Episode 141 – Insurance [6/7 Series] with Kim Butler

Announcer:
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 discovering how to make way more money and pay way less tax. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility. So death and taxes, the two most challenging subjects for us to ever talk about. And yet the two things that frankly are inevitable, we are partners with the government whether we like it or not. And at some point we are likely going to die. It's certainly not a sure thing anymore, but it's pretty likely. We're going to talk about life insurance and what's the positive side. So in tax-free wealth, I talked a lot about the positive side of taxes. We're going to talk about the positive side of life insurance and actually look at some of the benefits and how to use it the right way.

Tom Wheelwright:

I have one of my oldest dearest friends, Kim Butler, who's an expert in this area. She's a very recognized expert in the life insurance area. And Kim, it is so great to have you on our show, going through this course. This is chapter six of my book, The Win-Win Wealth Strategy, which Kim influenced substantially. Kim, if you would just give us a little bit of your background, what you do and your focus right now.

Kim Butler:

Well, happy to, and it's always a joy to talk with you Tom. I think we could jabber away for many hours, and such a blessing that everybody gets to listen in while we do. So yes, I have worked with the personal finance arena since 1988 when I graduated from college. Started at a bank, then went to what would be called a financial planning firm and got involved with life insurance right away. Had absolutely no clue about it. This is not anything you learn in college about. And the few people that might, it's some weird thing that some kid around the corner does or your dad's friend had or what have you. And yet as my career progressed, first through both the life insurance arena and what we would call the typical investment arena, stocks, bonds, mutual funds, and then beyond that into the life insurance combined with real estate and every alternative investment known to man.

Kim Butler:

And then as careers do, I think came back around to truly focus on what I love, get rid of all of the other ancillary things and it brings us to this product which is called life insurance. Thank goodness it is not called death insurance. And we'll talk about that. And I've been able to help people in the United States and even through some contacts in Canada because North America's really the only country that has life insurance exactly like we have it. England used to, I think India has something similar. But this is my space. I love it. I love helping people with it and I love learning all the terms. And yes, that sounds horribly geekish and boring, but hey geek is in, so I'm in.

Tom Wheelwright:

For those of you listening, you've got a tax geek and a life insurance geek talking about death and taxes for the next 45 minutes or so. It'll be fun. Because Kim and I have had multiple discussions over the years and we'll call them discussions, not arguments. We were just talking about that before that Americans don't like to argue because they see it as a negative, whereas Europeans actually think that's a positive. But in any case, we will have a discussion about this. Kim and I have had flat out arguments about it in the past, but we'll have discussions now. And what I'd like to start with Kim, is I want to give everybody a baseline. Can you start with, give the two or three functions of life insurance?

Tom Wheelwright:

I talk about the functions of the tax laws, raise revenue and produce incentives. Those are the two functions of the tax law. How would you say, what are the functions of life insurance in a very basic way?

Kim Butler:

Sure. The first function is to replace an asset called a human being, that has an economic value, just like any insurance is we're narrowing our discussion to mostly life insurance. One, because that's my expert. And two, and this is an important distinction, it is the only insurance that's attached to a guaranteed event. So you had some fun at the beginning like, maybe we could live forever, but pretty much death is guaranteed. So that's number one on our list today, which is it replaces the economic value of a human being working or not working and we can get into that. And then two, it takes advantage of actuarial science. And this would be something fun, Tom, to look up.

Kim Butler:

I don't know what was first, the actuarial science, which we could all agree that actuarials are the nth degree of geeks or the science around taxes and accounting, but I'm going to guess it was actuarial science. So it takes advantage of that in a way that is the law of large numbers and is also around a whole bunch of other ancillary tax benefits and other that don't relate to the taxes at all, but just relate to the guaranteed event called death.

Tom Wheelwright:

So if you would, just for our listeners, what is actuarial science? What does an actuary actually do?

Kim Butler:

Those two words together, they sound horrid. Actuary is, I don't actually even know the actual Webster definition, but it's around the law of large numbers. It's around the science, the math if you will, of taking a group of 1,000 people as an example and using statistics to figure out how many of those 1,000 are going to die. So that's one side of actuarial science. And then the other side of course is how many are going to live. And maybe at the very end of our conversation today we can talk about that other side of actuarial science, which is annuities that are the ability to pay an income stream for life. And that's how insurance companies make so much money. So that's what an actuary does, is measuring numerically, scientifically deaths per thousand and life and living per thousand.

Tom Wheelwright:

I heard a great definition of an actuary, an actuary is actually an accountant who's had a charisma bypass.

Kim Butler:

That's good.

Tom Wheelwright:

I like to say that just because accountants are known to be boring. Okay, so that's the primary function, is to replace the economic value. I like that. Okay. Any secondary functions?

Kim Butler:

Yes. Because that is a very long-term job replacing the economic value, sitting and waiting until that economic value that human dies. There are two functions that got created in the effort to make that long, long, long time of that product that has to sit on the books, sustainable and literally acceptable in our society. And this did start in Europe and then is now in the US. Early, early, it's literally one of the very first financial products that occurred. And so this breaks down to the two main types of life insurance that we know of, which one of them should be called death insurance. And that's term insurance. Term insurance plays a huge, huge role. It is a fabulously amazing product and as many people know, it only will pay the death claim if you die in the term of time that your product is for.

Kim Butler:

It could be yearly renewable, but you still have to renew it or it could be 30 year. You die in the 31st year you get nothing. So that's the delineation of those functions. And then the other side of that of course is the permanent side. And we can have some more nuanced discussions about this, but this basically means the environment where that death claim is going to occur no matter when it happens, could be 31 years out, could be 100 years out. And for that product to exist during that long, long period of time, there has to be living benefits, which is why it is called life insurance. And that's the cash value component that lets the product stay on the books so long without having to continue to pay for it.

Tom Wheelwright:

So basically you're funding the extended term of the insurance when it would otherwise be perhaps uneconomic to continue that insurance if it were term insurance. Is that fair?

Kim Butler:

Very well said.

Tom Wheelwright:

Okay. One of the things that I heard years ago from our friend Patrick Don Hall, I said, so tell me the percentage of, and I expect you to know this off the top of your head, the percentage of term life insurance policies that actually pay out.

Kim Butler:

It's one half of 1%.

Tom Wheelwright:

One half of 1%. And the percentage of whole life policies that pay out?

Kim Butler:

It's 98 or something super high. It's actually not 100 because people do cancel them, but it is a very, very high percentage.

Tom Wheelwright:

So what's interesting to me about that is I have to bring it back to accounting terms. So I look at term insurance as an expense and I look at whole life or permanent life insurance as an asset.

Kim Butler:

Correct.

Tom Wheelwright:

Okay. Because that's something that's actually going to produce income at some point. Term insurance is simply an expense that is protecting, basically it's a protection. That's what it is. It's like any other insurance. Okay, so term insurance, I think everybody understands term insurance, it's pretty simple. Before we get into the permanent, when would you use term insurance?

Kim Butler:

Every day of the week for almost every human being out there. And it's because of that human life value amount. So human life value is the definition of the economic dollar figure that is being replaced. So a quick numerical example, if somebody's making $100,000 and they're in their 30s, then they're probably going to work another 30 years or so. Their human life value is $3 million. And so they should have term insurance, maybe they should also have whole life insurance. But the fact is that term insurance is a very viable product. It's inexpensive. You can get qualified for it. Actually the qualification's the same, but you can also numerically, monetarily handle it.

Kim Butler:

And because of that human life value, that fairly large figure for most people, term insurance is going to be one small little expense that they will be able to pay. Their family can have the peace of mind, they can have that death benefit in place. And it may also be doing business jobs like funding buy, sell agreements and other things like that. Perfect product for all of that kind of thing. Literally every human being should have some.

Tom Wheelwright:

Literally a risk management tool. Literally you are managing the risk of dying or of somebody else dying that is important in your life. And that's the whole purpose of insurance, is to manage risk. Let's go into now permanent insurance because we have lots of different terms in permanent insurance. I want to start with the simple one, which is whole life. It's an insurance that is so interesting to me as to how it's available, what it's used for, why people would have it. I have a whole life policy as you know, and I've come to find, I have a particular use for it. I'd like you to describe, if you would just describe whole life itself and explain cash surrender value, what that means, and then explain, okay, when would you use whole life?

Kim Butler:

Whole life is truly the only product and it is a very unique product in the financial realm that should be called permanent. Because the definition of permanent is absolutely positively going to be there no matter when the event occurs in death, in this case permanent. So we can get into some nuances of the other types of products that people call permanent, that I don't think are permanent. But the bottom line is whole life has two components. One is the death benefit, same that we've been talking about. The other is the cash value. You use the term cash surrender value. That is the living benefit if you will. And today when we're recording this in 2023, there are tons of people on YouTube talking about the cash value of life insurance. And that's a new thing. It used to be literally an unheard of product.

Kim Butler:

It is an asset like the cash value, the literal dollar figure is an asset on your balance sheet, whether it's on your business balance sheet or your personal balance sheet. And it is there to be used while you are living, which is why the product is called life insurance and why term insurance should really be called death insurance. And let's just get in quickly to interest rates because people are always curious about it. It's a very conservative asset, grows at about 4% these days. That's after the cost of the death benefit, after the cost of running the mutual company. That might be a fun one to bunny rabbit trail on. And after the cost of commissions for the agent. It is typically dividend paying. And what that means is there's growth on the cash value, you have guaranteed growth, but you have dividends on top that are not guaranteed.

Kim Butler:

But by most of mutual companies in the US have been paid every year for 100 years. Very boring but very effective and liquid cash value is.

Tom Wheelwright:

Let's talk a little bit about why. One of the course benefits on life insurance is life insurance proceeds are not taxable, they're not subject to income tax. And that would be true whether it's paid out from a whole life policy, a permanent life policy or a term life policy. That's one of the benefits. And that cash value that grows inside, which is that just really safe investment. Tell me why is the government so, the US government, because you said not all governments, although I do charts and tables on this in chapter seven in my book. What's the public policy behind this? Why is this so important to the government? They would actually give, it's tax-free growth in your policy. The death benefits are tax-free. What's the public policy behind this, Kim?

Kim Butler:

It is to take care of widows and orphans, to be very blunt about it, because this was in place long before social security was in place. The insurance industry is state regulated, not federally regulated. And it is so important to take care of those left behind. But it's also important, and this is why it's tax-free, to identify that it is the replacement of an asset. A human being earning 100,000 a year is similar to a $3 million asset. And so there's no gain in that transaction. If that person dies, there is $3 million that replaces that income and that's why it's tax-free. Just like our car insurance is tax-free, if we ever have an accident and it replaces our $50,000 car.

Tom Wheelwright:

Excellent. How many insurance companies have failed in the last 100 years? Do you know that?

Kim Butler:

I don't know the exact number, but I know that it's a handful, a very, very small amount.

Tom Wheelwright:

And what happens when they do fail?

Kim Butler:

They're taken over by other companies and this is why it's so minor, because those other companies step in immediately and back up. Typically it's the other companies that do business in the state and most companies do business in all 50 states with a couple exceptions for New York. But the companies come in and they take over the guaranteed cash value, they take over guaranteed death claims and they take over guaranteed annuity payments and literally just make sure that those guarantees are absolutely going to be paid without any delay. And again, that state regulated industry with a state structure of other companies supporting other companies, even though failure is very, very small in number, it literally has left nobody with an unpaid guarantee. Again, death claim, annuity payment or guaranteed cash value.

Tom Wheelwright:

Interesting. So really not that dissimilar from a bank. Banks get taken over, they don't just fail. You have the FDIC to come in, you have the banking regulators come in, but life insurance is that important. The reason I bring this up is just because I think understanding the safety of this asset is so important to understand that this is not something that you're worried about price, you're not worried about, is it going to be there in the future? This is, as you say, it's permanent. It's something that will always be there. So let's talk about some of the functions of that. Let's talk about the functions of the death benefit first, because I do think that there's some important functions of that death benefit, which is not just replacing human life value.

Tom Wheelwright:

So for example, I'm at a point where I don't need insurance to replace my human life value. I have other assets to do that. So what do you see as some of the uses and the benefits of that death benefit?

Kim Butler:

Well it goes to what we were just talking about, which is the importance of the permanency. And I want to just add a sentence to that last conversation and then answer your question at the same time because they go together. And that is that the mutual company, so we're talking Guardian, MassMutual, New York Life, Northwestern Mutual – Lafayette, Penn Mutual, there's about 20 of them, have a 100% legal reserve requirement that makes them very different from banks. And so when we pair the death benefit, which when we acknowledge that death is a guaranteed event, it's not something you negotiate like disability, you could or could not be disabled or you could or could not be ill, your car could or could not be total, death is not negotiable. When you tie that guaranteed unequivocally clearer event to a guaranteed absolutely going to be their payment, that enables you to bring those two guarantees into your life in a way that is very beneficial to you while you are living.

Kim Butler:

And the easiest way to explain this, and I have a little special report that we've prepared for your community, that'll be on your show link wherever it is. But the easiest way to explain it in one sentence instead of the 20 pages, is to think about it like if you were guaranteed to win the lottery when you were age 90, you would live your life in your 60s, 70s and 80s very differently than you would if you did not have that guarantee. And having the death benefit of the life insurance is very similar to that guaranteed could win the lottery. Now am going to transition, if you have death benefit in place, it is like you are going to win the lottery at 90 and it lets you spend your money differently from 70 to 90.

Tom Wheelwright:

If you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine, he's a former board certified surgeon and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he is geared towards. So if you're a high paid professional, you're going, look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated, I'd like to take control of my money and my life and my taxes. I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast by Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Tom Wheelwright:

And honestly we've talked about this, but that's why I have a life insurance policy, that is the sole reason, is because I want to be able to spend my assets. I don't have want to have to worry about my kids. I don't have to worry about my wife. I want to make sure, okay, they're going to get taken care of, but they can get taken care of through the life insurance. They don't need my assets to be taken care of and therefore debts are paid off. They have assets because debts are paid off. Now I feel comfortable, okay, what I do with my assets is for me, because they are absolutely taken care of. I have used it that way. I use it as a replacement of having to worry about what happens when I die. It's that sleep at night factor, which is what a good CPA is about too, is a good sleep at night. Sleeping night versus IRS versus dying. I love that.

Tom Wheelwright:

So let's turn to the life benefit. Let's turn to that cash value of that policy and that life benefit. Can you walk through just the basics of how that cash value does benefit you during the life? What are some options that you can use it for and how that's important to really investing and other types of using that instead of just letting it sit there?

Kim Butler:

Well, I just talked with a client the other day. He's an accredited investor, wanted to pursue this investment and was told in order to do the investment you have to have 150,000 of liquidity elsewhere. Pretty common requirement for accredited investments, especially the alternative investment space these days. And he forgot that he had the cash free of life insurance. So he is looking through his bank accounts and saying, well I'm sort of fully invested. I have liquidity in my cash value of life insurance and that will solve the need for this requirement so that I can go do the investment that I want to do. That's a great example of how life insurance cash value didn't get borrowed against, it didn't get withdrawn, it just sat there doing its boring job of being a good liquid available investment.

Tom Wheelwright:

Why do you call it liquid and available? Can you just walk through, because this is true in all the contracts, right?

Kim Butler:

Absolutely.

Tom Wheelwright:

What that availability is.

Kim Butler:

You buy contract law, have the opportunity to borrow against or withdraw that cash value. And the way that I like to think about it is for any emergency or any opportunity. I literally encourage clients think of their cash value as a line item on their balance sheet, call it their emergency/opportunity fund. And the first job of all liquid cash, and I'm talking liquid like in three to four days, is to solve emergencies, whatever those emergencies may be, personal business, you name it. And then the second job of liquid cash is to take advantage of opportunities. This could be down payment on a real estate deal, it could be a particular business that you want to buy, fill in the blank. It could be you want to take your entire family on a vacation for a few months, whatever the opportunity is.

Kim Butler:

As a general rule I think we want to think of it in terms of investments, but that cash value that's stored at the mutual life insurance company. So let's just get clear real quick, mutual, not stock or public and we can come back to that, but that is growing, that earns dividends, can also be borrowed against. Borrowed against.

Tom Wheelwright:

Let's talk about what that means because I think that's important, because people think of a 401(k) and you borrow out. You don't borrow against, it's not collateral. We're just talking about using that as collateral. But interestingly enough, you're using it as collateral with the company that has the collateral, which is the insurance company and they actually will always lend you that money. Correct? At whatever the stated interest rate is at the time. So that means that it's still growing, it's still paying those dividends, it's still doing that. It's still functioning in its realm. You're not taking it out, you're just using it as collateral just like you would use your home as collateral for a loan. That's really all we're talking about.

Tom Wheelwright:

Okay, so I can actually use it as collateral at any time. It's literally value. I know you always encourage people don't take it out, borrow. And the reason for that I presume is why would you give up that asset? Correct?

Kim Butler:

Right. We want to be confident with it and do things that we are certain about. This is not a time to borrow against, to speculate at all. And one of the things that you address in your book so well is that if you're going to take on debt, you better be fairly certain that that business or that real estate deal that you're doing will earn the cash flow to pay that debt back. And this is one of the mistakes that I think is out there quite a bit in the YouTube sphere these days, is you have people talking about borrowing against the cash value of your life insurance policy and never paying it back. And as you stated, there is an interest that is charged from the life insurance company. It's a fixed rate by the way. Fixed when you sign your policy, never to change. They're usually five, 6% these days fixed.

Kim Butler:

And that interest must be paid to that life insurance company while that loan is on the books. You can't be borrowing against it at 60 and expect that to work until you're 90, 100, 110, 120 years old. So borrow against it, pay it back from the business or the real estate deal that you borrowed against it for. Use that velocity of money method that you and I talk about so often to keep cash moving and let your real estate help your life insurance, help your real estate, help your life insurance or you could interplay with business there and get those dollars, borrowed against paid back, borrowed against paid back over and over and over again so that they're available and ready to be used.

Tom Wheelwright:

I'm going to add just a little piece of tax here because you talked about the interest that you're paying. So unlike like a 401(k), you're paying interest to your 401(k), therefore you're actually paying into a non-taxable, and so it's not deductible under any circumstance. This is different because it is just a loan. The money that you pay, like you said, it's going back to the insurance company, it's not going into your account, you're not paying into your tax-free or tax deferred account. Instead you're paying the insurance company for that loan. That money's coming from them, it's not coming from your account, you're just collateral. And I want to be really clear on that. And so what that means is under tax law, whether interest is deductible depends on how you use that money.

Tom Wheelwright:

And because you're using that money, if you use that money for business, real estate investing, then it's tax, it's actually deductible as that type of expense. So if you use it in your business, it's going to be deductible as business expense. If you use it in your real estate investing, it's going to be deducted as real estate interest expense. I think that's a very important distinction because it's growing inside tax-free because you haven't taken it out and you're still getting the tax deduction. It's a very a tax efficient borrowing from that standpoint. You're really, if let's say it happens to be growing at the same rate that you are paying, you're still making money. So let's say you're paying 5% and it's growing at 5%, well it's growing at 5% tax-free, which is a net 5%, whereas you may only be paying a net 3% because of the tax benefit.

Tom Wheelwright:

I think that's an important point. Now if you can, I want to start expanding a little bit to other types of so-called permanent life insurance and the one that we hear most of is universal life and what's the distinction between a whole life policy and a universal life policy?

Kim Butler:

Absolutely. The distinction is the way the product is built, so whole life been around two to 600 years depending on what you define as its starting point. Universal life's only been around since about the 70s and it was built as a term insurance product. And as we stated the beginning of our conversation, term insurance price goes up either every single year or it might be level for a period of time, but then it takes a big jump and then it might be level for another period of time. Whereas whole life insurance has a fixed premium that never changes. It's literally part of its guarantees. The term insurance underlying cost rises and rises and rises and rises. And there are cousins of universal life, fixed universal life, index universal life, variable universal life, fill in a couple other blanks. I'm sure they've come up with some other words. The bottom line is they all function like term insurance and consequently should not be called permanent.

Tom Wheelwright:

Interesting. Well that's very interesting. So it's really like a replacement for the old saying buy term, invest the difference, right? Because that's really what you're doing. You're buying term and investing the difference. You're just investing it within the insurance company.

Kim Butler:

Right. And why on earth would you want to rely on the insurance company to do that work when you could go find your own real estate deal or pick your own stocks or what have you? I've never really have understood that, although I will admit to you that I used to sell variable universal life and this is how I learned the detriments of it. And it is just really clear to me that it's not even in the same court or playing field as whole life.

Tom Wheelwright:

It's almost like combining your insurance with a financial planning situation or a financial advisor where they're going out and they're investing, but they're probably, they're picking an index fund, which is what they normally pick I think in a universal policy, is an index fund, which means that you're subject to the vagaries of the market and they put some, actually insurance on that, which is an option which prevents you from losing money. So you're not going to lose money, but you can make money.

Kim Butler:

Well, here's the security thing.

Tom Wheelwright:

Yeah, please.

Kim Butler:

Just real quick on that, because that is absolutely how it's sold, that you can't lose money.

Tom Wheelwright:

Exactly.

Kim Butler:

But there may be a 0% floor for that investment component, but you still have insurance costs, trading costs, all below the 0% floor.

Tom Wheelwright:

Got it.

Kim Butler:

So you absolutely can lose money, and I've seen it happen. You could lose 1.5 to 2% per year because of all those costs that are below that 0% floor. I just really encourage people to be very, very careful around the space, and one of the biggest recommendations I would make, because a lot of people are unclear, they think they have whole life, but they actually have universal, and you can read some of the terminology if you want. And the easiest way to get clear on it is to request from your life insurance company something called an inforce illustration. I-N-F-O-R-C-E. And if you'll look at that, first of all, it'll make it evident that the universal life policy, no matter how well it does, will probably implode. That means fall apart from the inside, around age 80, 85 at the most. That's not very old.

Kim Butler:

The whole life insurance you'll see in Dow. And what that means is it just keeps getting bigger and bigger and bigger and bigger and bigger until age 120 where the cash value equals the death benefit. Huge distinction there.

Tom Wheelwright:

Interesting. So in your mind, why would you do this instead of buying term insurance to invest the difference? So from your standpoint, you get a lot more freedom. It's a little bit to me like the 401(k), right? Why are you putting it in 401(k) when you could actually have all of the benefits of the 401(k), but you have control over yourself? And the only reason is that you're not interested in your own investment and being a participant in that, right? You don't want to be an active participant in your investing, you want somebody else to just handle it.

Kim Butler:

I suppose that that could work. I'd still rather have you just buy an index fund and then buy term insurance. Because-

Tom Wheelwright:

I'm curious though. I'm sure you have, I'm guessing you have. Have you looked at over the last 20, 30 years comparing whole life to Universal and who wins?

Kim Butler:

Yeah. We've looked, there's studies like this kind of thing just as in your business, that the insurance companies put out and the American College puts out and that my husband with his truth concepts calculators is able to replicate himself or do himself. And we've studied it 16 ways to Sunday and there can be a potential of having more cash value in the index or variable universal life. There absolutely can be. But when you're talking about death, which is a certain guaranteed event, do you want anything in the arena of can be, when the opposite side is also true, which means maybe it doesn't work out.

Tom Wheelwright:

Interesting. Okay, so we understand the tax benefits. So far our tax benefits are we have a potential interest deduction when we use it to borrow. We have like would with any other borrowing, but we know it's there. Another thing is it's liquid but it's tax-free liquid because debt's not taxable. So when we borrow against, that's not taxable. And then when it gets paid out as a death benefit. So let's say that you get to that point and you're saying that the cash surrender is growing and the death benefit's growing. When you die, what's paid out? Is it the death benefit and the cash surrender benefit or does the death benefit include that cash surrender benefit or what's going on there?

Kim Butler:

Let me just use the numerical example, because the answer to the question is you do get both, but you get it paid as a death benefit. And that's so important because you want it to be tax-free.

Tom Wheelwright:

Exactly. That's the way it's taxed-

Kim Butler:

You want capital gains tax at that point. And so here's what happens. If you have a million dollar whole life insurance policy and you start and there's zero cash and a million dollar policy, as you build that cash value via your premiums, and this is such an important point and that is that premiums build cash value, right? Then the death benefit grows. And so over time, let's say you died fairly early and you had maybe 300,000 of cash value, that death benefit would easily be 1,000,004, even maybe 1,000,005. So it's called a death benefit. It's paid as a death benefit and it is the original base face amount, which was the million, plus the cash value. And the numbers are not always exact dollar for dollar. Sometimes they're a little more, sometimes they're a little less, sometimes they're a lot more and you get both. But it's paid as a death claim with a death benefit that is income tax-free.

Tom Wheelwright:

Very important. And of course there are strategies we can use so that it's not only is it income tax-free, but it is estate tax-free. We call those ILIT or irrevocable life insurance trusts. And we can actually have our heirs own the policy and therefore it's not taxed then. We can get literally no tax. Of course we're not getting deductions like a Roth 401(k), right? No deduction on the front end, but we pay no tax on the back end and we can actually eliminate the estate taxes well pretty easily. Before we wrap up, I do want you to explain the difference between mutual and stock companies, because you've brought it up several times and I do think it's an important distinction.

Kim Butler:

Yes. There are mutual companies, like I mentioned, there are probably about 20 of them. The stock companies are publicly held. So this is the John Hancocks, the Transamericas, the Prudentials, the MetLifes. And some of those companies used to be mutual, but they are no longer. And so those are publicly held companies. They do not offer whole life insurance anymore because when they pay a dividend, they have to pay their dividends to their stockholders, right? On the mutual company side, when they pay a dividend, which they have to do by law when they have a profit, that dividend goes only to the policy holders because it's a private company and there are no stockholders. So a mutual company is very different than a stock company in the life insurance realm.

Kim Butler:

And then that additional nuance of a dividend paying mutual company, because as a quick example, there is one company that I'm aware of, maybe more, so I won't mention the name, that does have whole life insurance but doesn't pay any dividends. And so that's just [inaudible 00:41:32].

Tom Wheelwright:

So would it be a fair comparison to say a mutual life insurance company versus a stock company is comparable to a credit union versus a bank? Right?

Kim Butler:

Yeah, I think so.

Tom Wheelwright:

Because a credit union is owned by its depositors, it is a mutual type company whereas a bank is owned by its shareholders.

Kim Butler:

The only additional important point is that life insurance companies that are mutual, and I truly don't know this about stock companies, must reserve dollar for dollar. Whereas as we know, banks and credit unions can reserve seven to 10 cents on the dollar. The life insurance companies that are mutual are known as 100% legal reserve companies. If they say they have a dollar in reserves, they have a dollar.

Tom Wheelwright:

Got it, got it. So in closing up here, Kim, would you just give our listeners two or three actions that you think they ought to be taking in order to maybe look into or figure out what to do from a life insurance standpoint?

Kim Butler:

Absolutely. There are a bunch of places that you can get cheap term insurance on the web. Ethos, Ladder are a couple that come to mind. Please go get a bunch of term insurance. That's just the simplest, easiest, inexpensive step that you can take. And then do understand that there is a difference between cheap term on the web, which is fabulous, beautiful, and you should have lots of it. And convertible term insurance, which is typically at a mutual company, is going to cost a little bit more but is switchable or convertible to whole life. That's a space that people might start to check into. And then of course you have direct whole life. Additionally, as mentioned, please get an inforce illustration. If you have that ancient life insurance policy that's in your file or you bought one a few years ago and can't remember exactly what it is or what it's doing or your parents bought you one, please call the insurance company 800 number, ask for an inforce illustration. I-N-F-O-R-C-E.

Kim Butler:

They will typically email you that PDF. I am available to your listeners, if somebody really just doesn't understand their PDF called an inforce and they really need help and they don't have an agent, they don't know where to go, it literally takes me five minutes to figure out what that inforce illustration says. I would be honored to provide that brief guidance and then just learn a little bit about life insurance. I like to ask people how they learn best. Do you want to read, do you want to watch, do you want to listen or do you want to play a game? And we have learning material in all four modalities.

Tom Wheelwright:

Awesome. Thank you very much, Kim. And by the way, there is an inforce example in the appendix of The Win-Win Wealth Strategy. We made sure that we included that. So you can go to that if you want to know what that looks like, it's in the appendix to The Win-Win Wealth Strategy, chapter seven. So with that, Kim, where's the best way to find you?

Kim Butler:

Prosperitythinkers.com is our website and we have a special email for your community, a special link I should say prosperitythinkers.com/tom. And there's a special report on there that is called pay down permission and it elaborates on this arena that is the least talked about space. All the YouTubers are talking about using your cash value while you're living and you want to do that and you want to learn how to utilize the death benefit while you're living, which is what pay down permission addresses.

Tom Wheelwright:

Got it. Thank you very much, Kim Butler. Just remember, life insurance is just one of those things. It's a safe asset. It's not all of your assets. It is a safe asset. It's something to include in when you're thinking about this, and it has tremendous tax benefits as we talk about in chapter seven of The Win-Win Wealth Strategy. And it has great policy benefits as well. I've learned over the years after Kim and I have gone through this, I finally figured, I finally have a handle on it. Honestly, it took me 30 years, but I think I finally got there and I think we went through a pretty good illustration of it in The Win-Win Wealth Strategy. And really appreciate Kim for coming on, Kim for what she's doing in the life insurance industry.

Tom Wheelwright:

And just remember when you include things like life insurance as a safe asset and you look at these things, you're always going to end up making way more money and paying way less tax. We'll see you next time.

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