Guaranteed vs Non Guaranteed Cash Value Life Insurance – Episode 378

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[00:02] Today, we’re going to be talking about what the difference is between guaranteed and non-guaranteed. Drum roll please, fill in the blank. Cash value of life insurance. Yes. So if you’ve been listening to our previous episodes, you’re going to hear the follow-up and learn how this is going to affect you and your family’s finances. So Kim, I am all ears. Well, this is a fun one. It’s going to go a bit deep, and so I’m going to trust our listeners are ready. So a question came in from a listener about the difference between guaranteed columns. So think about your life insurance illustrations that you’ve all seen. You have a guaranteed cash value column, and that column also usually has a guaranteed

[00:51] death benefit and a guaranteed premium. They’re usually on the left-hand side of the illustrations, the pieces from the insurance company. And it always cracks me up. Occasionally, people say, well, can I have that in an Excel or can I play with it? No, it’s not a mathematical calculation. It’s an actuarial calculation, and they only come from the insurance company. It doesn’t mean we can’t put them in the Truth Concept software and play with them a little bit, but it does mean that they are not on Excel. Let’s unpack this. How does a normal person understand this? With a little bit of help, either from Kim on the phone with the PDFs in front or with continual reading and listening, as so many of our community is so good at doing in

[01:38] the area of self-education. So we’ll just keep going because that’s how you learn, right? So on the right-hand side of these illustrations is usually about eight or nine columns. So the left-hand guaranteed side usually has three or four columns. The right-hand side has a few extra columns, and they’re typically titled non-guaranteed. And the reason that that right-hand side is non-guaranteed is because it includes the dividends, specifically the future projection of payment of dividends. So as has been stated before, once a dividend gets paid, it becomes a part of the guaranteed cash value. And literally that piece of paper that you had in the year 2020, as an example, needs to get thrown away because the piece of paper that you need to be looking at in

[02:30] the year 2021 is going to have a higher guaranteed cash value than the piece of paper that you had in 2020. And so you literally need to be throwing away your illustrations every single year and looking at the new ones. Now, life insurance is frankly pretty boring, so I don’t even know that you need to be looking at it every single year. We usually recommend every two or three that you look at what’s called an in-force illustration. The word is in-force, I-N-F-O-R-C-E, and it means what is going on right now. So back to this right-hand side of either your initial illustration or your in-force illustrations, there is a column that is a dollar figure of projected to be paid based on the current year’s dividends.

[03:23] Like if you’re looking at one from this year, it’s going to say right at the top based on the 2020 dividend scale. And again, dividends are not guaranteed to be paid, though once they get paid, they become guaranteed. But still, this is a projection. So of course, this is the non-guaranteed side. Now, to take it to the next level, you want to unpack, we’re just going to keep digging. The next level is to understand that what you’re looking at are dollar figures, and it gets a little confusing because if you go and look on the web and you say, like, what is XYZ, life insurance companies, dividend rate, you’re going to get an interest rate. And that is a dividend interest rate, again, for the year 2020,

[04:12] that is a gross rate. So if you go look right now, you’re going to see numbers in the 5.6% and 5.7% range, maybe 5.8%, I don’t recall exactly. The various companies are all fairly similar and they’re all going to be in that 5.6% or 7% range for the year 2020. Again, that’s a gross dividend rate, like an interest rate. We can use the Truth Concept software, and it’s the only software that I know that will pull a correspondingly annual net rate. In other words, what’s the difference between gross and net? It’s three things. Cost of the death benefit, cost of running the mutual life insurance company, and in the first year, cost of commissions for the agent. So again, the difference between gross and net are those three things.

[05:04] And then you have what ends up on your illustration as a dollar figure. So dividends are paid in dollar figures. And when you look up the dividend on the web, you will see, in addition to the gross interest rate, a dollar figure. Like the insurance company will say, we paid out X million or X billion of dividends, and it’s a shame because it doesn’t mean anything to people. I don’t even know why they do it, and they’ll talk about how exciting it is because it was more money than last year. Well, yes, they have more cash value on the books than last year that helped them create those abilities to pay dividends, which are a function of the mutual ownership of these companies. You, as a listener that owns a policy, are an owner of the

[05:55] mutual company whose policy you own. They work kind of like a credit union. Maybe that’s a helpful analogy for people that has members. Well, life insurance companies have policy holders, which are the owners of the company. You cannot buy stock in these mutual life insurance companies. And you get a dividend that is payable to you as an owner. The difference is unlike dividends that would come from stock, like if you own stock in a company, and most people, when they get a dividend from investment in stock, they reinvest that dividend. Well, clearly, if the company that you own, so we’re not talking life insurance here, we’re talking just regular stock investments where you own individual shares and you get a dividend, most people reinvest

[06:42] that dividend, if the company’s share price goes down the next day, you’ve essentially lost a portion or all of your dividend. Well, with a life insurance company, that cannot happen because, as I said earlier, once the dividend gets paid, it literally moves from the right-hand side of your illustration to the left side. It moves from non-guaranteed to guaranteed, never to go down again. So you have a situation here where while the net rates are in the three to four percent range right now, so gross at five and a half, five, six, five, seven, net at three to four, depending on age and health and gender, not a lot of difference there, but some. So that three to four percent range is net, net, net.

[07:27] That’s after the cost of the death benefit, after the cost of the commission in the first year, after the cost of running the mutual company. And that is a fabulous return for liquid money. Absolutely. I mean, wouldn’t it be nice if large funds out there actually were as transparent like that and they went through and once the dividend was paid, that it wasn’t going to be redacted or taken away? It’s so amazing to me. I see emails, webinars, podcasts, events, blog posts from these companies talking about all these ways that we’re trying to create good positions of cash for their clients. They’re laddering CDs and they’re coming up with treasury bonds and bills and all sorts of variations. And they’re doing everything they can.

[08:18] And they’re earning one, one and a half percent. And that’s it. And it’s usually taxable. Yeah. Yeah. Taxable. Absolutely. That’s another piece to it. Yeah. And we have three and a half or four that is not taxed, as long as that policy stays in force. But they resist. They, the typical financial planning industry, resists whole life insurance like the plague. Why? That’s the million dollar question. Why? It is the million dollar question. And Todd and I have debated about this. Yes, this is a part of our dinner time discussion. Thankfully, not a lot, but sometimes we think it’s because it is the product to compete against. Like it is the A player that everybody wants to beat and for whatever reason.

[09:09] And this did not used to be the case. If you go back in the even 40s, 50s and 60s in the United States, there are news articles. The whole life agent was at the top of the list. The whole life product was spoken about in a positive way. But I guess I should correct my own language. And what happened is that in the 70s, the whole idea of financial planning came on the scene. The 401Ks came on the scene. And the stock market as a place for people’s investments came on the scene. And as we know, the stock market promises something for nothing. Put a little bit in and you have a chance to get a lot. And us human beings like that idea. If I just go to the gym for 15 minutes, maybe I can be in the shape of my life.

[10:04] Guess what? Probably not. We want something for nothing. And yet we truly know that we can’t have that, not sustainably anyway. Well, life insurance requires something for something. Life insurance requires contributions, premiums, paid up additions, consistency. Yeah, you can skip a year. Yeah, you can adjust your PUA’s, your paid up additions. But the fact is it requires something in order to get something. And it just fell out of favor. That is the best answer that Todd and I can come up with is the twofold aspect of it fell out of favor because it takes a little bit of work and a little bit of time. And in America, we don’t like time. We want something right now. And you had all these other entities that came on the scene

[10:50] that did not used to exist. Mutual funds and 401k plans, et cetera, et cetera, et cetera. And so whole life insurance kind of became the product to beat. And those two things together just caused it to fall to the background and to become the literally sometimes hated product that it is today instead of the revered product that it used to be. Do you mind if I throw my hat in the ring on what I think it could possibly be? Please. OK, so there’s a very famous investor and innovator that I follow. His name is Naval Ravikant. Brilliant, brilliant person. And he says this phrase often, and it just clicked for me. So this is where I’m throwing my hat in the ring, where he says, seek wealth, not status.

[11:43] And so is it perhaps the 401Ks, the mutual funds, the stocks and all the other shiny things have become the status. And as we’ve seen in our makeup of a world now, that we have influencers out there that have these large social followings and they’re famous for being famous, but they’re not actually providing value. Yeah, there’s no substance. Exactly. And so when you’re in the game and you’re in a status game, there can only be one winner and everyone else is a loser. Whereas when you’re in a wealth or a prosperity game and you’re using this vehicle, we’re talking about this whole vehicle, then you’re in a cooperation and collaboration game. So that’s my thought to that. I don’t know if it’s right or not.

[12:32] I love it. I think it’s very, very accurate. And you add that to the aspect of time and the aspect of the something for somethingness that whole life requires. And you have it pinned down perfectly. Here’s what I would love to do. If we could take a couple of minutes and maybe just dispel a few of the things because you’ve explained what the net would be, the net to three to four percent. Again, not guaranteed. This is, you know, put the big asterisks there. We’re talking historically. But I would love for some of the listeners that are on the fence or new or maybe they have a family member and they just don’t know how to explain or they’re ashamed or they maybe started this, but they don’t want to they’ve been made fun of or whatever it is.

[13:21] So how do we help encourage them and arm them with a little bit more oomph so they can move forward? Well, you said a very important word that I want to catch. And that’s you used the word historically. And I don’t I don’t know if you actually meant to use that word, but I’m really glad you did, because this is not historical. And that’s a major, major difference. All the other investments that we look at look historically. You can get a history of your mutual fund. You can get a history of the how a particular stock has done, etc, etc. And while some projections can get made into the future, they’re based on history, right? You look at a mutual fund mountain chart. It’s based on history. Life insurance is not based on history.

[14:05] The average rate of return since I have been in the business is around 7 percent. That’s historical. The three and four that we’re dealing with today is 20-20 period. And it changes every single year. Every single year, the life insurance company declares the dividend. Now, here’s the other really important part. I’m so glad that this came up because this was part of the question and I forgot to answer it. And that is what is the guaranteed rate then? So if you look on pages two or three of your illustration, it’s going to talk about a guaranteed rate of four percent. That is gross. Just like the five and a half on the Web is gross dividend, non-guaranteed rate, the four percent is gross guaranteed rate.

[14:52] And so we have to net that down by the three costs, just the same as we net the dividend rate down. So again, you have your four percent guaranteed interest rate. Then you subtract from that the cost of the death benefit, the cost of running the mutual life insurance company and the cost of the commissions in the first year for the agent. And you tend to net around two percent for the guaranteed cash value. Yet, the guaranteed cash value is not a function of interest rates. The guaranteed cash value, we can equate it to an interest rate, which we just did. But the guaranteed cash value is a dollar figure that is guaranteed. And this is such a critical distinction that only whole life offers.

[15:43] Because as an example, a guaranteed CD, it’s the interest rates that is guaranteed. If you don’t have any money in it, it means nothing. The guarantee of cash value of whole life insurance is a dollar figure that’s guaranteed. You have to have money in it. And it’s guaranteed to go up by dollar figures. Yes, we equate them to an interest rate because that’s how we all think. But the actual guarantee is a dollar figure. And that’s so much more meaningful than an interest rate. Because again, if you don’t have any money in the account, your guaranteed interest rate is irrelevant. It could be 110 percent. What’s important is the dollars and to have those dollars guaranteed and then to have them be guaranteed to increase is amazing.

[16:27] Yeah, it’s whole life boring. I know, but it’s still amazing. Yeah, no, it’s boring until you start doing it and you get about five or ten years in and you say, wow, I’m so glad I did this boring stuff. If our listeners want to look at additional illustrations or maybe read the finer details, is there a page on the website that you suggest or a book? What would be the next step? Yes. So my book, Busting the Life Insurance Lies, has the most sample illustrations in it. And I encourage it. It’s a bit of a deeper read. So our Live Your Life Insurance book is the super fast one. If you’re new to the area, I start with that. Live Your Life Insurance. But the Busting the Life Insurance Lies book is definitely the place to go.

[17:19] And then please don’t hesitate to reach out to us for a personalized illustration, either a new one for new life insurance that you’re considering or what’s called an in-force if you already own life insurance from us. You have to get your in-force illustrations from the company that provides your life insurance. So if we’re not your agent, you need to go back to the agent or call the company directly. And typically those can be emailed to you in usually a matter of days. Sometimes companies take a while on them, but they’re getting better. They’re adopting the 2020 time frame of send it now, please. So that’s the most helpful thing is to look at a personalized illustration. OK. And what we’ll do is we’ll make sure to put links to both of those books

[18:08] mentioned inside of the show notes. All you need to do is click the button below the podcast player and you’ll be able to see those links. Or if you’re on the web, you’ll be able to see it inside of the blog post. And for your specific questions, send that to hello at partnersforprosperity.com. If you want to get your specific illustrations or even just something that would potentially work for you. Sound like a plan? It is. And I will say there’s audio versions of both of those books available. And then I always offer if people will email me, then we’ll just send you a sample personalized illustration. That will be so better. So that also can be done at hello at partners number for prosperity dot com.

[18:52] Wonderful. Well, thank you, Kim. 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.