Questions on Life – Episode 190

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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 bestselling financial author, Kim Butler with us today. My co-host, and we’ve got a great topic that we’re going to be talking about, I will just kind of start this out by saying that I’m a people person and I love to watch people, particularly when they know they’re not being watched. What I’m going to tell you about is a conversation that I heard between two investors that

[00:47] were trying to make a decision about purchasing a life insurance policy. They were focused on one particular area and that was on the net assets of the company that they were going to buy the life insurance policy from. I apologize, this is a little long-winded, but the one believed that a higher net asset value indicated that it was a strong company and it was better prepared for the future. The other investor felt that this was a company that was being conservative to the point that that was money that could have been used to either decrease premium costs or increase rate of return to the investor, or to the policy holder, sorry, not investor. Now neither one of these are necessarily right or wrong, but after hearing this conversation,

[01:43] I just had to get Kim’s opinion on this and I’ve not heard it yet, so it’ll be good for both of us. Awesome, well that was a great setup and I want to remind us all of something that my husband Todd Langford says all the time and it’s about mutual life insurance companies. So you know, who knows whether these two people were talking about a mutual company or a stock company, but when you’re talking about a mutual life insurance company, and just a quick primer for those that don’t know, mutual companies are owned by the policy holders period, more like what one would think of like a credit union versus stock companies, of course, are owned essentially by the public. They’re out there, anybody can buy

[02:27] their stock, anybody can be an owner, anybody can lend money to them in the form of bonds, et cetera. Mutual companies, and so here’s the Todd Langford statement, by law must return 100% of their profits to their owners, which are the policy holders, and that ends with a period, like by law they must return 100% of their profit. And so there is no such thing as, oh my gosh, I think that this company should hold onto assets more or less in order to benefit or harm or help or hurt the policy holders. And isn’t that just the most wonderful piece of mind that those of us that own life insurance with a mutual company know, K-N-O-W, that we are getting 100% of the profits. Now, obviously the insurance company does have some reserve requirements and a couple things that they

[03:34] can do within a year or two to balance out some of their cash flow and that kind of thing, but from a legal standpoint, by law they have to return 100% of the profits. And so not only do we need to be excited about this when we own whole life from a mutual company, but we also need to be very aware of it and conscious of the fact that any other product, like Universal Life or Index Universal Life or Variable Life or all the other hybrid forms of life insurance that is not whole life, don’t necessarily play in that same sandbox. In other words, the whole life policy holder is an owner of the company and gets the profits of the company in the form of dividends. A lot of those other types of policies

[04:28] like term insurance even and Universal Life policies don’t get dividends. And so Todd Langford’s question is how can you get more than 100%, which is what the Index Universal Lives are trying to do. But Todd, let’s go back to this net asset value thing. State again what the discussion was so that we’ve got it top of mind. Well, the thing that concerned me the most is that were they focusing on something that was important in making a decision or were they focusing on something that was provided to them to really distract them from the questions that they should be asking. What is the significance of that number versus the features and benefits of the policy itself? Yeah, that is a fabulous question. And I’ll readily admit that while you don’t want to

[05:22] buy insurance from some tiny fly by night new company, whether a company has X dollar billion or X plus one dollar billion in assets, frankly is pretty irrelevant, especially when you’re talking about a mutual company that’s been in business for I’m going to say at least 100 years. And you know, it’s kind of funny when you throw out that time like I’m not kidding the most of the insurance companies are 110 to 100 and I think 70 or so even maybe 180 years old. In fact, you can really look at some history and it’s close to that 200 mark. So here we go, you know, talking about oh, the company needs to be at least 100 years old. And we say it like it’s nothing. But we should stop at that. You know,

[06:15] most of the stock market companies, most of the banks, most of the various things that people invest in, we’re talking maybe five to 50 years old. And then all by themselves way, way out there with a ridiculously long history are these mutual companies. So to me, that’s a much more important fact, whether they’re mutual or not. Number one, how long they’ve been in business or not. Number two, and then I’m sure we can come up with some others, but the value of their asset base, not even in the top 10 in my mind. Kate, I’ve got a couple other things that I just want to ask questions about that. I’m sure that you automatically think about that. Maybe the rest of us don’t. And that’s the comment that if the net asset value was lower, the premiums would be less.

[07:11] Yeah, that’s a really, it’s an astute comment in a way, even though, like you said, you know, just taking taking it by itself doesn’t necessarily mean bad or good. But I should say, and because when we use the word, but it just negates the sentence prior to that. So, and premiums, when they are charged for whole life insurance, build cash value. And we’re, as a society, so conditioned to think of the word premium as equivalent to the word cost. You talk about your car insurance premium, and everybody knows that you pay your car insurance premium, you never see it again, unless you get in an accident. Of course, you don’t really want to see it again. And that’s the end of the story. But with whole life insurance, a higher premium just indicates higher contributions to cash value.

[08:06] And I’m not even talking about the paid up addition part. That’s the extra special, like overfunded part, but just the base premium itself. So lower premium means less contribution to cash value. And so there’s a disconnect here. You know, maybe the value of the company does dictate, although I really don’t think it does. But let’s just pretend that it does for a minute. Does dictate premium high or low? Well, that’s fine. But that’s the wrong question to be asking. The right question to be asking is, what portion of my premium is going to cash value? And because life insurance illustrations are all net, in other words, they’re net at the cost of insurance, they’re net of the commissions, they’re net at the cost of running the company, which policy owners contribute to

[08:57] because they’re owners of the company. You can literally see on an annual basis, when I put in X dollars as premium, I get a corresponding increase in cash value. And that corresponding increase in cash value is net. In other words, after all the costs. Now, of course, that increase in cash value is also driven by the existing cash value that’s in there, not just by that single year’s premium. But there is no literally no way and no legal way for an insurance company to quote, lower a premium, because the state so this is something else that’s very important to remember, is that the life insurance industry is not regulated by the federal government. It’s the state governments that regulate it. And the states have to approve

[09:43] policy design to a certain degree. And so they have just guidelines and restrictions around premium levels. And frankly, that’s why that’s why we’ve made the statement numerous times on this podcast. As long as you have a mutual company, as long as you’re looking at whole life insurance, it really doesn’t matter which company you go with, because long term, they’re all going to be the same. You’ve got your top four big ones, Mass Mutual, New York Life, Northwestern Mutual and Guardian. Those are big in size. And that’s what these guys were talking about that net asset value size. Well, you know, that’s one measuring stick for sure. And then you have a host probably 20 or 30 additional mutual companies that play in the

[10:29] number five space. And let’s just say to the number 25 space in size that are completely legitimate, fabulous, you know, you could even call them boutique, because they are a little smaller companies that offer whole life insurance. And frankly, it doesn’t matter. You could throw a dart, pick a big company, small company, again, one that’s over 100 years old and be just fine. Super. Now, the you mentioned something about the state regulation on premiums. Is there much of a difference from state to state? No, that is a really good question. We always have to find out what state people live in. And so occasionally I’ll get I’ll get the follow up question like, well, if I move, does it matter? And so no, there is no difference. There is different regulation

[11:18] that’s very nuanced from state to state. But if you looked up a one hundred thousand dollar or a one million dollar or a 10 million, it isn’t going to matter on a 35 year old female in three different states, it would be the exact same price regardless. Now, as you get to the larger numbers, there’s some band breaks, sort of volume discounts, if you will. But the state of residence is not relevant. However, we have to know it because when you run an illustration, you literally cannot get past to go if you do not have the gender, the date of birth and the state of residence. So just to kind of sum up here before we move on, what would be the top, just if you would, just the top three questions, if you were going to simplify people and say here’s the three

[12:09] things you should start out asking an insurance agent when you’re beginning to evaluate a potential policy. So I’m going to throw you a curveball with this. Frankly, I think one of the first questions should be how much whole life do you own as the agent? Like the agent better own the product that they’re talking with you about. And I think what you were asking about more was the company, right? You want questions about the company? Well, no, just, you know, if you’re out there and, you know, somebody, you meet somebody, you feel comfortable in the relationship and, you know, maybe you’re trying to decide between a couple of different agents or a couple of different companies or a couple of different policies. You know, what are the three

[12:54] questions you would ask of each of those policies to determine which one’s best for you? Yeah, that’s a good question. And so I want to restate that, frankly, it probably doesn’t matter. And if you’re really curious about it, then buy one from each. But I think some legitimate questions just to make sure is you absolutely want, in my mind, to have a mutual company. And then you want to have whole life insurance and make darn sure it is whole life. There is a lot of universal life out there parading as permanent insurance, and that’s not accurate. And then you do want to be clear that you have the option for the pay to petition writer. Now, a lot of companies will give you that option for 100 bucks a year

[13:40] or 120 bucks a year. Doesn’t mean that you need to max it out. There’s a lot of misunderstanding around that. I think sometimes people feel like if I haven’t maxed out my pay to petition writer, which is the way to put in extra cash and I’ve ruined the deal, that’s not accurate at all. But you do want to make sure that you have that pay to petition writer. And I own policies that don’t have the pay to petition writer on it, but they still work just fine. However, going forward, that’s something that people should be looking for. And then I will bring up one other just because it is out there in the marketplace with some incorrect information. And that’s whether or not the life insurance company

[14:21] is direct recognition or not. And we probably don’t have time to get into that in too much detail today, but let me just say that it does not matter. So you might be having an agent tell you, my company is either direct recognition or not direct recognition, and it’s better because of that. That’s not accurate. It’s just a difference between the way that the insurance company treats the loans. But the dividend still gets paid and a lot of information out there does say or implies it might not exactly say it, that if you have a direct recognition company, you don’t get dividends on borrowed against cash value. And that’s not correct at all. So I believe we’ve got another podcast that gets into the direct recognition issue more thoroughly,

[15:10] or if not, you and I can record one. But those are the things that I would encourage people to take a look at. Yes, we have done one. And secondly, is there what resource would you recommend that people go to next if they’d like to do some more research? Well, you know, I have to admit I’m biased because I have some books out there that were very carefully written to make sure people got the right information, the most thorough information without being overly detailed and boring because it is life insurance we’re talking about. And so the best truly is our newest book, and it’s called Busting the Life Insurance Lies. Now I’ve got a little one that’s called Live Your Life Insurance that’s also very

[15:52] valuable. In fact, I really encourage people to read it every single year, like kind of a owner’s manual, you know, for a brush up. But if you really want to dig in and you’re curious about some of the nuances, Busting the Life Insurance Lies has, I think 38, it might be 39, I can’t remember, myths that are out there. Some of them are true, and some of them are not true. And we tell a really fun story throughout the book. So it won’t be boring to read it. And yet, it will get a person that’s interested in that kind of research. And of course, they can jump around and they might lose the story a little, but each of the lies are well titled. And you can go pick them out and get really, really clear about the whole truth around the life insurance arena, making sure that

[16:39] you get the research done that you want. And then from there, of course, there’s lots of additional sources on the web. But as we are all learning these days, you got to be careful with what you read there. And you should always look at the author and make sure that the author is somebody that actually owns whole life insurance and really truly understands it, believes in it and uses it. Super. Well, Kim, I can’t tell you, I think this has been a great podcast. I know I’ve learned a lot. I’m sure our listeners have too. I encourage you to get more information. If Kim has done anything for our industry, it’s not so much providing answers as she has taught people how to ask the appropriate questions. So in any way that

[17:20] we can continue to help with that, we appreciate your input on our show. Again, this is the Prosperity Podcast. And I’m the No BS Money Guy, Todd Strobel, saying take care. We’ll see you all soon. 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.