Converting Your Term Life Insurance Policy – Episode 280

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[00:00] 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. Hello listeners and welcome to another episode of the Prosperity Podcast. Today we’re going to be taking on a case study. This case study is probably something that you, as a listener, can relate to, or you may have a parent or a relative that can relate to this. So here is how it goes. I have a relative and in passing conversation, they said that their term policy was just about to come to fruition. So they’ve gone almost the entire 20 years and they said, we need to convert this to a whole life insurance policy.

[01:00] My answer was, hold on, there’s a book you have to read and someone you need to talk to. And what we’re going to do is we’re going to talk about that book and the person to talk to on this podcast. So Kim, are you there? I am, Spencer. I can’t wait to help with this. This is going to be fun. So the relative had a term policy and the amount of the term policy was I believe somewhere around $500,000. Okay. They’d had the policy for almost 20 years and they obviously had their better health locked in and they’d been paying it as an insurance policy. They knew what term was, they knew what they were getting, but now they want to convert it to term. You mean they want to convert it to whole? Sorry, convert it to whole.

[01:48] And so now they’re looking for the next steps. And this I think would be valuable for listeners in the same situation. Absolutely. So may I ask how old they are? So they are in their early 60s. Okay. And now Spencer, I got to ask you, like really? They said, like they used the words convert to whole life? Well, they said we have a term policy and we need to do something with it. And they said we’ve heard about whole life policies, but they didn’t know what kind. Ah, okay. I said, well, you know, we’ve got, you know, are you familiar with the term variable or universal or whole like mutual backed? And they said, yeah, we’ve heard of those, but we don’t really know what they do differently. I love it.

[02:38] And I want to come back to that. But I want to ask one more question. And that is, do they have a little bit of extra cash flow that they could save on a monthly or annual basis? Yes, they do. Okay, because that’s a really important point as well. All right. Let me go back to this middle point where I was kind of kiddingly quizzing you on, okay, what did they really say? Because this is something that I think should be as logical as what you originally said. In other words, human beings should wake up one day and say, hey, I have term insurance that’s at the end of its term of time and I should look to convert it to whole life. And I think it should be as easy as contacting a whole life agent and

[03:25] getting it done. Unfortunately, our society and the typical financial planning industry has made this conversion, so converting means switching from one type of policy to another, such a big issue that we’ve turned it into this amazing sales process. And I don’t necessarily mean amazing in a good way. And I think that’s really wrong. It is so interesting how us Americans, in particular, and holy cow, good job of your relatives for at least being open-minded, but us Americans tend to just immediately shut down and be like, ah, term insurance or nothing and I don’t want to learn about any of that other stuff. And yeah, I’ve heard of it, but it’s totally overwhelming and yuck, yuck, yuck. Whereas, do you know, I just talked to somebody from India.

[04:19] And in India, it is a totally normal thing. Like, people understand term insurance. They understand whole life insurance. They know what the two do and they’re both good. They just serve different purposes. And people actually do say, oh my gosh, I just got a new job. Now I’ve got ability to save. I should get some whole life insurance. People actually do say in India, oh my gosh, I’m at the end of my term insurance, I should convert it to whole life. And that’s my overall goal. I want to make us Americans as smart as the people that live in India that just say, I’m at the end of my term insurance, I should convert to whole life or at least look at it, assuming that I have a little bit of extra money to save.

[05:02] That’s the best way to look at it. And so before we get into the actual details of how this works, do we not think that way because of the sales culture or the financial culture or what throws us off from the correct way of thinking? It’s a great question. And I think it’s not the sales culture per se. I think that’s definitely a subset. But the primary reason is because of the typical financial planning industry, which started in the 1970s, not very long ago, that has caused America to get totally off track. And I think it’s also supported, unfortunately, by America’s want of something for nothing. Yeah, it’s not just the financial industry that has that problem. Hmm, OK. For this relative of mine to just have the foresight to think,

[06:00] OK, I need to do something, they’re already winning. But the pathway to get there is a little bit muddy and they’re not clear on that. So what as a financial advisor, what are next steps that a person should take? Well, the important thing, OK, now you’re clear. I just want to be clear. You’re asking as a financial advisor or you’re asking what your relatives should do next step. Like the relative, if you were in the same room and sitting down and saying, OK, hey, your policy is coming to fruition. Here’s what you do next. So what would you tell them? So the distinction of having savings ability, savings is a verb. The ability to save is a really important distinction because if the answer is no, then they really shouldn’t do anything.

[06:50] Unfortunately, you know, they’re probably just going to have to let their term insurance lapse and they’re probably not going to get any more term insurance. They might, you know, they might get like maybe a 10 more year policy or something like that, but it’s going to be crazy expensive compared to what they were used to paying. And if they really don’t have extra money, then that’s the end of the discussion. Do you have questions about that? Because, you know, there’s certainly people out there and I want to help them, too. Does that make sense so far? It does. And so here is some of the rough estimates that I came up with and I could have been totally wrong. But I just said, hey, if you had this older policy, my guess is,

[07:28] you know, you’re probably paying a hundred dollars or less a month for this term. Is that safe to say? Oh, gosh, that’s a that’s a can of worms. Like, who knows? It could be all over the board, I guess, for somebody. So they probably bought it in their early 40s. Yeah, that’s reasonable dollar figure. And then what I told him, I said, if you’re going to convert the whole, it’s going to cost a lot more than that. But I said, cost is the just the word I’m using. I said, it’s you have to look at it from a different perspective. I said, you’re not looking at it as the term piece and you’re not looking at it as an investment. I said, it’s a different type of savings vehicle. And that’s about as deep as I was able to get.

[08:10] You did good. You did good. So what I would do with somebody that had some extra savings ability is, first of all, identify what that is. So let’s say it’s five hundred bucks a month. I mean, it really doesn’t matter. We we can work with whatever they’ve got. Now, you mentioned earlier that you think this is about a half a million dollar life insurance policy. So a typical approach, I’m using the word on purpose, a typical approach is sort of a needs analysis approach, which says, OK, you had five hundred thousand of death benefit. Now you need to keep five hundred thousand of death benefit. Who knows whether that’s accurate or not. And so they might try to sell a five hundred thousand dollar

[08:52] death benefit whole life insurance policy. I don’t think that’s the right way to go about it. I think the better way to go about it is to identify how much they have to save. So unfortunately, I chose five hundred a month. That’s kind of confusing. That’s different from the five hundred thousand dollar number that we’re talking about that’s death benefit. Now I’m going to take the five hundred dollars per month. That’s savings ability. I’m going to plug that into the computer. I’m going to plug their age and gender into the computer and a general sense of health. I’m not going to get super specific on the health, but just a general sense. And then the computer is going to tell me how much death benefit they could get,

[09:35] assuming two different scenarios. And both are completely legitimate. I want to pause and just make sure we’re up to speed so far before I go forward. Is everything making sense so far? It does. I’m taking notes and the traditional is the needs analysis. And the sorry, the typical is the needs analysis. The traditional is the two solutions that we’re going to hear about. Exactly. And so traditionally, like think back to the 1900s, when you look at life insurance, you look at it from a human life value standpoint, HLV, human life value. There’s a whole host of support for looking at the death benefit from a human life value standpoint. So this is one of the ways. And it’s pretty much based on income, could be based on gross worth.

[10:26] And we’ve got some other podcasts that cover this in depth. So I’m not going to go into it a lot now. Let’s just say that their human life value is a million dollars. So that means like the total amount of death benefit that they could get on a single person. We’ve kind of lumped this family together. But let’s just talk about the main breadwinner for now. So you could go to the computer and you could get a million dollar quote, and it would be probably out of their price range. And so, OK, those are some interesting facts. That’s one way to do it. The other way to do it is to look at, again, their savings ability. And like I said earlier, you take your 500 bucks and you plug it into the computer.

[11:07] Now, within that, there are also two directions to go. The first is what we call a minimum death benefit, maximum cash value method, which is what most of our listeners are familiar with. This is the income for life out of the Palm Beach letter. This is Garrett Gunderson’s cash flow banking. This is Patrick Donahoe’s, you know, whatever he calls high cash value, low death benefit life insurance, where the cash value is high and the death benefit is low. You know, sort of obvious there. So that 500 a month would be split approximately, is a big approximation, half and half. $250 to the premium, which still builds cash value and $250 to the pay to petition writer, which is that special writer that gets us high cash value, low death benefit policies.

[12:03] The other way is to say, let’s scrap the high cash value goal and make it a high death benefit, low cash value approach. Now, this is still whole life. We’re not talking universal. This is still guarantees, but we would spend the entire $500 a month on premium. Now, again, I remind us premium builds cash value also. But that $500 a month is going to buy a low cash value, high death benefit policy. And when people are in their 60s, death benefit becomes a lot more important to them, I find, even than when people are in their 30s and 40s or maybe not. Some people that are in their 60s don’t care about death benefit at all. So there’s really no right or wrong way here. It’s going to be up to each family member.

[12:55] And of course, there are other family members that they’re dealing with to make the decision as to which is more important. And then I guess you could say we’ve got three directions to go. There’s the one, which is the high cash value, low death benefit, which has the counterpart, which is the opposite, the high cash value, low death benefit. And then there’s the other, which is the human life value and going to be a number that’s way bigger than they can handle, which means we would split that bigger number into whole life insurance and term insurance still, assuming that they could qualify and go forward that way. So that’s a lot of pieces and parts, and hopefully it made sense. But that’s what we would do.

[13:37] It does make sense. So I want to clarify with a few things. That’s OK. One, if we’re going to convert this term policy to a whole policy, they would not need to do a new medical, is that correct? That is correct. Assuming, big assumption, that the term insurance was at a company that actually wrote whole life. And that is far and few between. So I’m going to say 80 percent of the time, people do need to get new medicals. OK, so they would have to know what company that was. And if any listeners have that question, send an email to hello at partnersforprosperity.com. Kim can look into that for you. Yes. OK. So but the next and this is just my assumption that if someone let’s say they’re older, 60s or beyond,

[14:25] and they don’t have a lot of assets, then they would probably be focusing more on the death benefit. If they do have a lot of assets and good cash flow, then they’re going to find a different way to slice that pie. And they may be looking for something that has maybe more towards the maximum cash that they can be utilizing that more than they are worrying about the death benefit. Is that safe to say? It is safe to say. We’re definitely making some generalizations. But yes, you’re right on track. OK. Well, I think that this actually answers a plethora of questions. The last one is this, because I don’t want to be answering all the questions that this relative has. I would rather say here is the best book to read.

[15:12] What is that book? It’s called Live Your Life Insurance, and it was designed to help both somebody like this situation where they’ve got a little bit more information, get the additional information that they need to make a decision. The book is also designed for somebody that really doesn’t have any information. They’re kind of coming at it cold. We’ve written a specific chapter to intro the idea, if you will. It’s a short read. It’s available on regular Amazon as a as a soft copy book. It’s available as an audio book, and it’s also available with just some slight short videos, if you will, on live your life insurance. Well, thank you for taking the time to help answer my questions today. And I think our listeners as well are going to be thanking you

[16:01] for answering some of their questions. And and again, these pieces were some of the things that fall between the cracks. So for you as a listener, if you have questions, please reach out to Kim and hello at partnersforprosperity.com and she can answer all the questions of depending on the life insurance policy you already had and what’s the best way to slice that pie and everything else in between. She’ll help you with that. So thank you for taking some time with us again today, Kim. Absolutely love to do it. And I really want to reiterate to the listeners that I’m so happy to help, regardless of whether they end up buying any insurance from me or not. And it’s I really view my role as that of an educator and and an implementer,

[16:45] but only an implementer for those people that want to implement and to try to give them confidence that they don’t have to fear a sales environment like we were talking about the beginning of the podcast. That’s definitely out there and it’s prevalent. And one of the reasons that I love our work and the fact that we’re able to help clients in all 50 states over the phone and the web is it lets me be very, very efficient with my time. So I can spend 20, 30 minutes helping somebody quickly. Ideally, at some point, sometime, somehow, they or some of their family members will buy life insurance from us. But if not, that is OK. And I really want people to be confident that they can use me as a resource,

[17:26] use me as a second opinion, and not feel like they’re going to get shoved into a sales environment. That’s wonderful to hear. And and I can attest to that, too. So thank you so much, Kim. Yes. 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. If you liked this episode, make sure you subscribe and leave a review.