Whole Life Insurance Provisions – Episode 043

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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. Once again, we have our co-host and bestselling financial author, Kim Butler, with us today. Welcome, Kim. Hi, Todd. Happy to be here and delighted to provide this conversation. An actual client gave us an idea for this and we’re going to help some people today. Super. Well, a lot of people, I shouldn’t say a lot, but a lot of people, I guess, are buying life insurance policies, not just taking those policies that come with their

[00:54] jobs, which we encourage. There’s still so many more people who do need to do that. But one of the biggest concerns is that you’re making a financial commitment to keep making those premium payments and we all know that life circumstances can change. So today we’re going to focus our show on what happens if you can’t afford to make those premium payments. What are your options? Absolutely. So just a couple days ago, I was on the phone with a client that had lost his job and he’d been out of work three or four months and he was back in a job and very grateful for it. But during that time frame, he hadn’t made the life insurance premium payments to his own policy. And this policy was just over a year old.

[01:43] So he’d made 12 or 13 payments and then he’d missed two or three or four even, I think. And he was very concerned about it and legitimately so. But one of the things that we had the joy of telling him is that there is a provision inside, especially whole life policy. So we’re talking about whole life, the kind with cash value in them, not term insurance that does not have any cash value. The provision inside the whole life policy that kept this policy going is called an automatic premium loan or APL, automatic premium loan. And what it does is operate just like many of you have learned about borrowing against your cash value. So when you borrow against your cash value, you are having a loan and you may

[02:33] be using that loan to buy a car or a big screen TV or build a business. But an automatic premium loan is a loan where the cash value is used to pay the premiums. Now, let’s think through this. Every time a premium gets paid, and I’m not even talking about the paid up additions right now, just even the base premium, every time it gets paid, the cash value rises. Well, if you borrow against your cash value, and remember, when you borrow against your cash value, it doesn’t affect the cash value any. So let’s put some numbers to the example. Let’s say that we’ve got about $10,000 of cash value, pretty new policy. And let’s just say that the premium is $1,000 a month. And so you have your $10,000.

[03:20] And in this case, the guy missed, let’s say, just three monthly payments. Well, that’s $3,000. But as the automatic premium loan kicked in, when the $1,000 payment got missed and then paid because of the automatic premium loan, so borrowed against cash value, made the premium, the cash value rose by about $1,000. So now his loan is $1,000, and his cash value is $11,000. And then month two rolls around, and he misses the premium again. And the automatic premium loan, or APL, kicks in again. And the cash value is borrowed against. So now his loan rises to $2,000, and his cash value rises to $12,000. And then he did it again, third month, $3,000 loan, $13,000 cash value. And now he’s on the phone with me saying, OK, I’m back at work.

[04:20] What do I do? Do I focus on paying off my loan first? Or do I focus on making my premium payments first? Or do I focus on making my paid-up addition contributions first? And just a quick reminder, paid-up additions are the optional money, the extra money that you can put in but that you don’t have to that go above your premium. And a lot of people make the mistake of thinking that only paid-up additions raise cash value. But in actuality, premiums raise cash value also, especially starting the second year. So this guy’s got three options. What should he focus on? Have I made the fact pattern pretty clear? Yes. Unfortunately, the scenario that we see the most is that somebody loses their job, and then they stop making payments

[05:15] on things. So they stop making payments on their life insurance. Maybe they stop making payments on their rent or their house payment because they just don’t have the physical resources to do so when one of the other options that we haven’t really talked about would be going and borrowing against that cash value because when you’re unemployed, you have very few resources available because you no longer qualify for a loan. Would you qualify to borrow against your own life insurance? Absolutely. That’s the beauty of the cash value, is it is there for your use in whatever form you want, and you write the ticket. So in this example, not only could he borrow against it to pay premiums, but he absolutely could have borrowed against it

[06:04] to make mortgage payments or what have you. Now, in his case, that wasn’t a need, but he could have borrowed against it to put food on the table if that’s what was necessary. And absolutely done. Seven days, no questions asked. Interest rate between 4% and 8%, depending on the insurance company, the lower rates are variable, the higher rates are fixed, and that money is there in cash, like I said, within seven days, ready to go. So let’s go back to our example. So the question is, does he, now that he’s got his job back, does he focus on premium payments, pay-to-pedition rider contributions, or paying back the loan? And my suggestion to him, which is true 99% of the time, is that you want to get back

[06:49] on the base premium payments first. That should be the first thing that you focus on because not making the base premium payments is gonna continue to increase the loan, and we don’t want that to go on forever and ever. I mean, in his case, it could have gone on for quite some time. In fact, we’ve had clients on automatic premium loans for three, four, five years sometimes. But ideally, you wanna click that a little bit sooner if possible. So in his case, he started making premium payments again. He’ll do that first. And in his example, like we said, I think it was around 1,000. And he was making his paid-up addition contribution just one time a year. So my suggestion is that the second thing

[07:35] that he wants to focus on is paying down the loan. Now, that loan is his determination for how quickly he wants to pay it down. He can make lump sum payments. He can make partial payments. He can make interest-only payments. He can make monthly payments. He can make quarterly payments. He can make every now and then payments. He can do whatever he wants, but he will want to work on reducing that loan over time so that in the next two or three years, in his example, that loan is gone entirely. So first thing to focus on again, premium payments. Second thing to focus on, reduce the loan down to zero. And then third thing to focus on is picking back up those paid-up addition contributions, which are the extra amounts.

[08:24] Now, there’s one little bunny trail we need to go down on the paid-up addition contribution, and that is that you always want to make your minimum paid-up addition rider contribution. So typically, it’s $100 or $120 depending on the company per year. So you want to make sure that you’re at least getting that in, but in his case, he had a maximum paid-up addition contribution of, I don’t remember, maybe it was $7,000 or $8,000 a year, I think, and so that should really wait until that loan is paid off in his case, because he had a fixed rate loan, and so his loan rate was at 8%. And obviously, an 8% cost is more than about a 4% gain, which is what his cash value was growing at in the year 2015.

[09:12] So he’s better off paying off his loan first and then jumping into the paid-up addition third. So actually, premium payments first, loan second, paid-up addition third in that order, because that’s gonna give him the most efficiency for his money, the best bang for the buck, get him out of those loan costs as quickly as possible. And yet, again, I reiterate, I mean, that’s gonna be completely up to him and his control and his call as to how quickly he wants to do that. And in our example, we were talking about somebody who had a traditional job or an hourly or salary job, but you should think of this on the self-employed level as well. 2008, I was working with a contractor in Las Vegas, which that was an extremely competitive market,

[10:00] but the bottom fell out of the financing. The credit lines dried up. It was an absolute mess. This particular person had funded a large life insurance policy. It was actually done for some estate planning purposes, but he was able to jump into that market, replace his business line of credit with the cash value of his life insurance. And that was a once-in-a-lifetime opportunity to dominate a marketplace that you couldn’t have gotten in any other way. Absolutely. And it’s why we talk about the cash value of life insurance as being your emergency and your opportunity fund, because it truly does give you the capability to handle emergencies and to create opportunities. Opportunities usually require cash,

[10:52] and that’s what the cash value of life insurance is for. And I hear a lot of people talking about the life insurance as an investment. I really don’t see it that way at all. It is a place to store cash. And as I indicated in the year 2015, it’s earning around four or four and a half percent, and that’s without taxes. So very efficient environment, very flexible, in terms of how far you can push deadlines and that kind of thing. This example I gave earlier, he was a good, probably a year or two away from having any problems, but automatic premium loans can be backdated. If we need to catch something up within 30 days or 60 days, we can. There’s just a lot of room for little silly things like clerical error and human error

[11:41] that hopefully don’t happen. But if they do, around life insurance, you can relax because we can usually get the problem solved. And if somebody does something that makes it go haywire, it’s usually fixable. Whereas I know in the mutual fund environment and other stock market arenas, if you’re a day off, you can lose. And sometimes there’s not a thing that can be done about it. So it’s kind of a nice, whoo, take a big breath environment that really works for people. As a place to store cash, create opportunities, survive emergencies, help when things don’t go right, help when things do go right, and all along the way to be very peace of mind oriented because the life insurance industry, as we know,

[12:23] is not federally regulated and it is not operating on a fractional reserve environment the way that the banking industry does. So if that life insurance policy says that they have $10,000 with your name on it, they have $10,000 with your name on it, and it’s not fractionally loaned out 20 different times to a whole bunch of different people to use it. So you are first in line. The insured is literally the first beneficiary of the policy. Now that doesn’t mean you’re gonna put your name in the beneficiary line, but it’s your cash. Typically the insured and the owner are the same. Now on the rare occasions when you own a policy on somebody else, then it’s the owner that has the first line to the cash.

[13:09] But if it’s the insured and the owner, it’s your cash. You can do with it what you like. Kim, in the past, you’ve been very generous with our listeners. Did you bring anything with you today? Well, I still wanna share to as many people as possible, our Financial Planning Has Failed book and it’s available on audio now as well. So you can get that for free at partners4prosperity.com slash ebook. And again, it’s a 60 page book called Financial Planning Has Failed and it’s available as audio as well. Partners4prosperity.com slash ebook. Super. Well, this is an OBS Winnie Guy Todd Strobel for the Prosperity Podcast. Once again, I would like to thank my co-host, Kim Butler, and take care everybody.

[13:57] Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners4prosperity.com. If you liked this episode, make sure you subscribe and leave a review.