Borrowing Against Cash Value of Life Insurance – Episode 108

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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 to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host, best-selling financial author, Kim Butler, and I’m really excited about what we’re going to be talking today because we’re reaching out to the self-employed and actually talking about how do I prepare my business for tomorrow. The fact is most self-employed businesses have some form of credit lines and in 2008 we saw those credit lines shut off, we saw perfectly profitable companies go from

[00:55] heroes to zeros under no fault of their own. So our question is, we’ve been seven years, the cycle’s due to repeat, how do these self-employed people prepare so that it can’t happen again? Welcome, Kim. I know I’m putting a lot of pressure on you, but here we go. Well, I’ll just tell you what we did because we, as a business, I don’t know whether you want to necessarily call it self-employed or not, but we had trouble in 2008 and 2009 as our clients and their businesses scrambled and whether they owned businesses or not, we had a lot of clients have financial difficulty and so that caused our business to as well. And the way that we were able to keep our doors open and keep helping people, even though they weren’t necessarily paying us, is because we had cash value of life insurance

[01:51] that we had stored away during the good years and it did two things for us. One, it enabled us to get out of our premium payments on that life insurance during a period of time by borrowing against the cash value to make the premium payments, which then increased the cash value. And number two, we were able to borrow against it again or more thoroughly, more fully, because, of course, the premium didn’t take all of it. By borrowing against it further, we were able to make payroll and keep investing in a little bit of communication and marketing so that we could keep our good word out there. And so that whole life insurance, in fact, sometimes it helps with personal bills as well, absolutely sustained our, not one, but two businesses during a downtime.

[02:47] And I know my sister has a very similar story about how it helped her start her business, where she was an employee. And I don’t even recall when this was. I don’t think it had anything to do with 08, but she was an employee and really, really wanted out and wanted to create her own environment. But she knew it would take a while before she got cash flow enough to be able to pay herself. And she too used her cash value of whole life insurance that she had been saving during her time of being an employee. She’d been saving that up and she was able to use it to start her business and pay herself while she got the business up and running. And then, of course, she used the profit beyond what it took to pay herself

[03:32] to pay those loans back, just like we did when our company got profitable again. We started paying those loans back and we’re still paying on some of those loans because it was a long period of time. So these are things that a business owner can do while there’s cash available, build up their emergency slash opportunity fund and the best place to store that emergency opportunity fund is cash value of life insurance. So let’s just kind of double check here. So the cash value of life insurance in most states is exempt from lawsuits. So it’s sort of protected and I have this cash value sitting here. The bank has just canceled my credit line and I need to have some money because not only do I need to operate my own business,

[04:25] but since the businesses on either side of me are going out of business, my ability to expand is huge. Whose permission and what process do I have to go to to access that cash value of my life insurance? I’m so glad you asked. There is no permission slip needed. You as the owner of that company are first in line to get that loan and you don’t have to ask anybody to do it. There is a form necessary. Some companies over 50,000, some over 100,000. Most companies under those amounts don’t even require a form that you sign. They simply will take a phone call from you and process the loan. It takes about seven to ten business days to get the money. There are no questions asked. They want to send those dollars to the account of record or the owner of record

[05:26] and then you have an interest payment that they take out to begin with for the amount of money times either one year or the policy anniversary date, whichever is less. And then on that policy anniversary date, you’ll get another bill for interest only that will be for the next 12 months. Now, if you can, you want to pay that interest only bill with extra dollars. But if you don’t have that money, you can add it to the loan and go forward again. And as long as there is cash value, you can still keep doing that. Additionally, if you are able to pay your premiums, your cash value is rising. Of course, if you’re making paid-up addition contributions, it’s rising even further and those dollars create additional loan capability.

[06:27] If by chance you don’t have your dollars available outside to pay premiums and pay the addition, then you can actually borrow against your cash value to pay those premiums. Now, you can’t tap out a cash value loan with the first instance and then come back around and borrow again for premiums. But if you pay premiums, then you can come back around and borrow that because the payment of a premium increases cash value. And that is something that people tend to forget. We think that only paid-up additions build cash value, but the payment of a premium builds cash value as well. Not in the first year, but typically in all the other years. So many of us have kind of seven-year amnesia, and we just don’t remember what it’s like to have, you know,

[07:20] the bank’s credit line, regardless of how long it was for, has a clause in it that can be cancelled at any time. And I mean, if you’re out there working hard and trying to pay your employees and those credit lines get cancelled, it’s a devastating thing. And to be the one person out of probably 50 that is able to grow while everybody else is shrinking is a huge opportunity. Now, I’ve borrowed this money out of my life. I borrowed this money against my life insurance policy. What do I have to do to pay it back? Can I put it back in? Am I stuck with it? Am I going to pay on this forever? So ideally, you’ll get through your business challenge and start to make a profit again. And the first thing that you want to do is pick back up your premiums.

[08:13] So if by chance you are borrowing against cash value and thank you for correcting your language, yes, so important that we understand that we’re not borrowing from our policy. We’re borrowing against it. If you want to use the word from, then you need to say borrowing from the life insurance company, because that’s what you’re doing. So you borrow against your cash flow. You borrow from the insurance company. You pay your premium. You’ll want to stop that process as soon as you can and start to pay your own premiums yourself. And then what’s left over is what we could call the principal amount of the loan. Again, in theory, you are paying your own interest along the way, or possibly you are adding the interest to the loan either way.

[08:58] Your next step after you’ve got your premiums going again is to pay back the loan. In fact, I would say at that stage, it’s probably more important to pay back the loan than to make the extra pay to petitions. In most insurance policies, your loan cost is a little higher and your pay to petitions are growing. So you want to get that loan reduced. And you can do that in a variety of ways. You can set up an automatic payment on a monthly basis. You can have principal lump sums that are contributed against the loan, drastically reducing it in chunks at a time. You can make quarterly payments. You can make annual payments. You can make every now and then payments. You can pretty much do whatever you want.

[09:45] You can leave that loan on the books as long as you want. You do just have to remember that there is an annual interest charge. And whatever principal amount is outstanding at the anniversary date of your policy will be charged interest. Now, I do want to bring up one other thing that self-employed or any business owner should try to keep doing during down times. And that is to keep marketing. It’s so important to keep getting your message out there. And it’s often the first thing that we want to stop spending money on. But I guarantee you there’s a lot of business owners out there that have barred against their whole life to keep their marketing plan going. And that is what pulled their business out of the doldrums

[10:32] and enabled them to earn that extra profit to get that loan paid back as well as do all the other things that they wanted to do with their business profits. Super. Well, one of the other things you talk about a lot is, you know, if I am self-employed and, you know, I’ve committed to this life insurance policies. And again, you know, we’ve committed to the premium payments, not so much committed to the paid up additions because there’s flexibility there. Are there some riders there that can protect me in the event that I’m physically unable to go to work each day? Yes, there is something called a waiver of premium. It really doesn’t exist on any other product. And as the term implies, it waives not only the insurance costs,

[11:21] but the actual premium in most cases. There are some exceptions on this, but for most whole life policies, let’s say that your premium is $10,000 a year. Well, in this case, a large portion of that is contributing to cash value. And when you have waiver of premium, if you become disabled, you will actually get the entire $10,000 contributed to your policy, which, of course, then drives up that cash value. There is another rider that I think is of interest these days, and that’s a long-term care rider, which would be more of a permanent disability environment. And that’s a nice rider as well because if you don’t use it, the extra money just contributes to the death benefit which your family gets.

[12:08] If you do use it, you still have some death benefit which your family gets. But it does enable you to use some of that death benefit ahead of time while you are disabled in a long-term care environment, but will at some point obviously still pass on. And you get to actually borrow against that death benefit or lean against that death benefit ahead of time to handle your long-term care needs. So two riders to pay attention to, waiver of premium and long-term care rider. You know, finally, and none of us wants to think about this, but in the event that I pass away and maybe I have a partnership, maybe I have a sole proprietorship or maybe even I have a corporation, and that business has to go through the transition of being without me

[12:58] and still remaining open and profitable, what about the death benefit? Well, the death benefit can come in as a key person policy and make payroll and pay the rent and hire somebody to run the company and replace the role that you played and let that going concern, that’s what businesses are called, going concern, keep benefiting all the clients and of course all the people that work there as well. So especially sole proprietors, the death benefit is going to keep that business going, big businesses, every public company, they all buy. Key person insurance on their key people. So not only owners but executive level managers and good heavens these days, sometimes the bookkeeper and the receptionist and whatnot, they’re considered key as well.

[13:55] And so you can have life insurance policies owned either by the business or by the owner that are on the key people. And if death occurred, would pay into the business to help keep that business going. And I’m assuming that these premiums would be counted as a business expense, is that correct? Well, it depends how you want to set it up. Definitely a long answer that I probably won’t try to get into on the podcast, my initial reaction is probably not because if you deduct it on the front side, the tax authorities are going to want to tax it on the backside and you don’t want that death benefit taxed. But there are some ways where you can deduct it and sometimes those key employees are handling some of the taxable income

[14:44] that comes from that deduction. Sometimes there are other more formal structures that can build a key man in a particular way. But it’s definitely something that has a big, it depends answer and not something that you want to do without some accountant’s help and some good advice. Super. Well, Kim, have you got a gift for our listeners out there who might want to learn a little bit more about this? Always partners number four prosperity dot com slash ebook will get you a 60 page book called financial planning has failed. There’s an audio version there as well. A couple hours of recording. And again, that’s partners number four prosperity dot com. If you are self-employed, I sincerely encourage you

[15:31] to seek out a prosperity economics advisor. We work all 50 states here at Kim Butler’s office. Prosperity partners for prosperity would certainly encourage you to have a review, know what your options are because you’re in a unique position. And I don’t think that it’s one size fits all and that you really need to have a personal understanding. But again, for the prosperity podcast, thank you all for your time. Appreciate your questions 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 partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.