Life insurance offers tax and investment benefits to all investors. Kim Butler joins Tom to discuss the different types of life insurance available and what opportunities each presents to investors.
03:18 – What Is Term & Whole Life Insurance?
08:30 – Why Is Life Insurance Considered A Secure Investment?
15:00 – How Are Life Insurance Companies Regulated?
16:13 – What Kind Of Cash Flow Can Life Insurance Produce?
18:08 – What Type Of Person Should Buy Life Insurance?
24:55 – What Tax Advantages Does Life Insurance Offer?
Learn more about Kim Butler by visiting www.partners4prosperity.com
Speaker 1: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Welcome to The WealthAbility™ Show where we’re always learning how to make way more money while paying way less taxes. Hi, this is Tom Wheelwright. I’m your host, founder of WealthAbility™. Today I’m very excited about our topic today because we’re going to discuss a tax-free investment that’s available and useful to pretty much anyone and everyone. We’re going to discover how to use this investment for your very specific situation. We have an amazing guest, Kim Butler. She’s been using this investment for years, and years, and years. I’m going to let her do a little intro of herself, but Kim and I have known each other for, geez Kim, I think it’s over 25 years. Kim is the one who actually introduced me to this investment. Kim is, to me, the guru when it comes to this stuff. She’s very good at explaining it, so I want to welcome you, Kim. Welcome to The WealthAbility™ Show.
Kim Butler: Thank you, Tom. What a nice introduction. Yes, I think it’s super cool that you and I have known and worked together that long because in today’s world relationships don’t always last that long.
Tom Wheelwright: They don’t.
Kim Butler: We have a great business relationship. We both learn from each other. I’m honored to be able to share this information with you and your listeners today.
Tom Wheelwright: I appreciate it. Kim, just so everybody knows, where can they reach you?
Kim Butler: I’m at partners4prosperity.com, live in Mount Enterprise, Texas. We help people in all 50 states here in the good old US of A.
Tom Wheelwright: Awesome. Thank you, Kim. The investment we’re going to talk about, and Kim I want you to share what you were sharing with me earlier about the idea. Is it investment, or what is it? We’re going to talk about the difference between really different types of life insurance. People think of life insurance and go, “Oh no, it’s life insurance. I can’t believe you’re talking about life insurance.” When we talk about taxes, you know, the tax law is a series of incentives. It’s a series of incentives to people to do what the government wants you to do.
When I think about life insurance, I can’t think of very many things that the government wants more than for people to be secure if the primary earner in their family dies. That’s essentially where life insurance tax benefits come from, is they come from this idea that they government would like people to actually have it and not have to pay tax on it, so that they get the full benefit of it. What I’ve learned over the years from you, Kim, and our mutual friend Patrick Donohoe is that the idea of a term insurance and whole life insurance are very, very different. Would you mind explaining in really simple terms what term insurance is and what whole life insurance is?
Kim Butler: Absolutely. Term insurance is death insurance. You pay, you die, somebody gets. It’s very straightforward. It’s usually for a term of time. It might be 10 years, 20 years. It might even be one year, but it renews. People typically own it for their working years, which is totally fine. Term insurance is great. There’s nothing wrong with it at all. It serves a purpose. Whole life insurance is actually life insurance. What I mean by that is it exists to work with you and help you during your lifetime as well as at your death. The chances of you collecting on term insurance are extremely low. There’s studies out on the web that show less than 1%, less than a half percent of people that own term insurance will actually ever have that death claim paid, and that’s a good thing. We should be grateful for that.
Tom Wheelwright: Absolutely.
Kim Butler: The chance for whole life to pay is literally close to 100%, and you can do some things to mess that up. The reason whole life is called whole life is because it’s for your whole life. We’ll be talking here about how it’s other component, so the first component is the death benefit, but how does the rest of its components help you while you’re living?
Tom Wheelwright: That’s a great question. First of all, let me ask you the question, Kim. I usually think about life insurance, I think most people do, as this is something that we have when we’re young, when we have children, or we have a non-working spouse, and we want to protect them in case we die. That’s what term insurance is all about.
Kim Butler: Absolutely.
Tom Wheelwright: Okay. Whole life insurance seems very different to me because it seems to be that there’s an element here of whole life insurance, and maybe you can explain how the premiums work and cash surrender value. Maybe give a little bit more explanation of that because there’s this element here of not only am I protecting. Yes, it has that element that it will protect, if I die, but it also has this element of providing some amazing opportunities should I live.
Kim Butler: Absolutely. The nice thing about whole life is that it’s going to pay when you die. It’s funny, you said, “If I die,” and that’s a common thing that us humans say, and yet the last time I checked, I’m pretty sure death is a guaranteed event. We have to look at whole life insurance, and actually all kinds of life insurance, differently than we look at car insurance, and disability insurance, and even health insurance. In theory, somebody could go through their whole life and never use any of those other types of insurances, and yet whole life is a when event, a W-H-E-N, not an if event. Because of that fact, we can work backwards and enable the asset part of whole life insurance to serve us while we’re living. What I mean by that is there is an asset called cash value that you build up with whole life insurance that does not exist with term insurance. It has some components around it that are your favorite words. Is it fair to say that tax-free is one of your favorite words?
Tom Wheelwright: That is absolutely my favorite description of anything, is that it’s tax-free. I love that about whole life because here’s something that I know that as long as I follow the rules, I am never going to be taxed on this. Now I know there are times when you can be. If you break the rules, you distribute the money out, and you cancel your policy, you’re going to be taxed on that. If you follow the rules, then you’ll never be taxed. What I love is you’re not going to be taxed on the cash surrender value, which is really you think about the interest that accrues on the insurance. That’s basically you’ve invested this money, put it in, say, a bank account called the life insurance account, and it’s earning this interest. The interest isn’t taxable, but then the actual life insurance that’s paid, the face value of the policy, that’s not taxable either. In fact, if we do it right, it’s not even included in your estate. It’s not even estate taxable. We can do it, so it’s not gift taxable. It’s not income taxable, and it’s not estate taxable.
This is one of those few places where you can put money where it’s secure. I want to talk about that for a minute, but it’s secure. It’s literally guaranteed to be tax-free in all events as long as you set it up properly. When we talk about secure, why is it, Kim? I’m always thinking about this, that life insurance, why is it so thought of as such a secure place to put your money?
Kim Butler: That’s a really great question. When we look at life insurance as an asset class, and you can call it an investment. You can call it a savings account. It really doesn’t matter what moniker you want to put on it. The fact is that cash value, which is the term that we use for the living benefit of the whole life insurance has a guaranteed increase every single year that is a dollar figure. That’s part of what makes it so secure. You might even use the word certainty. It is absolutely certain that it will increase every year. Furthermore, this asset is in the life insurance industry. Again, I like to compare whole life insurance to a savings account or even a money market, some kind of liquid asset because that’s really the most common comparison that makes a like asset, to a like asset.
Cash value is most like a savings account. However, as we know, savings accounts are at banks. As most people know, banks reserve only seven to 10 cents on the dollar for every dollar that they hold. The life insurance industry is required by law to secure a dollar for every dollar. You have a certainty of principal, and then as I indicated earlier, you have a guaranteed increase that is again a dollar figure. It’s not an interest rate. Then on top of that, you have the dividends, which we could express as an interest rate. Now those dividends are not guaranteed to be paid. However, you have an industry that has a 100-, 150- sometimes, even 200-year history of paying dividends. Once a dividend gets paid, it becomes a part of the guaranteed cash value, never to go down again. That’s security. That’s the certainty that you’re looking for.
Tom Wheelwright: Let me ask you this question. In a bank, my savings are supposedly insured by the FDIC up to $250,000.
Kim Butler: Correct.
Tom Wheelwright: A life insurance company, however, is a private company. Why would a life insurance company be secure? Is it as secure as a bank?
Kim Butler: The Federal Deposit Insurance Corporation, FDIC, is what secures all the dollars at the bank. All it is is the taxpayer’s ability to pay. There’s not a federal insurance policy. It sounds like it, but that entity is very, unfortunately, misnamed. There’s no “insurance” insuring our dollars at a bank. It’s literally just the ability for the taxpayers to pony up, so you have this banking industry. We all have to use banks, that’s fine. They work great for checking accounts, but you have a desire on most families’ parts to have a more certain future where there are dollars are not having to be backed up by the taxpayer’s ability to pay. As you said, the insurance industry is private. It’s also state regulated. What people want to be looking for is what’s called a mutual company. Most whole life products are sold by a mutual life insurance company. What that means is that it’s privately owned by the policy holders. It operates similar to a credit union, if you will, whereas, of course, banks are public companies.
There’s another type of life insurance company called a stock company, which is also a public company. Most stock companies do not offer whole life. They offer other types of life insurance, but whole life from a mutual company, and I think there’s around 30, maybe 35 mutual companies, is the type of product that again, state regulated, completely certain, built on a whole bunch of guarantees. I would even go so far as saying it’s very boring, but it’s extremely effective.
Tom Wheelwright: Life insurance companies though, presumably, from time to time are poorly managed and go out of business. Then what happens?
Kim Butler: It does happen on occasion. It is fairly rare, and yet when it does happen, again, by law the other insurance companies that do business in that state pick up the three guarantees that typically exist inside life insurance companies. The first is the guaranteed cash value that I was speaking of earlier. The second is the guaranteed death benefit that you and I have talked about. You used the term face value. Those are interchangeable, death benefit or face value. Then the third is guaranteed annuity payments that that particular insurance company might have had on the books. The other insurance companies in the state pick it up, and all the guarantees are still guaranteed.
Tom Wheelwright: Here’s what I like. I know some of our listeners would agree with me, Maybe not everybody, but that’s okay, and that is I’m a little concerned about banks from the standpoint that if the government, if we have another crash like we had in 2008, that there may not be a bailout, but there may be a bail in. This happened in Cypress just, what, a year or two ago where the government actually froze the money in the banks and said, “We’re going to take off 25%. All the money that’s in the bank, we’re just taking 25% to keep the bank solvent because that’s important to the economy.” That’s actually what a lot of people like Jim Rickards and others have said, Robert Kiyosaki have said, “Look, this is what’s likely to happen the next time we have a crash, is that we actually have a bail in.” There’s always the question, could they get to the life insurance companies, but I think it’s an interesting point that this tax-free investment called life insurance, that it stay regulated. It’s not the federal government that regulates life insurance companies. Is that what you’re saying?
Kim Butler: That is correct. They don’t have the control over the life insurance companies that they do over the banks. I’m not saying they couldn’t somehow get that, yet the life insurance is literally with a longer history than the IRS, than the FDIC, than any bank out there. You know this from your work with closing large real estate deals. Any large real estate that’s ever done is typically funded by the life insurance industry, not by the banks. The life insurance companies are where all the money is.
Tom Wheelwright: Absolutely. When I look at this, I look at life insurance. The reason that I think that this tax-free investment is such a nice thing for a portfolio, if you will, is because we talk about some safety here. We establish the safety. This is not something that’s going to produce huge dividends. This is not something that’s going to produce 9%, 10%, 12%, 15% on its own. I know you really looked at it as more of a cash account that for the most part keeps up with inflation. Is that fair?
Kim Butler: Absolutely. I think the easiest way to put a definition around the gross of the cash value is to say that in its history, and again we’re talking a couple hundred years, it’s always been two or three points above bank rates. If you take your typical savings account today that’s at 1%, 1.5%, of course, taxable, the life insurance today is around 4%, 4.5% without taxes. If you look back 10, 12 years ago when banks were maybe at 5% or 6% on a savings account, the life insurance was more in the 7%, 8%, 9% range. You said it well. It’s not really going to compare with investments. You could argue that it is an investment because it grows, and it doesn’t shrink. It absolutely keeps pace with inflation, and of course the tax benefits are there. It really is your place for what I call people’s emergency opportunity money.
Frankly, who has a limit on their opportunity money? Everybody has got a small number for emergencies, whatever. It could be $1 million. It could be $10,000, but everybody has a defined number that stops for their emergency fund. When you think about it as a place to store opportunity money, like a lot of people, you and I are recording this in 2018. A lot of people are sitting on cash right now. They want heavy positions of cash. Cash is what gives us opportunity. When we have cash, we have the capability to take advantage of opportunity. That is unlimited.
Tom Wheelwright: You’ve been doing this for a long, long time.
Kim Butler: Almost 30 years.
Tom Wheelwright: Is this something that’s truly useful for everyone no matter what their situation is, or do you think it’s only limited to certain people?
Kim Butler: It’s amazing to say, but it truly is appropriate for anybody. I’ll give you a couple quick stories. My son just graduated from college. All of his buddies are out now getting their first jobs. Those guys can start their whole life insurance policies at $100/month. It’s perfect for them. Jump forward to your 30-year-old that maybe just got his dream job with a nice income, more money, bonus. Maybe it’s a 30-year-old starting a business, and it’s actually starting to make money now. Those guys contributed, let’s say, $1,000 a month, or they could do it annually, but at a higher level. Then let’s just jump all the way forward. Let’s say you’ve got a 40-year-old, but this guy has got a huge business, lots of capacity, all kinds of things going. He can be contributing at $100,000 a year, $1 million a year. It’s truly unlimited.
Then let’s just talk quickly about the 60-year-old, the 70-year-old that has a business and his net worth is worth $100 million. He can actually buy a death benefit worth $100 million, literally one-to-one on what’s actually his gross worth, not even his net worth. There is tons of proof that that will enable him to make his business, and his real estate, and the other things that he probably owns more efficient and more effective. It truly is for everybody financially. Then I’ll see if you’ve got a question on that, but let’s talk about medically because you do have to get approved for this life insurance.
Tom Wheelwright: Right, exactly. Let’s talk about that real quick.
Kim Butler: If you have had a medical history, let’s say there’s a heart attack, or there’s been cancer in your past, or what have you, there is a chance that you cannot get approved for it. Clearly, as people get older, they tend to have more medical issues. It is beneficial if you can start it when you’re younger, but it’s not critical. Sometimes with minor health issues, we can absolutely still get somebody approved. There are definitely going to be cases when the insurance company will rate you, which means they would charge you a little bit more for it. Sometimes that’s still okay, and there are cases where they will decline you. If that occurs, you can still own life insurance on other people that you have an insurable interest in it. An example would be a business partner, or somebody that you co-own real estate with, or maybe there is a parent-child relationship, or even a grandchild relationship that causes what’s known as an insurable interest and enables you to buy insurance on that other person’s life.
Grandpa is the owner and the beneficiary, and the payor, but the 40-year-old adult child, as an example, is the insured, in other words, who the actual insurance is on. Grandpa can still get all the living benefits of it while the insurance, the death benefit part is on the 40-year-old. That’s a completely legitimate strategy. The one group that doesn’t work is nieces and nephews and of course, strangers. You have to have an insurable interest in the person you buy life insurance on.
Tom Wheelwright: That’s a really interesting thought, as I have one business partner who’s in her 40s and another one in her early 30s. I’m going okay, that means that should I have this issue, which I don’t think I would, but should I have an issue, if I wanted to buy more insurance, I could buy insurance on them. I probably will not be the beneficiary in this lifetime of the death benefit. I can get the benefit of the cash surrender value, right?
Kim Butler: Absolutely. You could use that cash surrender value. It’s an asset on the books whether it’s on your personal books or the business’ books. That can be, like I was saying earlier, your or the business’ emergency opportunity money. I’ve used my cash value to make payroll. I’ve used my cash value to buy cars. I’ve used my cash value to invest. Sometimes I purposely don’t use my cash value, for example, when car loans are cheaper at the car company than at the insurance company. Then here’s another fun thing about using or borrowing against, or using your cash value as collateral. Those are all synonymous terms. You could actually use your cash value as collateral at a bank or another financial institution. You don’t have to borrow against your cash value at the insurance company.
Tom Wheelwright: Right. Now when we talk about borrowing against, you and I have talked about this. I like the term borrowing with.
Kim Butler: Right, either one works.
Tom Wheelwright: You’re borrowing with your cash surrender value. What’s going on is it’s not like a 401(k) where you pull the money out, and it’s no longer moving. That’s just collateral. It means that the insurance company still has it. It’s just in the policy itself, it allows you, and this is true I believe in every whole life policy, where it allows you to borrow, to use that as collateral for insurance either, I mean, for a loan either from the insurance company where they’re lending you the money or like you said, with a bank or other financial institution. Did I get that right?
Kim Butler: Yes, that is 100% correct. Just like a CD secured loan where your CD would keep on growing unaffected by the loan, and then you would have a loan collateralized by the CD, the life insurance works the same way. You have cash value that continues to grow unaffected by the loan. Then you have the loan and yes, you pay interest for that loan because the money that you came to you from the loan is the bank’s or the insurance company’s while your money is the collateral for that loan. It’s interesting. Go ahead.
Tom Wheelwright: Here’s a cool thing about this. I like the idea, it’s a cash opportunity fund. You borrow from the insurance company, for example, and you use that money for another investment, let’s say a real estate investment, let’s say a business investment. Here’s what cool about that. The interest you pay on that loan at that point then becomes deductible. You’ve got interest growing in the insurance policy that’s non-taxable. At the same time, the interest you’re paying is deductible. You actually make money. From a tax standpoint, you’re actually making money on this. I actually think that’s pretty cool.
Kim Butler: It is cool. It’s interesting. Sometimes people are challenged with this fact of I have to borrow against it or with it in order to use my money. Let’s think about what you do otherwise. If you just have a savings account, or a money market where your cash is stored, then you’re using it to go buy a real estate deal, you’re removing those dollars, and you’re buying your real estate deal. Now what do you do? You pay back that account to build that account back up, so that you can go do your next real estate deal. When you do that, you are basically starting at zero every single time. It might not be zero, it might be $100,000. You’re going up, down, up, down, up, down, up down every single time.
If instead you borrow against this cash account, and frankly it doesn’t matter whether it’s sitting at the bank or the insurance company for the analogy that I’m using right now. If you borrow against it, then you’re not starting over at zero every single time. You’re starting at the higher level. Then the next time it’s a next higher level, and the next time it’s the next higher level. This concept used to be used in the early eras of our country. When people had savings accounts they would literally borrow against them and pay themselves back at interest. If you go ask your grandparents about that, they did that with savings accounts. All we’re doing now is helping people do it with the life insurance cash value because it is earning a higher rate than the banks, and it is without taxes, but it’s the exact same concept. You’re paying yourself at interest. In this case, the interest is going to the insurance company because your account is continuing to earn the dividends unaffected by that loan.
Tom Wheelwright: This is amazing. Just so everybody knows, we just scratched the surface here. I wanted to get some real basics here, and Kim is so good. Kim, I so appreciate you explaining this in such simple terms because people think of insurance, they go, “It’s going to take me a few years even to recover my premiums, which is true.” Your cash surrender value is a little slow to build up. You have to recognize this is a long-term strategy, not a short-term strategy. It’s a long-term strategy. For me, what I like is the idea of some security here because there’s things, once I have security, and I want to wrap up with this. Once I have security in this life insurance account, then what it means is that I have that security. Outside, I may have some other security, precious metals, gold and silver, et cetera. I’ve got security in this life insurance account. Now I’ve got some freedom to do with the money that I have outside of life insurance that I don’t have to be quite as cautious about because I’ve got this backbone that’s taking care of me, if the whole thing collapses. That’s what I love, and I love that we’ve got this.
Of course, there’s things we can do with estate planning. There’s things we can do with children. There’s things we can do with funding education. There’s things we can do with funding retirement. I know these are all possibilities. We’ll have to get to that in another show, but what I love, love, love is that I love when I have a tax-free investment that I have flexibility with that I can do a lot of different things with. I know, Kim, you could go on for hours. In fact, you could go on for days on all the different things you could do. I love the way you put it, that this is really a cash account that is a secure, really as secure as you’re going to get in a cash account that’s actually more likely keeping up with inflation as opposed to a bank account that isn’t.
Actually, one of the other nice things that it actually puts a few restrictions on you. I’m a shopper, so I love to spend money. It’s like when I have precious metals as well, but what I love about this, I’m not likely to spend it. I’m just not going to spend this money. There’s actually some work involved. There’s some security from yourself as well, I think in the life insurance. Again, if you borrow, you have to pay it back. You don’t get a choice here. You have to pay it back. I love this, Kim. Would you give us your website?
Kim Butler: Absolutely. It’s partners4prosperity.com. There’s a ton of information on there that people can read, listen to, learn. Then if they have questions, they’re welcome to reach out to me. It’s partners4prosperity.com.
Tom Wheelwright: One of the things I love about Kim is that she’s all about education, as you can tell. This isn’t your first road show, your first rodeo. You’ve done this before. Obviously, you’ve explained 100, probably 100,000 times, not just 100 times. Kim, I appreciate your generosity. You’re always looking for how to actually improve your industry, as well as I know improving your clients. I know this is a big commercial for Kim Butler, but I can’t think of anybody I’d rather give a commercial for, frankly. By the way, at the end of the show we have a special gift for our listeners. There’s some amazing free education that we’re going to give away. Please go to Kim’s website, partners4prosperity, the number 4, dot com. I know she’s a wealth of information, and she’s very generous in giving away the information. Kim, thank you again for being on the show.
Kim Butler: Absolutely.
Tom Wheelwright: When we think about investments, we think differently about investments. The tax law is telling you, “Look, if you invest in whole life insurance, if you put your money here, we’re going to give you multiple, multiple tax benefits in order to do it.” We are doing what the government wants us to do, gives us some security, gives us something outside the bank, which I think a lot of people are very anxious about the banks. What we end up with is way more money and way less taxes.
Speaker 1: You’ve been listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.