How To Use Whole Life In Your Business – Episode 149

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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 back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host and the founder of Partners for Prosperity, Kim Butler, with us today. And we’re going to be talking about how business owners can use whole life insurance to build their businesses short term. I mean, what you can use this for pre-death as well as protecting the company by using the purpose of insurance and that’s to prepare for a potential loss. Welcome Kim.

[00:56] Hello Todd. Sorry to have a discussion around this today because there’s some really cool stories from history and then there’s also some really fun ones that are happening right now in present day. Some fairly well-known ones, of course, are Walt Disney. He used cash value of life insurance to get his first theme park up and running. There is history about Ray Kroc at McDonald’s, how he used cash value of life insurance to borrow against, to get those franchises up and running. Foster Farms, the people out on the west coast that do the chickens and the eggs, they right on their website talk about using whole life insurance to get, again, borrowing against the cash value to get their companies up and running.

[01:43] And then we’ve got three examples to share with you present day that are kind of fun. Dan Sullivan, the owner of Strategic Coach out of Toronto and Chicago has been my mentor for over 21 years. And we have a fun little video clip on our blog post that we’ll put a link on this to around his use of whole life and how it has helped them. He doesn’t really refer to it specifically, but borrowing against it is something that they can do or people can just leave it as their place for their emergency money. You know, the older and the bigger, the older you get as a person and the bigger you get as a business, the bigger account you want to have just sitting there for emergencies. So it’s a great story behind that.

[02:29] There’s another current one that’s fun. Jordan Adler, we’ve got a great video on. He’s a network marketing expert and he used his cash value of life insurance to buy a ticket into space. Literally one of the first human beings that’s not an astronaut to go into space. And that I think is happening in another couple of years. That’s going to be really fun to hear about from Jordan. So there’s a fun little video on our blog about that. And then I know you’ve got some clients, too, that have used it. Todd, tell us some about those examples. Well, I think the one that I think of most specifically was back in 2008, I was working with a company that was a construction company in Las Vegas, Nevada, and construction companies rely on their credit lines in order to be

[03:19] able to bid jobs and do projects. And Las Vegas was a very competitive market and like probably 80 percent of the people out there, their credit lines from the bank were cut off because there was just no lending happening after the mortgage crisis in 2008. And they were able to actually stabilize their business using the cash value of their life insurance. And because so many other companies were dependent 100 percent on the banks to approve financing. You know, I think, you know, a lot of people here, maybe they own businesses and they’re not exactly picturing what we’re talking about. And what we’re talking about is that as an employer, you can have life insurance on yourself. You can also even purchase life insurance on every person in your company.

[04:12] And the death benefit could be payable to you for so many years and then maybe payable to them as a bonus if they stay with you or or whatever. But the cash value by using what we call the paid up additions rider, you’re able to build up cash value very quickly. And by having this pool of people, you know, that your have access to legally insure because they’re your employees, you’re able to store cash, earn a better than bank rate of return on that money. And when you want the money, you can either withdraw it or you can borrow against it. And that’s at your discretion. There’s not a banker that’s going to say, hey, what do you want that money for? Yes. And it’s interesting when you use your cash flow, your whole life

[05:08] insurance, if you’re borrowing against it, you’re not impacting the growth. So that loan money actually comes from the insurance company and it lets you go do what you need to do with your business while the actual cash value continues to grow and the death benefit continues to grow. So as the death benefit continues to grow, that also supports that business. We’ve got a neat example on the blog about Stanford University and how the founder of that university’s wife actually used some of his death benefit to keep the university afloat after a period of downtime. And there are other examples. I’m aware of a church where the life insurance was purchased on the pastor and they borrowed against it, borrowed against it and borrowed

[06:00] against it. And they were in a growth mode and didn’t do a good job of paying the loan back. And the pastor ended up passing on. And so the death benefit paid, it paid the loan back and there was actually still a little bit left over to give the church some money to find a new pastor. So there’s a lot of examples where life insurance can be used not only from the cash value standpoint, but also from the death benefit standpoint. I would say as a practical matter, most of the time when people borrow money against their whole life policy, they usually borrow the money from the life insurance company. It’s it’s just easier. But I’d like to point out that, you know, the company that I mentioned and anybody can walk into that same bank that canceled

[06:50] their credit line because they no longer were able to lend and still use the cash value of that life insurance policy and give them a loan on that because they consider it a secured loan. Absolutely. So this is something that you might want to check out in your own area ahead of time. So take your life insurance company’s policy statement that shows your cash value into a local bank. So the smaller banks, the community banks, the credit unions, those are the better places to get a cash value loan from the bank. So the insurance company can lend you money against your policy or a local bank or credit union can lend you money against your insurance policy. And either way, your policy is the collateral.

[07:43] It continues to grow unaffected by the loan. And then you get to use the money that you have to then go out and grow your business or make payroll or do whatever it is that you need to do personally or what have you. I do want to make an additional comment about the effectiveness of the cash value continuing to grow, because when you borrow against rather than withdrawing cash value, you allow for what’s known as an uninterrupted compound interest curve. In other words, when you start building cash value, it grows slowly, slowly, slowly. But as your dividends get paid and you are reinvesting those dividends and pay the petitions, you get that cash value to continue to grow. And if you borrow against it, you never stop its growth.

[08:37] Whereas if you try to do your savings in a bank and then you’re forced to withdraw the savings, then you stop the growth. Now, obviously you can borrow against savings at a bank. It’s just that most people don’t. And so this continual growth is important and it’s something that enables people to end up in the future with a lot larger dollars than if they had withdrawn and then started over again and then withdrawn and then started over again. There’s one other issue that we need to cover and that’s direct recognition versus non-direct recognition. This is a really minor area, but it is something that some insurance companies will bring up and they always feel that their way is best. And a direct recognition company is one that’s going to

[09:31] directly recognize loans. In other words, it’s going to say that each policy has to carry its own weight. And so if this particular policy has a loan, there’s a chance that the dividend might be either, and this is very important, a little bit higher or a little bit lower on the borrowed cash value versus the non-borrowed cash value, whereas a non-direct recognition company is not going to directly recognize the loans and will treat all cash value the same, borrowed or not borrowed. Now, in the end, the difference between the two is extremely small. We’ve analyzed this heavily and it’s really very, very minor. But there are definitely some companies that try to make a big deal about this. And so it’s important for you to know that if you have

[10:23] a direct recognition company, you’re likely to have either a slight increase or a slight decrease in your dividend on your borrowed cash value compared to your non-borrowed cash value. If you have a non-direct recognition company, there’s not going to be any increase or decrease. It’s not affected at all. But again, this is a very minor issue. We’re just bringing it up today because sometimes the insurance companies bring it up as a big issue when it’s really very small. Got it. So the most important part, I think that we mentioned today is this idea of, I can’t say, I don’t know, for some reason, I think of business in seven year cycles. I think there’s even a book out there that I read once that said that, that, but I mean, think about

[11:06] your business over the next seven years. Will there either be an opportunity to grow your business that would require an injection of cash or an opportunity to save your business that would require an injection of cash? And I mean, knowing that you were in control of that cash, not that you had to find a lender or a source of funds is a level of confidence that I think just changes the way you operate daily. Absolutely. I’ve been there. I have absolutely borrowed against the cash value of our life insurance to pay payroll. I’ve borrowed against it to invest in marketing. I’ve borrowed against it to do personal things and I’ve borrowed against it to invest and I’ve also just left it alone. So often, once we’ve learned again about this

[12:01] borrowing strategy, we feel like we have to be constantly borrowing against our cash value. That’s not accurate at all. My cash value that’s sitting there today is such a peace of mind and provides that emergency opportunity fund and it’s earning probably around 4% without taxes, completely available if I need it and just knowing that is what provides the peace of mind, not that I actually have it in play or in use right now today. I completely agree. And I want to get your opinion on something before we wrap up here. What do you think is the value of, say, buying a life insurance policy on your employees, you controlling the cash value with maybe, you know, whatever they call them, golden handcuffs or whatever, a 20 year deal or

[12:51] something where eventually the death benefit gets assigned over to them. I mean, as an employer, do you see that employees see a lot of value in that or not? It’s a good question. I think if they understand it, they do. And I’ve definitely helped business owners buy life insurance on some of their key employees where the key employees were also clients of ours and they truly understood the product and the value of the cash and the value of the death benefit in the future. Unfortunately, a lot of people don’t really understand whole life and how valuable it is. And so they think, oh, yeah, I’ve got this life insurance policy and I’ll pay when I die. And that’s really all they view it as. So take some time to dig in.

[13:34] There’s lots of books on the web, ours, of course, live your life insurance is a good one. And if employers are considering this strategy, they really ought to have their employees read a book like that before they tackle this product, because I think the employees would then have a better sense of appreciation for what they’re actually getting. Got it. And one thing that I will mention is, is that the employers that I know who have done this, if you decide to set up a 401K plan for your company and you decide to do a company match, you have to do this for every employee has to be treated the same in this world of life insurance. And Kim, you can correct me if this has changed. You can vary the amount that you

[14:23] put in these policies to some degree by using paid up additions and compensate those people more as a way of showing the people who are building your business, how much they mean to you. It’s not an everybody gets the same thing type thing, is it? Correct. It’s actually under the tax code 162 and 172. So you, you hear people talk about these plans in that way. It’s also often called a executive bonus or a non qualified plan, because a qualified plan is like a 401K or a 403B where you have to treat everybody the same. These are non qualified plans and you literally get to pick and choose who’s in, who’s not, if you want to apply a vesting schedule or not, if you want a certain amount of death benefit to the company and

[15:12] a certain amount to the employee’s family or not, et cetera, et cetera. The owner gets to pick all of those differentiating factors and they can be a very effective way, not only for the owner to build wealth for the owner’s family and for the business, but for the owner to build wealth for a long-term employee that they want to reward as well. I love the idea of, you know, what you talked about as far as educating the employee to know the value of this, because once they catch onto the idea, it’s incredible. I mean, you know, you’ve given them something that depending upon their health or whatever, they may have never been able to afford that insurance on themselves and eventually will benefit their families.

[15:57] That’s right. Awesome. Well, this is No BS Money Guy, Todd Strobel once again, special thanks to Kim Butler. Hello at partners, number four prosperity.com. If you have questions or you’d like to ask some questions again, employer owned life insurance, probably a little more technical than most of your life insurance agents are prepared to handle, but definitely recommend that you reach out to Partners for Prosperity or a prosperity economics advisor that is fluent in this and can show you how to grow your business today, tomorrow and benefit the whole company at the same time. It’s a great concept. I’m sorry. And we, I mean, we could probably talk about it for another hour, but thanks so much, Kim, and

[16:46] we’ll see you all again real soon. Thank you for listening to the Prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.