All About Life Insurance – Episode 642

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, in this episode, we’re going to be unpacking life insurance. That means we’re starting with everything of whole term. We’re talking about death benefit. We’re going to go through all of those pieces that will be helpful for you. This is probably one of those episodes that would be fundamental that you can listen to again or share with others. So Kim, I can think of no better person than to have this conversation with. Well, it’s such a funny space because my start in the life insurance industry included a phone call to a friend that was an estate planner. So this person worked at a law firm that absolutely knew about life insurance. And I said, I have a moral conflict with this because I’m 24 years old.

[00:46] I’ve never heard of the product and I am being asked to sell it because I wanted to do full service financial planning. This is before the internet and I literally because of the health space, because I have a very particular approach for my own health and it includes basically no medical. And so because life insurance has to get physically approved and in the older years you had to do a lot more like blood samples, urine samples, et cetera, to get approved. Some of that’s less than these days, but I literally had a moral problem with it. And she said, Kim, it’s just a product. It’s a financial product. And the strategies that you use with it can make a difference. And you don’t have to overthink it.

[01:32] It’s a financial product. It has its place. So great. I went on and learned about it. And what’s interesting is now 30 plus years later, I do not have yet any one particular story that caused it to hit my emotions the way that is sometimes necessary for people to have a good relationship with the product. So for example, a lot of people in our industry, they’ll end up with an early death claim. Somebody passed on young or whatever that just really kind of rocked their world. I have had some death claims, but nothing of super big substance. However, what has hit the emotional side is the solving of emergencies and the taking advantage of opportunities. Now what’s interesting is a lot of people,

[02:17] and I will back up and give a quick description of the various types of insurance here in a minute, but a lot of people have a perception that the way to take advantage of opportunities with the life insurance cash value, particularly whole life that has cash value, is to borrow against it and pursue real estate or a business or whatever they’re going to be borrowing against it to invest in. Interestingly enough, what I’ve seen is that it’s the presence of that cash value unborrowed that has created the opportunity. And what I mean by that is it’s a really solid mix of certainty and uncertainty. So cash value of whole life is a very certain asset. Some people would use the word secure asset,

[03:02] but cash value of whole life is from a mutual company. So think Guardian, New York Life, Northwestern Mutual, Penn Mutual, Lafayette, Mutual Trust, Foresters, there’s a few others, that has a guaranteed growth rate that’s very conservative and it has a dividend history that’s also very conservative, typically paid every year. So this is your asset. And then it has a thing called a death benefit, which is what would pay in cash to your family if death occurred. So you have kind of two accounts in one. You have the protection component of the death benefit and then you have this space of cash value. Now, backing up to the larger lens of where your assets are, if you have an asset that is certain, C-E-R-T-A-I-N, absolutely going to be there for sure,

[03:52] that enables you to pursue uncertain assets at a much higher rate, caliber, capability, opportunity environment that you wouldn’t necessarily pursue if you didn’t also have the certain asset. So cash value of whole life. So whole life is the product. That’s an asset. Then you have a death benefit or a face amount. Those terms are interchangeable. That is an amount of cash that would pay if you die. Whole life, W-H-O-L-E. Backing up from that, you have term insurance. That’s what most people are familiar with, life insurance. It’s good for a term of time, which is great. It could be a one-year term. It could be a 30-year term. It could be 15 or 20. I don’t know that there’s 40-year term out there, but hey,

[04:37] if we get 40-year mortgages, maybe we’ll get 40-year term insurance. So term insurance does its job in that the protection is there as long as you pay for it and as long as you’re within that period of time, that term of time. It’s very simple. It has no asset. I encourage everybody to have lots of it. It always interests me when somebody says to me, I have insurance at work. And I say, great. How many times your income? And they’re like, well, maybe one times my income. Oh, my gosh. Life insurance offer, life insurance companies offer up to 30 times your income. And so when somebody says I have life insurance or on the alternate side, somebody has, well, somebody says, I already have a policy.

[05:24] You can have as many policies as you want. The number of policies is irrelevant. What’s relevant is that you are insuring your biggest and best asset, which is your ability to get up and go to work every day at a amount that’s known as human life value. And so think about it this way. If you own a $50,000 car, you’re going to insure that car for $50,000. If you have only the need for a bicycle, you’re not going to insure your $50,000 car for a thousand bucks because all you need is to replace your bicycle. That makes no sense. We would never do that with any other type of environment. And yet the life insurance space has gotten into this needs analysis thing. How much do you need has nothing to do with anything.

[06:13] If you die, you are an economic engine and you want to be replaced. And so that’s what human life value does. So I encourage people to come at it from the top down and the bottom up. The top down is the term insurance. Probably life insurance death benefit that is your human life value. Let’s just put some numbers to it. You’re a 30 year old. You’re earning a hundred grand a year. Your human life value is $3 million, rough numbers. So you want to have a total of $3 million of coverage. Top down is going to be $3 million. Now, if you’ve learned a little bit about whole life insurance, and I’ll talk about Universal and its cousins in a minute, then you probably want to buy some whole life also.

[06:54] Well, let’s say that you can do $500 a month, $1,000 a month, whatever your cash flow capability is. Let’s say that buys a $500,000 life insurance. So this is whole life. Remember, you have an asset and the protection and you’re going to spend your $500 or $1,000 a month. Maybe you’ve got some paid up additions and you’ve got because you heard on the web that you need the maximum cash value, minimum death benefit space. I don’t know how much of a fan of that I am today. I have been in the past. Let’s just say that it’s $500,000. So now what you want to do, you have your $500,000. That’s bottom up. That’s your whole life. That’s your savings capability, purchasing an asset called cash value, and also the protection, $500,000.

[07:37] And then you have top down $3 million. So that means you’re going to have $2.5 million of term insurance to fill that entire human life value amount. And you’re going to have just those two policies. Well, over time, you’ll convert or switch some of the term insurance to whole life. Quarter million at a time, half million at a time, million dollars at a time. I did this starting when I was 24. I’ve done it all the way. I’m almost 60. And our family, not only on me, but on everybody else, including some key people, have a total of 19 policies. We’ve gotten rid of our term insurance now, but a lot of it was converted over time. Our kids are grown and gone and completely on their own financially.

[08:22] So that is the space that you want to be thinking about is top down, bottom up as it relates to your human life value. Now, there is this whole life product that I’ve spoken about. WHL at Leeds, been around a couple hundred years, longer than that in Europe. And in the 1950s, about 70 years ago, a product that I would call a cousin was brought on the scene called Universal Life. There has since been variable universal life. There is also indexed universal life. Sometimes it’s called equity indexed universal life. And all of those products, anything with the term universal life or sometimes you’ll see the word flexible premium to indicate that it’s universal life are not whole life. They are not certain.

[09:10] They do not have guarantees. And even if you put a guaranteed writer on it, it is not the same. So without getting into a huge, long and very boring discussion today about universal life and whole life, I will just say that there is a massive difference. And if anybody is telling you that they are the same thing, that is categorically incorrect. And I cannot tell you how many times I’ve had conversations with experts. Maybe they were in the media. Maybe they were actually life insurance agents. And I’m trying to talk with them about whole life. And every time I bring up a point, they answer with a universal life answer. I can tell they don’t even understand that there is a difference. I didn’t used to understand that there was a difference.

[09:56] I spent my first five years in the industry thinking that they were all the same. Holy cow, have I seen the difference long term. Amazing, incredible difference. And if I had to give a quick analogy as to the difference, it would be this. We all know what trailer homes are, mobile homes. Okay, I’ve lived in one. They are amazing for a short period of time. We were building our home on our farm. We wanted to live on the property. We lived in a trailer home for three years because it took us a while to build our house because my brother-in-law was doing it. It’s a trailer home. If the wind comes, if the rains descend, that trailer home can have some problems. And yet we still call it a home and we call it a house even, a mobile home, right?

[10:47] It is not a brick and mortar foundation, cement, metal roof or tile roof or what have you house. So we are all very clear and this is not a political statement or a judgment at all about people that live in those spaces, but we’re all very clear about the difference between a mobile home and a regular home. Universal life of any sort is like that mobile home. Like you’d still call it a house, but it does not have the longevity or the guarantees or the certainty that whole life has. Whole life is cement foundation, brick and mortar walls or possibly even cement walls, wood and concrete combined if you want is fine, very solid roof and absolutely going to be there for decades, if not possibly centuries,

[11:39] which you said it so well. Holy cow, human beings, we’re going to be living well past a hundred. All of us listening to this, unless you’re in your 80s and not well, we’re going to be living past a hundred. We absolutely positively must start thinking longer term and whole life helps us do that. That was a master class right there because from most people’s perspective, they go down the trail of an either or, meaning you get people that are dedicated and they say, this can only be term insurance and this is how I have to operate my world and everything else gets invested in the market or whatever that looks like. Then you’ve got the other side which says, I’m leveraging to the max and I’m taking this whole policy,

[12:32] which is by a whole mutual back and I’m going to run my entire life and all of my finances through it and you have now cut the noise and charted a path that’s very clear. Thank you. It is the joy of our work that has been in existence for over 30 years and figuring out how to like my mom, the kindergarten teacher for 30 years, two classes a day, can’t imagine, taught me and my sister, which was explain things simply. And so this is what I love to do. Take those complex things, boil it down, give analogies that work, give substance to this discussion and help people make a decision and move forward and get some results. I love it. So good. Thank you for sharing just fundamental pieces for any of you listeners.

[13:30] Kim has an array of books. You can read on Amazon. If you’re not already subscribed to the podcast, make sure you are. And then there’s a special email address. Hello at ProsperityThinkers.com Just for podcast listeners. Kim, thank you for the conversation. Absolutely. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com