Bullet-Proof Your Savings – Episode 035

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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 to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have our co-host and bestselling financial author, Kim Butler, with us. Welcome, Kim. Thank you, Todd. Happy to be here this morning. We’re going to be talking about how to bulletproof your savings today, and we’re going to talk about some myths that a lot of people, including me, assumed were true, and then also go into some alternative suggestions of how we might be able to accomplish the things

[00:50] that we thought we were accomplishing with the banks. You know, it’s funny. The first job that I had out of college was with a bank to remain unnamed. And I actually loved my time there for about a year. And then I spent the next two years trying to figure out how to get out because it was so restrictive and so much a place of rules and procedures. Did you know that we had no less than 24 huge three-ring notebooks about the operations procedures around the cash in the bank? So that would make you think that banks were actually a really good place to save money. They have all these procedures. They’re supposed to be super safe. There’s the whole Federal Deposit Insurance Corporation, FDIC, and the idea that that’s

[01:40] supposed to protect our money. But my gosh, is that a myth? Don’t you agree? Oh, absolutely scary. And I’m referencing an article that I believe you actually wrote in Prosperity Peaks where it talks about the FDIC insurance and the illusion of protection and how there’s actually what is it, two to three percent of our money is actually protected by that insurance? Absolutely. The raised limit. So the FDIC went from $100,000 of protection to $250,000 of protection is an absolute joke. And if the bank started failing today, it is a very small percentage of our dollars that would actually be protected. My husband, Todd Langford, likes to say they might have just raised the benefit to a million because it really doesn’t matter what it is.

[02:37] First of all, there is no corporation and there’s also no insurance. So it’s called Federal Deposit Insurance Corporation, but there’s neither. It’s just a promise to pay and it’s paid by the taxpayers. And so if the FDIC can’t collect enough tax money to bail out the banks, which they have had problems doing in the past, then the people that have money in the banks are not going to get it bailed out. I believe banks should be used for our daily checking account, debit card, credit card needs, and that is it. Absolutely no money other than what we need on a monthly basis should be stored in a bank. They’re just not safe. And I’m sorry to say that. And I’m not making that a fear environment, just acknowledging that banks are

[03:26] not the place to store our emergency and opportunity funds. Every client knows we’re supposed to have about six months of emergency savings. That’s on every financial person’s list to recommend. And most people do that in banks. But the banks, first of all, only reserve a fraction of those dollars. And that literally means if you have an account that says $10,000 on it, they probably have one to 2,000 actually in that account. And all those other dollars are out in the fractional reserve system being lent to other people. And then furthermore, we have the problems that we’ve talked about with the FDIC, and there’s a host of other challenges with the banks. But I think we’ve got an alternative that we can talk a little bit about.

[04:15] Shall we cover that? I think that that would help. And the other amazing thing that I found in your article here was that they’ve actually stopped printing cash. So a lot of the money that exists now is just electronic dollars. Absolutely. Everything’s being reduced to the ones and zeros that all computers operate with. And I know that Europe and other countries have a much better system for safety among credit and debit cards. And I trust that someday the US will get caught up with that environment. But focusing on what you can control, control is one of the seven principles of prosperity. We’re big believers on focusing on what you can control, not getting all caught up in all the bad things the banks can do to you.

[05:04] But just realizing that other than the money that you need on a monthly basis, the best place to store it is not in a bank. There is an entire other industry known as the life insurance industry that is so much stronger because the first thing is that they actually operate on a 100% legal reserve environment. Meaning if you have an account with $10,000 of say cash value, you actually have $10,000 in that insurance company stored and protected. Now, of course, insurance companies use banks. I mean, we need banks to pay our monthly bills. But insurance companies don’t store their wealth there. They store it at the insurance company in the insurance company environment, which the insurance industry is not regulated by the federal government.

[05:56] The insurance industry is regulated by all the state governments. And so you’ve got two things there, the legal reserve versus the fractional reserve between the insurance industry and the banking industry. And then you have the issue of the state regulation for the insurance industry versus the federal regulation for the banking industry. And those two things tell us that the insurance industry, specifically cash value of whole life insurance is our favorite place to store emergency and opportunity funds. And that’s a scary thing for some people. They just are not used to using cash value of life insurance that way. So one of the fun things I enjoy telling clients is to print out the status report or the online picture of your life insurance cash value and

[06:45] put it on the fridge and mark it as your emergency slash opportunity fund. And that I think will help people feel better and remember that those are liquid dollars. Those are available to you in seven days. That insurance cash value is a much safer place to store money than a bank. And definitely than a brokerage house because a lot of people use money markets and brokerage houses as their emergency slash opportunity fund. And then of course credit unions are the third place that people will store that kind of money and a credit union is probably safer than a bank as well. But we like the returns that are available on liquid cash inside the cash value of life insurance. Two great questions have just come in.

[07:33] Question number one is what if we’re talking about my business? So a business can own cash value of life insurance on its balance sheet, just like an individual can own it. And the business would ensure the key people, typically the owner, maybe a president or CEO, CFO type of position. Or even just a key player in our business, we ensure every single person that works here. And so that is an asset of that business on the balance sheet of the business. There’s absolutely nothing wrong with a business owning cash value of life insurance. Now again, the business is gonna have a bank account, of course, to do their monthly payments on things. But the actual emergency slash opportunity money for

[08:18] a business much better stored in cash value of whole life. Got it. So no problems with having a business own life insurance. And then secondly, you mentioned rate of return, and maybe you could give us a comparison on that. Sure. So the life insurance industry has always paid on liquid cash value, interest rates in the form of a dividend that were two to three times bank rates. So right now, when a bank savings account is at 1%, the insurance industry is paying 3 or 4 or maybe even 5%, depending on your age. In the 1980s, when I was at the bank, the late 80s, the banks were paying maybe 6, 7, 8% on liquid savings account money. And the insurance industry was paying 8, 9, 10% again, depending on age.

[09:13] So you can count on the insurance industry always paying two to three points above bank rates. The 2015 dividend scale, which is what we equate interest to in the life insurance industry, is two to three points above liquid bank rates. The biggest difference in addition to that, of course, is that the life insurance cash value is not taxed. So the question is, where is your bank savings account is? Next question that we have is concerning government intervention in bank accounts. And this is something that absolutely terrified me. Of course, any time you deposit more than $10,000, they fill out what’s called a SAR, or a suspicious activity report, which is not necessarily good or bad. But if you try to keep your deposits under $10,000,

[10:06] you can actually get an even worse trouble. And the government has the right to take your bank accounts first, and then you have to prove that you deserve to get them back later. Am I reading that correctly? That is correct. It is amazing what the government can do in terms of control. And something else that I just heard the other day is what other banks can do. The banks sometimes appear to be conspiring together against the depositors. I heard of a situation where somebody owed one bank something, and that bank came to the bank where there was money, and the first bank took it from the depositor out of the second bank. So it is a tricky environment. There are lots of rules, and we would like to think those rules are there to protect us as the depositors,

[11:04] but frankly, I think they’re there to protect the banks. Now, if we took that same conversation over to the cash value of life insurance again, is it a different scenario there? Well, yes, because the cash value of life insurance is a protected asset in many states, not all states. And the way that you can check your own state is at AssetProtectionSociety.org. AssetProtectionSociety.org is the place where you can check whether your state protects cash value of life insurance entirely in the event of an amount of money being there for bankruptcy or that kind of thing, as well as many other types of lawsuits and other arenas where somebody else would like to get at your money. So the life insurance industry does have a little bit more protection in that arena.

[12:04] Again, it depends on the state. But furthermore, the life insurance asset is a private asset. Because there is no taxation on it, there is not a 1099 form, as an example, that would show up out and about on your tax return, in the mail, et cetera, to indicate the presence of that account. One other thing I was reading in your article here was how life insurance is treated in the college application process. Yes, I’m glad you brought that up. Typically, the colleges and the various services that look at college financial aid applications do not consider cash value of life insurance an asset. There’s a couple exceptions to that. But in most cases, cash value of life insurance is not considered an asset to be used for educating a child

[13:00] so that you could have a lot of money stored in there and you could still actually get some of the grants and loans that you might be applying for when making an attempt to get a kid through school. And of course, there’s problems with the loan environment on the student aid side. But nevertheless, if you have cash value of life insurance, typically that does not count as an asset. Would you have a recommendation of where people could get more information on this? On the life insurance, the best place is our little booklet called Live Your Life Insurance. And it’s at liveyourlifeinsurance.com as an immediate download. You can also get it on Amazon as a physical book. And then we also have a book that explains a little bit more

[13:51] about our entire thinking in this area that’s available. And this is a free book at Partners, the number four, prosperity.com slash ebook. It’s called Financial Planning Has Failed. And it talks about using life insurance as a place to store cash because the typical financial planning recommendation is to use banks as a place to store cash. And we believe that is a failed recommendation. So it’s included in the book, Financial Planning Has Failed, 60 pages, a couple hours on an audio version. And I’m excited because we’re going to have a video version of it here in another month or so. So that’s Partners, number four, prosperity.com slash ebook. And maybe you could just take just a minute and explain how a prosperity economics advisor would structure a policy

[14:42] different than, say, a traditional insurance agent. Sure. So there’s a really simple addition that gets added to a whole life policy. And it’s called a paid up additional rider. And it’s abbreviated as P-U-A. P is in paid up for you and addition for a paid up addition. And all it means is a place to store extra cash. So if you’re looking for a place to store cash, you pay your premium on your whole life policy. That builds cash value. And that right there is something that a lot of people forget. Not the first couple of years your premium is paying for the death benefit at that point. But beyond that, your premium builds cash value. But then the way to get more cash value in there is the paid up addition rider.

[15:30] You want to make your paid up addition rider every single year. There are some companies that call it by a different name. But if you ask about a paid up addition rider, anybody that works with whole life insurance should know what that is. There is a minimum and a maximum to the paid up addition rider. But it’s a function of your premium and your death benefit. So technically, it’s an unlimited amount. You just have to have an unlimited amount of death benefit and unlimited dollars to fund it because you have to fund your premium also in order to fund the paid up addition rider. But every year you want to have a goal to put the maximum paid up addition rider in your policy. I’ll admit I can’t fund mine at maximum every year anymore.

[16:16] It’s too big of a number. But that’s the goal. And so you can typically fund it as minimum as $100 or $120 a year depending on the company. And then again, as high as rule of thumb would maybe be around one times your premium. So if you had a $10,000 annual premium, you could put approximately $10,000 of additional paid up addition rider money in there. And in the second, third, and fourth year, you would immediately have $20,000 more cash by doing that. And your death benefit also increases. The paid up addition rider raises the death benefit a little bit. It has to in order to keep that all being completely tax-free. This is a very important concept for our listeners. A lot of business owners in 2008 actually survived

[17:10] by using the cash value they were able to accumulate in these policies when their credit lines were taken away. And they had that cash value because they had these accelerated policies. They didn’t take a long time to build up cash value. They built cash value quickly because they had policies that were structured properly. And again, those came from prosperity economics advisors. And if you don’t know what one of those are or don’t happen to have one, Kim, I bet you would be willing to talk to somebody also, wouldn’t you? Absolutely. Always happy to help. So please reach out to us at partners4prosperity.com. If you’re interested in an appointment to discuss this, we can email you illustrations and information ahead of time

[18:01] so that you can be prepared and have your questions ready. And we love to play Q&A. Anything you want to say before we wrap up? Just to remember the free e-book, partners4prosperity.com slash e-book, 60 pages and a couple hours on an audio. Super. Well, we’ve been talking about bulletproofing your savings. This is No BS Money Guy Todd Strobel for the Prosperity Podcast. Once again, special thanks to Kim Butler. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners4prosperity.com. If you liked this episode, make sure you subscribe and leave a review.