Where Does Your Life Insurance Fit Into Your Net Worth – Episode 396

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[00:02] Partners, on this episode, we’re going to be addressing a listener question. And this one is a little bit of a technology piece and coordination piece. So are you ready, Kim? Yes. Excellent. So this is the question, which is, how are you taking on your personal finance statements? How are you taking your whole life policy into account with that, especially on platforms, different apps, or different programs like that? Oh, this question just makes me want to grab my computer and shake it and make a new program come out of it. Because the answer to the question, I will give as specifically as I can, yet it’s such a challenge because most of the platforms out there, so Mint.com, personal capital, you need a budget, even things like QuickBooks and Quicken,

[00:56] do not do a good job of reflecting how a whole life insurance policy should show up on your own sheet. So at least with QuickBooks, you can make your own categories and the cash value should show up as cash, like in your liquid asset column, because you can withdraw it. You could withdraw the money, you could cancel the policy, you can get at that cash. So it should show up as the liquid portion of your balance sheet. Your premiums are essentially obligations. So if you’re looking at a cash flow statement, you’re not really going to have anything coming out because right now you probably, most of our listeners don’t want to be taking dividends in cash. So you’re really just showing the premium going in and nothing

[01:45] coming out. And then the harder one is the death benefit. And frankly, it doesn’t belong on the balance sheet at all. So most people have some type of separate list. And again, this is where the Mint.coms and other formats really just don’t do a good job of all. You need a separate list of insurances. Frankly, you should have your car insurance, your home insurance, your liability umbrella, your life insurance, your disability insurance, your health insurance. You can think of this as like all of the things that do that protect assets, protect income. Your estate plan could be in that section. And that is one thing that does cause a little bit of confusion on the death benefit. So the death benefit is income

[02:29] tax free. And for most people of our listeners, they’re not going to be paying estate taxes because we’re over 11 million with the estate tax protection. Now that could change. And of course, we do have some listeners over that. When you have a large estate like that, your death benefit is included for estate tax purposes. But for 99% of the work that we’re doing and the people that we’re helping, really, you don’t need to worry about the death benefit being included in a state taxes. Now, if the government makes a whole bunch of changes in the state tax law, then maybe we need to take a look at that. And there are certainly some solutions to it, but just have a list of your insurances and have the death

[03:15] benefit listed. I keep an Excel spreadsheet of all my policies. It has premiums. It has paid up additions. It has the date of the policy because the anniversary dates are very important. It has the maximum paid up additions. It has the cash value. It has the loan and it has the death benefit. And remember your death benefits going up every single year. That’s a really important fact, frankly, about most whole life policies, all of the types of policies that are from a mutual company. And so not that you need to update that kind of thing every single year, but it’s good to take a look at it every two or three years and just reflect the increased death benefit. So that’s how it should show up on balance sheets and income

[04:04] statements. And again, not so important on the income statement, but that cash value is a liquid asset and it should be on your balance sheet like a savings account. Okay. And so it sounds like you have just a tool like an Excel spreadsheet to be able to keep it neatly organized. But if we go even deeper into this, and this was a follow-up question, which is then how do you adapt it or how do you determine what’s going to be happening with this when you take into account loans on your policies and all of these other pieces? Yeah. So thank you for adding that question. So you’re going to put the loan on the debt part of your balance sheet, just like you would any other debt. Generally speaking,

[04:51] you don’t net those. You can create a net worth number, but you want to keep a separate line item for cash value and a separate line item for the loan. And so what we’ve done, and we use a bookkeeper who I’m happy to refer to people, she is not cheap, but she is extremely valuable is we’ve just tracked our loans through a normal amortization schedule. We can pull one in truth concepts. Mostly I try to make sure the loan has a payback schedule. And again, this is more of a cashflow thing that is reflective of what the loan was used for. So if I borrowed against the loan for payroll for my business, I just try to get it paid back in the next year or two. If I borrowed against the loan for a cashflow in real estate

[05:41] deal, I use the cashflow to pay back the real estate. If I borrowed against the cash value for a loan to invest in something that’s more like a set amount where I’m not going to get cashflow, but I know I’m going to get the money back through four years, then I’ll just pay interest only on the loan every time the insurance company bills me for it and then pay back the loan when the investment plays out like a more of a fix and flip that’s longer term or that type of thing. The loans, I think there’s a lot out in the marketplace about the loans and a whole bunch of extra tracking and paying extra interest and a whole bunch of things that frankly just make it confusing. It’s not really necessary. And it’s really

[06:27] out of whack in today’s economic interest rate environment, because as we’re all well aware, the banks are lending money at, depending on whether you’re talking to mortgage or a car loan, two, three, four percent, maybe five, six percent. The insurance companies are usually between four and six right now, whether you’re fixed or variable or whether you’re using an outside source for your loans. And so you’re not going to get in there and pay extra interest on it. That just doesn’t make sense. And I love Nelson Nash’s book and many people have read it and they want to pay extra interest. We have to remember that was written in the 1980s when bank interest rates were at fifteen percent, one five. Well,

[07:07] if you have a life insurance loan at eight, which the insurance company rates were a little higher than and you you could get a loan at the bank at fifteen, but you didn’t. You brought against your cash value at eight. Well, yeah, you want to pay back that, quote, extra interest, the difference between the eight and the fifteen. That’s going to go in as paid up additions. And yet again, nobody’s really going to do that today. It doesn’t make sense in today’s economic environment. If you want to do it, just focus on maxing out your paid up additions. And if you have maxed out your paid up additions, then just buy another policy. It’s why people end up with a portfolio of life insurance policies, just like other people have a portfolio of real estate or portfolio of stocks or bonds

[07:48] or mutual funds or whatever it is that they have, which again is why I have an Excel spreadsheet with all twenty some I don’t even know the number anymore policies that are on there. And thankfully, with a bookkeeper to keep track of them all. You know, you actually unpacked three pieces inside of this that some of our listeners may have pulled out and some of the newer listeners may not. So I want to touch on those three. And I think there’ll be an aha moment. Sound like a plan. Yes. OK, so one, you’re actually thinking more in terms of cash flow versus net worth. Why is that? Yes, always. Thank you for bringing that up. It’s because it’s a way more important number to measure. Most of the typical financial planners out there measure net worth.

[08:33] Most of the typical financial planning things measure net worth, like, oh, living balance sheet or money or, you know, even the meant dot com and the you need a budget and personal capital, et cetera. It’s not a relevant number. I mean, we say you can’t eat equity. Well, you can’t eat net worth either. It’s kind of the same thing. And so cash flow money going out is an important thing. We need to be saving money. Money coming in is an equally important thing. And so we want to learn about investments that cash flow. We want to learn about ways that money can keep moving and not just be stagnant and sitting. Now, again, I reiterate, as I always do, the first job of the life insurance is to be your emergency fund.

[09:19] You don’t want to be constantly barring against it for opportunities and have no emergency money left. But when you get past that emergency money level, different number for every family and you want to pursue opportunities, you want to pursue cash flow, investments where money is moving, investments where money is coming back. And again, we could argue that the life insurance policy itself is one of those because it does pay dividends every year. Again, in the early years, the dividends should just be reinvested into paid up additions. And yet that will be something to create cash flow for you in the future. Oh, that was really good. OK, my second takeaway on this, which goes back to Nelson’s book.

[10:03] And as you clearly stated, you know, that was written years and years ago. Now we’re in a totally different environment. And so how is it that you’re understanding one, the environment that we’re in now versus I often see people get stuck and feel like what was written years ago has to be ironclad and cannot be moved? Yes, we are well aware as human beings that life goes forward every single day. And boy has the recent times just really proven that. I mean, you just have to figure out a way to keep moving forward. And that means not only your life, your money, but also your learning. And so it’s awesome to get a foundation and then you need to keep learning and you need to learn in the current environment.

[10:49] And so while whole life is this ancient, ancient product that pretty much acts the way it has always acted, the interest rates in our economy move around and consequently, the dividends from the life insurance company move around a little bit. I don’t mean to imply it all that they’re connected because they’re not, really, especially when you use the term stock market rates, which is a completely different category. So the first category being more interest on cash and liquidity. And as we’ve said so many times, life insurance should be viewed as an investment anyway, should frankly never be compared to the stock market, because it’s not anywhere even close. And yet all of those things, economic rates are

[11:37] one of the principles of prosperity that ProsperityEconomics.org, which is our nonprofit, espouses. We don’t talk about it as much in the seven principles of prosperity that Partners for Prosperity works with. But economic rates are a part of our lives. They move around almost every day. You know, one of them, some one of the interest rates somewhere is moving. And while we don’t need to be overly focused on it because there’s not a lot that we can do about it, we still need to be aware and we need to dig in and learn and do what it takes to be current with our knowledge about how our finances are being impacted by all of those things that are out there that we don’t control, that do move around and that cause us to need to learn new.

[12:25] Very well said. The third takeaway I had from our earlier piece was assembling a portfolio of policies. I think too often when we get started using this, you know, tool, what happens is we feel like it’s a one time and then it’s done. But once you see it in action, you realize it’s a portfolio. What is the one takeaway you could give to helping understand, helping someone understand to break that paradigm? Yes, I think it is best looked at through the lens of an adult growing up. And so when you’re in your first job, you should buy your first policy. And when your income goes up, you should buy your second policy. And when it goes up again, you’ll want to get a third. And then you want to make sure your spouse has one if you get married.

[13:14] And when your children are born, you want to put a policy on them. And then probably your income will go up again. And then you’ll buy another policy and another and another. And then at some point, if you’re a business owner, you’ll start to also buy policies on the key people in your company. And so over time, you just build these policies. You keep paying the original policy. I cannot emphasize that enough. I’m always very saddened when somebody comes to me. This happened just a week ago. And there’s an agent that has talked to them about borrowing against one policy to pay another a big no, no. And also stopping one policy’s premium and paid a petition flow in order to start another. And that is not ideal.

[14:02] I’m not saying that sometimes it doesn’t happen because of just certain cash flow requirements that occur in people’s lives. But the very first policy that I bought when I was 24 years old was 50, no, $100 a month, I think. And I keep paying that. And the reason I don’t know the exact number is because Carrie, the bookkeeper pays it. But and I pay it annually now, of course. But nevertheless, it is a structure that just enables forced savings, which all of us human beings need habits. And the more we can automate these habits, right? You and I’ve talked about this numerous times. The better off we can be. And so you want to start one policy and keep paying it. I don’t know why people don’t think they can have more than one.

[14:47] I get that question more often than I would expect, where people say, oh, you can have a second one. So I’m not sure where that thought comes from, that people think they can only have one. I guess, you know, we only have one car insurance policy. We only have one home insurance policy. I guess it’s maybe where it comes from. Yeah, that’s that is strange. Well, you know, I think what you did in this episode is you helped all of us understand Kim’s take on cash flow, but really should say Kim’s take on prosperity versus the world’s take on net worth. And I, for one, am happy to focus on prosperity. So thanks for the lessons today. And listeners, if you liked what you heard, what you can do is you can go to partnersforprosperity.com

[15:36] and there is a ton of different training on there. Or you can take a look if you’re not already a subscriber to the podcast. Subscribe and listen to the other episodes that we have. There are hundreds and hundreds that you can dive in and learn from, or you can go on Amazon and see the different books that have been written. But thank you for spending your time with us today on this episode. 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.