How to Spend Your Death Benefit While Living – Episode 089

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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, and we’re going to be talking about how to spend your death benefit while living. This is a special report that has been written on by bestselling financial author, Kim Butler, who is also the co-host of our show. Welcome, Kim. Thank you, Todd. Happy to be here. And I have to also include Kate Phillips, who helped us not only write this special report, but we together created some truth concepts calculators to prove numerically

[00:54] the concepts that we’re going to talk about today. Super. Well, I love the idea. I’m intrigued already. The fact that I can spend the death benefit of my life insurance and still get that money back for my next generation as well, correct? Absolutely. So what’s interesting about this is a lot of times when you hear the terms spending your death benefit, people immediately somehow convert it in their heads to the cash value. But there’s a clear distinction here. Everybody knows what the cash value is of their life insurance policy, and everybody knows what the death benefit is of their life insurance policy. And I’ll tell you younger people that have this goal in mind that they really don’t need to know how to do it.

[01:36] They just need to remember one sentence and it’s, I can spend my death benefit while I’m living. And so this works great for confirmed bachelors, gals that say they’re never going to get married, never have kids, et cetera. And if you just know that and understand that in your eighties and nineties, you will be able to make use of that death benefit while you are living, then that’s all you need to know. But we’re going to get into the subject a little bit today so that people can have a sense of how this gets done. And again, this is a audio version of a 16 page special report that we’ll make available as we finish up our talk today by sending an email so that you can actually see the written material as well as the pictures of the

[02:28] calculators that prove the concept. We’re just going to hit it conceptually today, and then you can hit the numbers in the special report. Right. So if you would send an email to Todd, T O D D S, S is instorable, Todd S at partners, the number four, prosperity.com. And in the subject line, just put spending my death benefit or spending the death benefit. I will email you that report out. That’s the easiest way for us to get it out to you right now. Continue Kim. Fabulous. So the report’s actually called permission to spend. And one of the things that it goes over is the idea of a permission slip around your death benefit. So in essence, that’s what’s happening is your death benefit is giving you a

[03:13] permission to spend other assets more effectively so that you can get a bunch of benefits. And the first benefit that you can get is a reduction of taxes. So the first strategy, and I should say that there’s about five of them. I don’t know if we’ll cover them all today on this podcast, but they’re, they’re about five or so ways to spend the death benefit while you’re living. And the first strategy is something that’s called a pay down or a spend down, and this is, I will admit the one that you’re probably going to want to look at the numbers behind it for. So again, you can get the report by emailing Todd S. S is in Strobel at partners, number four, prosperity.com. That’s Todd S at partners for prosperity.com.

[03:59] The spend down is taking a non IRA account. So this would be like maybe your bridge loan account, maybe a stock account, something that’s not in a retirement plan, not in a 401k plan, but just regular after-tax money. And the typical approach when somebody’s in their seventies or eighties, I said eighties or nineties earlier, it’s really seventies or eighties, is to spend interest only having your whole life insurance policy intact gives you the permission to spend principal and interest. And what that does for you is reduce your tax because if you’re spending principal, you are clearly not getting taxed on those dollars because you’ve already paid tax on those dollars. You’re still going to be taxed on the income, no doubt.

[04:46] But we can actually prove to you that it’s more efficient, more effective for you to spend your principal. The problem is that means over time, you’re going to run out of that account. You’re literally going to spend or pay down that account to zero. So less tax, that’s good. Less fees to the money manager. That’s good. But then over time, and typically you do a spend down or a pay down over 10 or 15 years, maybe even 20 years over time, that account is going to go to zero. So you have to have strategy B. And so this would be the second way to spend your life insurance while you’re living. But let me just do a check in with Todd here and make sure that the spend down or pay down idea is clear that we’re spending our principal

[05:30] and our interest together. And I, in today’s world, so many people, 25 years ago could confidently say they could live on just the interest. We hadn’t experienced an interest rate environment like we’ve had these past few years. So the difference between being able to spend principal and interest and just interest is so huge when you consider that we’re going to live longer and these lower rate environments could last much longer than we anticipated being able to spend that principal critical. So yes, I’m with you. Fabulous. Fabulous. So now your account is down to zero. And what do you do next? So the next way to spend your death benefit while you’re living. And again, this is under the permission slip idea as well.

[06:21] And that’s to do a reverse mortgage. So reverse mortgages do have a lot of emotion connected with them. And some people do not like this idea at all. And that’s OK. I thoroughly understand that. And we’ll have other strategy bees here in a minute. But this strategy can generate tax-free income and consequently be very effective. And I would also just like to remind people that when you’re in your 80s, your children are in their 50s as a general rule of thumb, maybe even 60s for some people. And that means that they’ve already established a life with a home. And in most cases, they do not want yours. And so here you are as an 80-year-old. Maybe you did a pay down from 70 to 80. And now you’re looking at a reverse mortgage, which, by the way,

[07:14] a reverse mortgage is always more effective when you’re 80 than when you’re 65. Or 62 is, I think, even the earliest age that you can implement one. Much, much better to do reverse mortgages later in life. So here you are as an 80-something-year-old. You’ve got grown children, adults that are in their 60s with their own homes, their own families, their own lives. And you’re debating about whether to hold on to that house. A reverse mortgage can provide tax-free income if you’re willing to have the knowledge that the house may end up going to the bank when you pass on. However, if you have life insurance, your family could make a choice about that house. And this is what’s such a beautiful strategy

[08:01] because it’s combining reverse mortgage, which, of course, you could do without the life insurance and create tax-free income. But by combining it with the life insurance, you put your family back in control. You get the tax-free income while you’re living. Then when you pass on, they get the death benefit and they can choose whether or not to pay off the bank and keep the house or keep the money and let the bank have the house. And of course, it’s not an all or nothing deal any stage of the game because you’ve got maybe two spouses. You could do a reverse mortgage over one life or over both lives. You’ve got a life insurance policy. It might be of a different value than the mortgages, et cetera.

[08:42] So we’re just talking concept here. But it’s so important to realize that the children may or may not want the house. And it’s so much more important in my mind to give them the freedom to make the choice. Now, understandably, if this is like the fourth generation family cabin by the lake, you know, that’s different than just a home that somebody has lived in for a long, long time. But again, reverse mortgages combined with death benefits can create tax-free income for the people that are living in the home and then flexibility and control and decision making opportunity on the family’s side once that person passes on as to what they’re going to do with that home. This is probably one of the most stressful things

[09:24] that I think families go through is making the decision on a reverse mortgage. And I think it’s helpful to separate the house from the home. The home is what you created in the memories that have been stored of a lifetime of raising your family. The house is just the physical shell that when you’re no longer living, the value is not there anymore. The sentimental value is just not the same as the home that you created. So, you know, don’t be afraid to mortgage the house. You can keep your home with the reverse mortgage that everybody can still come over for Thanksgiving dinner. But the house is a thing. Absolutely. And that tax-free income can really make a big difference in your lives as you’re looking at the reverse mortgage opportunity.

[10:16] So a couple other ways to spend the death benefit while you’re living. Many of our listeners are clear about the concept of a life settlement. That is where you would be selling your policy. And again, this does not have to be an all or nothing deal. It’s one of the reasons why people have more than one policy. Maybe you sell one and keep one. But you can also take one and split it up, sell a portion of it to a life settlement company and keep some for the family. Now, typically, you would be selling your death benefit only if you had a terminal illness and were after age 85. Those are the types of policies that life settlement funds tend to buy. However, it’s still a viable option and could be a very good use of dollars

[11:02] for you if that’s what you wanted to do. So that’s another way that you can spend or use your death benefit while you’re living. So that’s the third way, if you will. And then the fourth way is something called a charitable remainder trust. And this is only going to be appropriate if you have a highly appreciated asset, maybe an individual stock, maybe a company, maybe a piece of real estate that you want to sell and get a break on the capital gains tax. So charitable remainder trusts are pretty tricky. You have to have probably a good ten or fifteen thousand dollars in attorney’s fees and a competent attorney to help you get the trust done before you’re actually going to sell the asset. It’s the trust that sells the asset.

[11:49] And then the language is really accurate. The charity gets the remainder of the asset. And essentially you get income along the way and then your family gets the life insurance. I’ve seen numerous charitable remainder trust proposals that had term insurance in them, which makes absolutely no sense. Number one, people typically are not going to do a charitable remainder trust until they’re in their 70s or 80s anyway. And that’s not a good time to buy term insurance. Ridiculously expensive at that level. And number two, the term insurance is going to run out before you do. And that way the family is being disinherited because the charity is going to get the remainder of the asset and the family will get nothing.

[12:30] So a charitable remainder trust combined with a whole life insurance policy, ideally one that you bought when you’re in your 30s, 40s or 50s, even though now you’re 70 and 80 and doing the charitable remainder trust, that again, combining of strategies, the combining of a charitable remainder trust with a whole life insurance, I should say combining of products, that strategy of those two products can be very, very beneficial. Also very tax effective because, of course, you’re getting a benefit for the deduction that you are gaining due to the contribution to the charity. So charitable remainder trust, our fourth example of a way to use your death benefit while you’re living. And I would just like to point out that, you know,

[13:15] when you talk to people that are in their 70s or 80s, you know, when they had that chance to buy life insurance in their 30s, 40s or 50s, I’ve never had a person say they regretted buying the whole life insurance policy, only the people who regretted not buying it when it was available. Yeah, that is well said. And I’ve had numerous people in their 70s and 80s wish that they had bought more, wish that they had death benefit already in place because they really either weren’t able to at the time because of health reasons or just even financial reasons. So, yes, it is definitely something to do and to share this podcast with your children and grandchildren so that they’re buying life insurance

[14:00] in their 30s and 40s and 50s when it’s viable, effective financially and also doable from a health-wide standpoint. Super. And one more time, there is a PDF that we will send out to you. Todd, the letter S as in Sam, Todd S at partnersforprosperity.com and put permission to spend. That would be the best thing, correct, Kim? Absolutely. That’s the title of the report. And we will get you that 16 page report. This is No BS Money Guy, Todd Strobel for the Prosperity Podcast. Thanking again to our listeners. Keep your questions coming in. And thank you so much, 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 partnersforprosperity.com.

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