash value has contributed to making that ride much smoother. So that while I try to pay premium

[15:58] pay to petitions, which are the overfunding every single year, I am not able to every single year. For one thing, now my pay to petition opportunity is a lot bigger than I can handle, but that’s fine. I contribute some to the overfunding and then I pay the premiums and the whole loan environment, borrow against it, pay it back, borrow against it, pay it back. But because I control that payback, that enables me to pay back the loan as I’m able, while at the same time, I’m paying my base premium. Now, while I’m paying back the loan, maybe I don’t do the overfunding. And so those are some of the technical things that I can help people with is to figure out the order that works best, which is basically premium loan payback

[16:46] and then pay to petition rider. And we always keep our pay to petition rider open by just putting in the minimum, which is usually a hundred or a couple hundred bucks a year. So it’s pretty easy to keep it open for future opportunities when I know my income will rise or maybe I’ll sell a piece of an investment that I want to now use to pay a loan back or to contribute to the annual premium or the pay to petition overfunding capability that year. So it’s a very fluid environment that really falls and rises with my own financial capability. So well said. Like that can be something that we’ll get to use over and over. And for you as a listener, you’re hearing that one, you are the expert. I mean, you’re the one that I

[17:32] turn to for any of these questions and to know that you have a portfolio of these, that there will be some lean years and there’ll be green years. In some years, you’ll be contributing a ton. And then there are other years that you’re going to be using the policies and leveraging and however that looks. And now you’re attaching it with an entire life span versus so often I hear opportunity seekers and they’re just talking about a quick win and then they’re out to the next project. This is lifestyle. So Kim, very helpful for any of you that are listening. If you have specific questions, if you’re wondering if right now is the time to start, send an email to hello at ProsperityThinkers.com. What a great way to explain that for us, Kim. Thank you so much.

[18:22] It’s a joy. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.