How Paid Up Additions Affect Dividends – Episode 379

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[00:00] As a listener, you’ve been listening, you’ve been hearing us talk about whole life insurance and paid up additions and you’ve been familiar with the language. Now we’re going to dive in deeper with a listener question and it’s going to start with this. How do paid up additions affect dividends? And Kim, I am thrilled to learn more about this because you’re an expert on this area. Well, it’s funny, you know, sometimes when you’re new to learning about something, your questions are fabulous, but they don’t have quite the right words in them because you’re not understanding, which is awesome. So I loved this question, which was how do paid up additions affect dividends? And the question behind the question is how do paid up additions affect cash value?

[01:04] So this is going to be a deep dive and I’m just thrilled that there are people that are excited about this because I get excited about it because whole life insurance as a product, as a financial product, works so incredibly well. And you’ve heard me say this before, it’s so boring and yet so effective. It’s because of that efficiency and effectiveness that I get excited about it because I’ve seen it work in my life since I was 24 years old. I’m in my early 50s and it has worked and worked and worked and frankly, even when it didn’t work, it worked. And so that’s just awesome. And I hope to share with you knowledge that can help you feel not only slightly excited, but confident about this product and its place in your overall finances,

[01:58] which is the position of cash, the position of liquidity. And so now let’s get into our question, which is we have this thing called cash value. And if you’ve read my books, this is your Clue account, C-L-U-E, control liquidity, use and equity. Some people call it their infinite banking account. Or if you’re a Palm Beach Letter reader of the past, it’s your 770 account or your gosh, they had a whole bunch of different names for it, but it’s just called cash value. And when you pay a premium, you build or add to that cash value. And that’s like shocking thing. Number one right there, because Spencer, when you think of the word premium, what do you think of? I think of a cost and I think almost in a penalty.

[02:47] So that’s how I’ve looked at it in many ways, but it really depends. Well, when we think of car insurance premium or home insurance premium, it is absolutely a cost. Well, with whole life insurance, your premium builds cash value. It’s so important to know this and to remember this. Now, clearly it doesn’t do that in the first couple of years because you have to pay for the death benefit. Yet, as you progress, typically starting either the third or the fourth year, your premium builds cash value. Then there’s this way to add extra cash value, which is called a paid up addition. And it’s a weird term, but the PUA’s or paid up additions are available at every whole life insurance company out there.

[03:30] By the way, these are not a part of universal life. This is whole life that we’re talking about that has paid up addition capability. And it is a function of you adding more cash. So let’s say your premium is $10,000 a year, your paid up addition capability, depending on your age, might be 11 or $15,000. Let’s just call it $12,000 for our discussion today. So, and these are all proportional numbers. In other words, cut them in half if they’re too big for you, double or triple them if they’re too small for you. And when you do that, every single number has to be doubled or tripled or cut in half. So you have a $10,000 premium, a $12,000 paid up addition. That means that you’re adding $22,000 to your cash value as long as you’re

[04:25] in the third, fourth, fifth year of your policy. Now, the paid up addition does build percentage-wise more cash value than the premium does, especially in the early years. But it’s all going to the same place called cash value. Now, the second part of that question were the dividends. And so we’ve talked about this before, but I’ll tell you, literally five years ago, after working with this product for almost 25 years, I had an additional aha around dividends and what it does, what they do for cash value. Dividends are plural, so they. And that is that while not guaranteed to be paid, so a dividend is not guaranteed to be paid. Never mind the fact that most mutual life insurance companies have paid a

[05:20] dividend well over 100 years every single year, they’re not guaranteed to be paid. Yet once they get paid, they become a part of the guaranteed cash value. And we’ll do another podcast on the difference between non-guaranteed cash value and guaranteed cash value. But the point is you have a guaranteed cash value. And this was my big aha. You have a guaranteed cash value and you have a guaranteed increase in that cash value. And if a dividend gets paid, you have an additional increase. This was the distinction that I finally had the light bulb moment on. And I knew it intellectually. I knew it, but somehow I didn’t know it viscerally. I guess is the word your guaranteed cash value is guaranteed to increase.

[06:13] So you have like a double guarantee there. And then, like I said, once the dividend gets paid, you almost have a triple guarantee. So your gross cash value, everything, your premiums, your paid expeditions and your dividends and the increase that you’re guaranteed to have every year. If you put all that in one place, it’s just called cash value. And it is the increase of cash value that we are usually looking at. And so this is the space that we’re talking about in terms of what’s going on with dividends. And they are unaffected by the loan for the most part. So it is such a nice thing to know that we have this cash value to rely on for our emergency opportunity fund. And it is going to grow.

[07:05] Okay. So for people that are new to this, can you help explain just a couple little pieces, meaning you said that you’re going to see a lot of this growth and we’ll call it, you know, real significant difference, three, four, five plus years into it versus at the beginning. Can you explain why that is? Yes, absolutely. There are three things going on in the first few years that cause the life insurance to have such a slow start. And this is absolutely not a fun thing. And it’s why a lot of people don’t want to do life insurance. And yet when you realize that you’re going to use this product for the rest of your life, good heavens, what are a couple years? Those three things are the cost of the death benefit, the cost of the

[07:50] commissions to the agent and the cost of running the mutual life insurance company of which you are now an owner. And then there’s one other piece that we’ve covered, which there is a ceiling on the paid up of additions that you can make, correct? Yes, that is correct. So like my 10 and $12,000 example, that $12,000 maximum paid up addition number is the maximum. You could come down from there, but you cannot go up from there unless you move everything up your premiums, your death benefit, the whole thing. Again, the illustrations are completely proportional. Meaning if you change one number on them, then all numbers must be changed. So really, this is almost something where we have to say, hey, yes,

[08:40] we get that you are starting this. You’ve got some short term thinking, but you have to use long term thinking in this because as you’ve mentioned, the dividends are adding to it. So it’s an and moment. It’s adding to it. And now five, six, seven, 10 years down the road because of the paid up additions and the dividends that have been put into that and all of that other, the premium amounts, you now have a lot more that you can use at your discretion, correct? Yes, that is correct. And it’s that cash value that creates the Emergency Opportunity Fund enables us to be so much stronger in our finances, a fabulous foundation. And just like when you think about real estate, if you want to build a really big house or a really tall building,

[09:28] you’ve got to have a strong foundation in order to do that. And so a lot of times with our clients, we’re helping them build that foundation first. A lot of times with our clients, we’re helping shore up a weak foundation, i.e. a not sufficient level of cash and liquidity in the family’s financial position. I’m going to play devil’s advocate on a question here. And I’m genuinely curious on the answer. So if I look at it and say, well, instead of me putting in maximum paid up addition, how about I use that same capital for a real estate investment or I put it into some other type of investment that’s going to yield me a lot more money? How do you counteract that? And what would you say, Kim? It’s so important to understand that life insurance, whole life insurance

[10:16] is not an investment. It’s a position of cash and liquidity. And so you absolutely want to be doing both. And if you can get into the third, fourth, fifth years of the policies, assuming that you’ve built up enough of that emergency fund in that short time frame. And so for some families, it takes a little longer. Then you can absolutely do both by funding the life insurance policy borrowing against it and going to do your investment. However, in the early years, you can’t. And so if you’re all about investments, I support that. While at the same time, I’m going to encourage you to take a couple of your hiatus and get this whole life insurance policy started because peeling off a small portion of your savings ability.

[11:01] We’re not talking a lump sum here. We’re talking about monthly and annual contributions of your savings ability, like as a verb. Peeling that off for a couple of years is going to benefit you drastically long term. And when I look at clients that have investments and a position of cash, they’re so much stronger than clients that only have investments. And holy cow, have we not seen evidence of that in 2020 when so many people needed to pivot or shift in their businesses and their lives as the lockdowns occurred and the requirements adjusted, people in a position of cash were more peaceful, more able to make good decisions, not scrambling than those that did not have cash in the form of liquidity and emergency money available.

[11:53] So it’s really that long term thinking. And so you’re saying hold off if you can. And obviously you’re in the house of both. You want to do investments and use this fund. But if you are focusing on the cash value and growing that at the beginning, let’s fast forward the clock 10 years. Now you have an opportunity fund where you could use that money for the down payment or an investment or equity in a business or whatever that means, correct? That is correct. 100%. And of course you have to make that investment be more than the cost of borrowing. And yet you truly are getting your dollars to do a whole bunch of different jobs when you can pull that off. I’m gonna add one last kicker. Here’s the great thing.

[12:36] This is what I love. This is a Spencer opinion here. This is what’s great. Now, when you’ve done it this way and you need the money for a down payment or for equity into a business or whatever that may be, you don’t have to go to the bank and get a loan. You don’t have to have someone pull your credit. This is yours. You get to make the rules. The person with cash is king. That’s why this is so amazing. And I’m grateful that you taught this to me and to listeners, Kim. Well, thank you. It’s a joy to do. You can tell in my voice how much I love talking about it. Wonderful. All right, listeners, if you liked this episode and you’ve learned something, here’s what I would love for you to do. We would love for you

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