What Are You Using Life Insurance For? – Episode 349

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[00:01] Welcome to the Prosperity Podcast. Today, we’re going to be talking about some of the questions that you’re going to fill out when you’re doing an insurance application. Before we jump into that, we’re going to grab a quick Emma dog update. Emma dog. Let’s hear something. Yes, I want to, our listeners want a 30 second update to know how she is doing currently sacked on the floor about five feet from me with her big long arms. Her arms are arms, you know, paws, front, as long as mine, and they’re all stretched out straight. And she’s my second favorite thing to talk about. But I think I said that alpacas were my second thing. So I have two second things. Well, I promise this. I promise we won’t let the alpacas hear that episode or Emma.

[00:51] So they won’t know they’re competing with each other. You know, as we’re going through and we’ve talked about some big paws, this episode is actually a big episode for the purpose of answering a listener question. So if you guys haven’t sent in your questions yet, make sure you do that. Hello at partnersforprosperity.com. So here it is. When filling out an insurance application, oftentimes people are trying to decide a couple of selections. So you have the buy and sell, deferred compensation, charitable planning, family income, mortgage and there’s a list of those. Help us unpack and understand how to approach this type of question. Yes, it’s a great question and one that we just fly right by typically on the application

[01:41] and mark the default, which is family income. However, it’s completely legit for a person to buy a life insurance policy for paying off their mortgage upon death. It’s not actually what I would recommend. In fact, I have a death claim that I’m helping a client with right now and her husband’s passed on. She’s still relatively young and if she wants to use it to pay off mortgage, of course she can, but I’m going to not recommend that because it would be so much better for her to keep the cash and use it to make mortgage payments with than to pay off her mortgage entirely. However, there are times that peace of mind overrides pure financial efficiency and this may be one of them. We’ll see. As it relates to some of those other things that people use mortgages for, or sorry,

[02:30] life insurance for, but sorry, Spencer, I interrupted you. Did you have a question? No, I don’t, but I think that it really depends. As you mentioned, and we’ve talked about mortgages in the past, a 15-year versus 30-year and then paying off your mortgage early, a lot of that comes down to a personal preference of how secure they feel, but I will say from hearing the conversations you’ve had with others, once they get the full picture and they have a prosperous mindset, they’re able to approach those traumatizing moments with a prosperity thinking and they can say, you know what? I actually want the cash flow. You made a great point there. Well, cool. It is definitely an important one and I just see too often people lock money up in the

[03:13] walls of a home and then for whatever reason, the family needs to shift gears and not be in that home anymore. It’s a sad thing to do with money in my mind. Back to this life insurance application and the stated request from the insurance company as to what it is for, I truly think it’s just like a survey. They’re just curious what you think it’s for because it doesn’t really impact how you get approved with a couple of exceptions and it certainly doesn’t matter how the death benefit is going to get paid or anything else, again, with a couple of exceptions, but let’s lump all of the first three words that you rattled off, which were buy sell, defer compensation and charitable work into a category of business use.

[04:03] Obviously not always business, but most of the time a charitable remainder trust is the effect of a business decision in some form, ideally a tax decision and also sometimes a financial decision that relates to an asset, often a business or a piece of highly appreciated real estate and I’ll give our listeners a little tip. If they really want a deep dive and I mean a deep dive into the charitable remainder trust idea, Spencer, if you’ll include in show notes truthconcepts.com forward slash CRT standing for charitable remainder trust, listeners can get a free report that Elizabeth wrote for Todd and under the Truth Concepts brand, which is the software that is a proven strategy and again, this is financially proven with Truth Concepts software, the effectiveness

[05:01] of not only the charitable remainder trust, but the combination of a charitable remainder trust with a life insurance policy and that is why life insurance companies have this as an option. A charitable remainder trust is a legal document, but the combination of it with a life insurance policy is a fairly well known advanced strategy, so like maybe some time we’ll do a whole life 301 or 401 course on that strategy, but if our listeners want a little heads up, that is the place to go truthconcepts.com forward slash CRT. Is that clear enough for that part? Absolutely. Yeah. We’ll make sure to get that in the show notes as well. Fabulous. Thank you. And then the buy sell and the deferred compensation, those are business strategies.

[05:47] So let’s say Spencer, you and I are in business together. We’re both married to other people. You to Jen, me to Todd and a buy sell agreement again, like a CRT is a legal document, but it’s typically funded with life insurance so that if I die, you have the ability to pay for my stock or membership of the company to Todd so that you and Jen can business full on without having Todd, which had been not involved, involved in the business. So a buy sell protects the business owner and enables them to have the business to themselves in the event of a death and sometimes even in the event of a disability of a partner or a stockholder or a member. You know, it seems like that should be a part of every single exit plan when

[06:43] a company is being created, yet they don’t think about that. Oh, so true. I mean, attorneys do bring it up, but most business owners are like, yeah, for later. And it really, it really should. You’re right. I mean, it absolutely should be a part of the early aspects of it. So yeah, that’s the buy sell part. And then the deferred comp is something for a more established business where, and there’s two different ways to do it, but where you’re essentially working with a key employee could be an owner or could not be. And you’re using life insurance to fund again, a legal document called the deferred compensation agreement, whereby the executive is deferring some of the compensation and saying, don’t pay me now, buy this life insurance policy and

[07:29] pay me later with it. Another name for that is called a supplemental executive retirement plan, SERP, S-E-R-P. And that would be where the business puts the money up for the life insurance policy, which will then supplement the person’s retirement income later. So both deferred comp and SERP are the same idea. Legal documents funded by the life insurance just depends on who does the funding, the person for deferred comp or the company for the SERP or the supplemental executive retirement plan. So lots of uses. And as you mentioned a few minutes ago, this is more or less for the life insurance company to understand what the use of the policy is, but it’s not going to impact or affect anything, correct?

[08:15] It’s really the only time it would impact or affect is if somebody was already at human life value for their personal insurance, they could get additional insurance by identifying that it was for a buy sell or for deferred comp or general interest or whatever the family income and the mortgage that’s going to fall into their own personal human life value. And it’s pretty rare that people have full, full human life value, you know, 15, 20, 30 times income, one times gross worth. I mean, those are human life value numbers. Those are big numbers. And so it’s fairly rare that that’s an issue, but has been occasionally where we have somebody at personal human life value and we have to do a cover letter that says to the insurance company, Hey, this specific policy is

[08:59] for a buy sell agreement. So you need to look at the value of the business, not this person’s income and net worth. Good point. And I think as a final touch on it, and this is trying to help me process and understand anytime that we’re setting up new policies, we want to have clear thinking on why we’re doing it because once we put our focus on something, then we’re going to get greater results. And so if we are starting a new business or having a career change, or maybe our family’s growing, understand why we’re making these decisions so that you can get the maximized multiplied results out of it. That’s, that’s how I’m approaching this. Is that the appropriate way? Well said. Yep. Yep. You’ve got a good perspective on it.

[09:40] Okay. Well, wonderful. Well, again, this was a listener question and these are some of the things that we absolutely love. And sometimes there’s listener questions that don’t make it to the podcast because it’s personal and it’s going to get answered through email. So regardless of the type of questions that you have, please submit them over and send us a hello at partners for prosperity.com. And we would love to include you here in the podcast. Fabulous. 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.