Is Life Insurance an asset?

Susman Insurance Agency Podcast, with Karl Susman

Is Life Insurance an asset? Is it a plus or minus in your overall financial picture? This week, join Karl Susman and guests as they discuss and explain whether life insurance is an asset or not! Transcript follows. JIM: When you think of life insurance, what do you think of? For most people, they just look at it as an expense, a bill that you have to pay, a liability. Well, did you ever think of it as an asset, part of a diversified portfolio? Well today, we have John Wheeler, a 40-year veteran of the insurance industry that might put a new perspective on the way you look at life insurance in the future, and the importance that it provides you and your family. Even though we’ve always known that insurance can be an asset, listening to John Wheeler’s insight might have you thinking about life insurance in a whole new way. Welcome, John. 0:47 JOHN WHEELER: Good morning. 0:48 JIM: Good morning. I’m really looking forward to our discussion. I heard you speak a little while back where you put some new perspective in the way that I look at things, especially when it comes to the area of life insurance. Why don’t we just start out with what is the real need for life insurance for someone today? 1:04 JOHN WHEELER: When I’m talking to a client, the way that I explain the need for life insurance is basically dollars walk in, if you walk out, for whatever purpose it’s needed for without delay, so whatever you had planned to do with your income and/or assets is what life insurance can either replace or preserve. 1:21 JADE: Hi John, I got a question for you - can you help clarify the different between term and whole life insurance? 1:44 JOHN WHEELER: Basically term insurance is the lowest initial cost life insurance available, but long term, has the highest cost. In almost every situation, if you live too long, you’re going to pay more in premiums than you would receive in a death benefit, and typically, that’s going to occur well before any normal life expectancy would’ve been reached, so it’s very much like renting. If can be a good, viable, short-term solution, but at some point in time, it’s going to be more expensive than if a purchase had occurred at the same time you started to rent, so statistically, it’s also important to understand that less than 7% of the term policies issued ever pay a death benefit. Now whole life, on the other hand, is an asset that you actually own that builds equity, so it’s like owning versus renting. It normally has a fixed acquisition cost, provides a guaranteed asset growth, which can then be used during the insured’s lifetime, and still provide a guaranteed death benefit, and unless the insured is either very old at the time of purchase or has poor health at the time of purchase, it’s almost impossible to ever pay more than the death benefit would be received, especially if it’s purchased from a strong mutual company that also pays dividends, because then the dividend could actually provide an increasing death benefit as time goes on, even though the premium stays the same. 3:01 JIM: And you know John, a lot of times people look at just the cheapest coverage out there. What’s really important is when they sit down with their insurance professional, is determine for how long they’re going to need coverage. Now while those coverage amounts may decrease over time as they build up their net worth statement and build up their savings and things like that, there should be a permanent amount of coverage, because one thing people don’t even consider is they think, well, once I’m at retirement, I’m okay. Well, I know sitting down with people on a regular basis and looking at where their sources of income are going to be, many Americans today are dependent on their social security checks, and for a married couple, if one of them dies, they’re going to lose one of those checks, so how do they replace that income, and a lot of times, people don’t think that far ahead, and while term insurance is a great way to get started and get the appropriate amount of coverage that you need, and if that’s the only thing you can afford to have the proper coverage, one thing you want to make sure is that you have decent conversion privileges and you’re able to convert to some permanent coverage for some of those permanent needs, would you agree? 4:06 JOHN WHEELER: That’s absolutely correct; because the first thing to be considered is making sure that there is an appropriate amount of coverage, if at all possible. Everything else is secondary beyond that point, but a lot of times people look at that initial cost and there’s such a significant difference, especially when you’re younger, that it just looks like, well, this is just so much cheaper, it makes so much more sense, and then you always hear about the buy term and invest the difference philosophy and we’ve recently been reminded that some of those investments don’t always just go up at the same time, as well as are you really going to continue that savings pattern and leave it alone? America is the worst saving country of the industrialized nations and our famous last words is I’ll put it back, so sometimes that doesn’t occur, and, as we’ll discuss a little bit later, the other issue with the whole life, if you’re in a position that that is a cash flow possibility, can also be leveraged as well. 5:03 JIM: And it’s interesting, too. I just met with a couple this last week and we were talking about amounts of coverage and I showed them permanent coverage and I showed them term and quite honestly, the permanent coverage gave them a little bit of sticker shock. As we discussed it a little further, they opened up and said boy that seems like a lot of insurance and when you think about it, how much coverage should somebody have? Well, if you’ve got someone who is the main breadwinner and maybe all the health insurance is provided through that breadwinner, many people don’t think about how are they going to pay for health insurance if all of a sudden, it’s not provided through that employer? They look at the income. They say money is really tight, yet, they seem to think that money won’t be so tight when someone passes away with a policy that might pay a quarter million, well, if you’ve got someone 30 years old making $50,000 a year, if you’ve got a quarter million, that’s five years worth of income replacement, and that doesn’t even include the cost of the benefits that are being provided, so the amounts of coverage that we’re showing people today, a lot of times that gives them sticker shock, how do you deal with the amount of coverage, or what are you telling people they should be looking at? 6:09 JOHN WHEELER: The easiest way that I get a client to understand really what we’re talking about first of all, is I’ll ask a simple question. Would you be willing to give me all your future paychecks for the amount of life insurance and assets that you currently own, and 99% of the time they’re going to, in seconds, say well, no, and then I’ll just ask the question, are you aware that’s what you’re asking your family to do? Because at the end of the day, we have the concept that as I replace debt with wealth, I no longer need life insurance. Well, if you’re taking a term insurance approach or some type of insurance that is not going to increase in value as time goes on, you’d better hope you’re right for the simple fact that inflation is going to tear away those dollars, and then a lot of people say, well, we really don’t have inflation now. Well, go to the gas pump and explain that to me. Look at your healthcare costs. Explain that to me. Look at the cost of education, so even at a time where today’s economy we say, well, there’s really no inflation, well, there is in a lot of the things that we have to deal with each and every day, so the bottom line of it is, my son taught me a long time ago, it’s always better to use other people’s money. When he was spending my money, he looks at it all together different than when he’s spending his, and likewise, we want dollars that are going to walk in if we walk out that are still going to be able to provide what we would’ve if we were still there, and if the cost of providing some of those things from a security standpoint to our family, is still going to be increasing in cost, we need something that is going to help keep pace with that, like anything else, whether we’re looking at retirement or whatever, it still takes more dollars to do the same thing as time goes on. 7:49 JADE: I really like at how you kind of looked at term insurance as renting and whole life as ownership. Why do you refer to whole life as an asset class? 8:03 JIM WHEELER: Because it is, in fact, an asset that has equity value. That equity value is guaranteed to grow every year you own it. Very few assets you can make that statement about, and the equity also can be used for a multitude of purposes, whether it’s emergencies, education, retirement income, or even to capitalize on other opportunities that may arise. Life insurance cash value is normally the second or third line on a personal financial statement in the asset column. It has asset value that you don’t have to die to receive, and it’s one of the only assets that you can own where they will never see red ink on their annual statement showing a loss in value from previous years. 8:43 JADE: Let’s go back to the comment you made, too, of a little bit earlier in the show as far as the cash value component again. How can you view that as an asset, because you mentioned the term leverage? 8:52 JOHN WHEELER: The issue of the cash value is, like I say, this is a living benefit. People often look at life insurance, well that is only for someone if I’m gone. Well, if you have a permanent type of insurance, like whole life that has asset value as well, most of the time, at least 90% of that value is accessible just upon request, so that could be used for whatever purpose that you chose to, whether that is to take advantage of opportunities from a leveraging standpoint, or whatever, very much like real estate, or something of that nature. 9:24 JADE: John, we’re going to take a quick break and when we come back, let’s talk about the asset class maybe that’s closest to whole life to kind of put things into perspective, so please stay tuned. 9:33 BREAK 11:24 JADE: Welcome back as we continue our conversation today with 40-year-plus experienced insurance planner, John Wheeler. John, prior to the break, we were talking about the importance of life insurance, the differentiation between term and whole life, and you commented how life insurance or whole life insurance can be considered an asset class, so let’s continue on with that and talk a little bit about what’s the closest asset class to whole life insurance today? 11:48 JOHN WHEELER: Well, there could be a lot of differences of opinion on this, but I liken it more to real estate and the reason I do so is because real estate can either be rented or owned, whereas whole life, as we said, is an asset whereas if I’m buying term insurance, that’s like renting, and it’s always more expensive to buy initially, but there’s no asset value unless you buy, so you might think in terms of CDs, things of that nature, as far as safety, but in how it actually works as an asset, I actually feel real estate is closer. 12:18 JIM: Well, let’s talk a little bit more about how they compare, Johnny. I know when I heard you talk a few months ago, you went through a real detailed analysis of really how closely it does compare to real estate, and in many instances, can have more favorably comparisons to real estate. 12:35 JOHN WHEELER: Sure, see real estate value increases or decreases the same amount, whether there’s a mortgage on the property or not. We’ve recently been reminded that real estate can go down as well as go up, and whole life insurance, guaranteed cash value on the other hand, will increase the same amount every year, whether there’s a loan on the policy or not, and some mutual companies then will even credit the same dividend, whether there’s a loan against the policy at the time the dividend is declared or not, so whole life insurance cash value will never decrease, but is guaranteed to increase every year to maturity, which is typically age 100 or 121, in some cases, depending upon the carrier. Now owning real estate can also have tax advantages, such as deductible interest payments, property taxes being deducted, improvement increasing basis, and in some situation, may be even depreciation deductions if it’s for rental property, but most of the deductions are still, however, we have to remember, out-of-pocket costs, so at the time of the sale more than one year later, we might also get capital gains treatment, or if it were a primary residence, possible capital gain exclusion up to a certain amount. Now whole life insurance also has tax-deferred accumulation and can also provide tax-favored income and, in some cases, even tax free if you’re using loans and the contract is not a modified endowment. It also provides a tax-free death benefit income tax wise, in most situations, and the dividends are going to be received income tax free until the dividends received exceed the premiums paid in. Now real estate can, perhaps, also provide leveraging by using the equity in some form of secured loans, providing that the bank is willing to do so. Now the secured credit loan or a credit line, you still have financial standards that have to be met. You basically need to prove you don’t need the loan for the bank to really want to give it to you. Now real estate equity can also, as we’ve recently been reminded, decrease as well, so that makes future accessibility even more difficult, and possibly having the credit line either reduced or closed all together. Now, obviously, if you have a loan, interest is also payable on that loan, but if a loan exists at the time of the purchaser’s death, it’s also important to remember it’s still owed by the estate, so that loan still has to be paid off. It isn’t forgiven, and if the purchaser were to become disabled, any payments are still required by the lender. Now, even after the mortgage is paid off, there are also costs to keep it, which people don’t take into account sometimes. We still have to pay insurance, property taxes, upkeep, etc., so in essence, you never really completely own it. Try not paying your real estate tax for a few years and see if you really own it, even if the mortgage is paid off. Now, in contrast, normally in the range, as I indicated earlier, about 90% of a whole life policy’s equity is available upon request, with no repayment requirements whatsoever, other than typically you’re going to be billed annually for the interest and the payoff amount then would be subtracted from the death benefit in the event of death. No further payments are required after death, and the death benefit is normally going to be received income tax free, and if the policy includes a disability waiver of premium, then any future payments would also be waived, if you’re disabled before a certain age, usually 60 or 65. Now future dividends, if a mutual contract, could also be used to pay off that loan interest, or even the loan itself over a period of time, and remember, whole life is also guaranteed to increase in value every year you own it. Wouldn’t it be nice if you could say the same thing about real estate? 16:10 JIM: The other thing I know that you mentioned that I find of interesting perspective is when you borrow against life insurance; you can choose to come have that deducted off the death benefit, or the proceeds to your family. You can’t just take money out of the equity of your house and choose to tell the bank, hey, look, when I die, just forgive the loan at that point and take if off what my kids get, you’d probably be living somewhere else because they would make procedures to have you find a new place to live. 17:25 JOHN WHEELER: Even paying the interest for that matter, because try not paying the interest if you have a credit line, and they’re not just going to add the interest on to the credit line normally if you’re anywhere close to what that limit is, and, as you just mentioned and I mentioned earlier, a lot of those credit lines today have decreased. You didn’t do anything wrong. You never missed a payment, but just because of overall debt that’s in existence or real estate values declining, and unless you had a major down payment at purchase, you may be upside down on the loan. 17:59 JIM: A couple years ago, took an equity line, because I’ve got three kids college age right now. Two of them are attending college and I had an equity line just kind of as my backup to have some extra funds available, and the bank wrote me a letter and said your equity line is frozen, but thank you for keeping making those payments, so what I thought was going to be a line of cash that I’d have access to, has not been there, but I do have a permanent life policy which I’ve accessed several times over the years as I needed to, and it’s been a great way of having some access to some funds when my IRAs, if I pull that money out, I’m not 59-1/2 yet, so there are penalties and taxes involved, it’s nice to be able to borrow that money and not have another financial impact out there, and then I could pick my own loan repayment schedule. If I had a little extra money, I could throw it in there. If I was a little short or wanted to skip a payment, that wasn’t really a problem. I was able to structure the loan that way, so it is a fantastic tool. 18:55 JOHN WHEELER: It’s also important to realize that that whole life guaranteed cash value increase still occurs, whether there’s a loan or not, so you’re actually building additional equity guaranteed every year, and it provides more flexibility than almost any asset in the marketplace today. A lot of people’s 401(k)s have become 201(k)s. Credit lines have dried up. I’ve had clients that own businesses that have used cash values of their life insurance to help meet payroll, or because they couldn’t get the loan from the bank or their credit line was cut to be able to make up for the fact that their receivables were slow coming in, or we have clients that do have college-age kids and maybe they bought a 529 plan and that tax free income they were looking forward to if it was used for education, is wonderful as long as there’s gain. Many of them don’t even have any gain, so having that cash value of the life insurance that they could utilize allowing that 529 plan possibly to come back and get some gain, provides flexibility, or even at the time of retirement. We’ve had clients that having an asset that they can dip into whenever they wish, as opposed to many other scenarios, that when you turn the spicket on, you can’t turn it off, the only time I’m going to totally lose in the market is if I sell at a loss, whereas the market will go up and the market will go down, but if I have the flexibility to where I’ve got another well that I can draw water from when I’m thirsty, as opposed to continuing to sell at a loss, provides a lot of initial security. 20:30 JIM: Having a diversified portfolio makes sense and permanent life insurance certainly is a good part of that overall diversified portfolio. John, one other thing I’d like to ask you about, and that is, we’ve had accelerated death benefits for awhile, and recently, what’s been added to the different options available with that, has been linked benefits for things like long-term care. You want to just comment on that a little bit? 20:54 JOHN WHEELER: The key advantage to those type of linked benefits is again, the taxation, not paying tax for that and being able to access, in certain situations, even more than what the cash value was, so if it’s just one other way of providing additional flexibility in the event that it’s needed, but the key thing is, is it an absolute replacement for some of those things? You have to still be sure that you understand that life insurance death benefit was decided upon normally for a specific purpose, and if I spend that death benefit early, then it isn’t going to be there for the other purpose as well, so it isn’t an absolute substitute, but it certainly can provide some additional flexibility, if nothing else, for the unexpected in life. That preferential tax treatment is always a good thing. 21:43 JIM: I know we’ve had cases where we’ve worked with clients where that accelerated death benefit, sometimes what’ll happen is the majority of that death benefit can be made available for the family if someone’s terminally ill, for example, and instead of waiting until that person dies, it actually allows the family to take care of some things and have that person be part of the decision making on how that’s done and can really be a powerful tool. 22:08 JOHN WHEELER: Exactly right. The whole issue is being sure that your planning and whatever area that it is, provides enough flexibility for the unexpected, because if a client will commit to me exactly what what’s going to happen, we’ll tell them exactly what’s going to do, but none of us know that. None of us know the type of situation that we’re going to encounter before we leave this world, so providing that additional flexibility to where I have another source that I can provide for my needs, whatever those needs entail, can provide a lot of extra security. 22:39 JADE: Can you share a story or two as far as how that’s made a difference in a family’s life? 22:59 JOHN WHEELER: I’ve seen families that because the home equity went away for whatever reasons or education planning never got quite to the point that it was, any number of scenarios like that where when they didn’t even realize sometimes that this value could be used in advance, that can make a big difference. One of the best stories of all time wasn’t a personal client, unfortunately, was Walt Disney. He had this vision of Disneyland and he couldn’t get enough loans and so on and so forth at that time, for this cockamamie idea that he had, but still yet he had the foresight to purchase quite a lot of permanent life insurance and loans on his life insurance helped start Disneyland, but I’ve had families that because of that planning, the unexpected occurred. I had one client who was a real health nut. When he took off his shirt, even guys looked. He had a twelve-pack, I mean, he looked like someone that was just perfectly in physical health, came down with lymphoma, lived less than three years after that. He could’ve been the type of individual that had said, look, I’m healthy, I’m relatively young, because he died in his early 40s, there’s really no reason for any of this. Well, we got to see how disability waiver of premium worked because there was a period of time that he got, before he passed, that there was no way that he could continue working, so disability waiver continued to have these contract values continue to build, even while he was disabled, and then when he passed, his kids got to stay in the same school, the house was paid for, a large portion of the income that he would’ve been bringing home was still provided for, and his kids still talk today about the real love letter that he left and showing how he did truly care because of the foresight that just in the event something might happen, I want to be sure that my promises were kept. See, in the life insurance industry, we were the original promise keepers. Everybody else comes to the wake with sympathy and good wishes for the family and expressions, feelings of sympathy. We’re the only ones that walk in with a check instead of bills, and it’s very, very important to remember, the bank may tell you no, but a life insurance company won’t if you have value in that contract. It’s like the Good Book says, ask and you shall receive. We’re the only ones that will do that beyond question. Otherwise, if I’m looking to be able to get a loan, my equity value may go away, rules may change and regulations may change and so on, and it’s the unexpected that we also provide for at the same time. Life insurance I’ve often, permanent life insurance, in particular whole life, I’ve often referred to as the Eighth Wonder of the World. 25:32 JADE: Well you’ve made a very compelling argument as far as how to view life insurance as a protection tool. You’ve touched on some amazing stories that really allows you to look at life insurance in many different ways, and you’ve done a great job of helping us understand how life insurance really is a comparable asset class to other assets, and actually in many cases, more favorable, but, at the same time as we kind of walk through today, I feel sometimes that the listener might think there are just so many choices and options, so maybe as we wrap up here, just talk about the importance of not going these decisions alone and working with a qualified insurance professional to really understand the needs and determine the best approach to take. 26:15 JOHN WHEELER: Well, like anything else. I might start having chest pains and I could always go on the internet and I could see, well, let’s see, it could be gas, it could be a heart attack. Are you felling lucky, as Clint Eastwood would say? As most other situation, the average individual spends more time planning a family vacation that they do their financial future. Doesn’t it make sense with something as uncertain as life is, that it would make sense to sit down and get an opinion of someone who that is their specialty and that can help explain the various different types of coverage according to what you’re feeling is important to you and what you’re concerned about, to help put the right situation on it. If I went to a car dealer and I said, well, I want to buy a car. That doesn’t give a lot of direction. There’s a wide variety of cars to choose from. All of them have advantages and disadvantages. Our field is no different. So, sitting down with a qualified professional that can help explain to you the differences to where you, the consumer, can make an educated decision, and basically at that point, what we do is put price tags on those solutions. Not everybody feels that certain things are the same advantage or disadvantage that other people do. Even though I may see an advantage in some solutions, it may at this time, no necessarily be affordable. I may have champagne need and a beer pocketbook, but at the end of the day, understanding what I’m dealing with and various different ways to approach that, is ultimately the key, so getting that assistance and walking through the maze of decision making process and trying to fit something specifically for me, is, by far, the best approach. 27:55 JADE: Oh yeah, and I appreciate that perspective. It’s an area sometimes that people think it’s just the word life insurance already kind of puts up that wall and gosh, it’s too complex, I don’t understand it, it’s too expensive, there are just a lot of misconceptions out there, and working with that person who has devoted their career to focusing on this area of planning is definitely wise advice. We really appreciate your time today and your perspective, and hopefully this inspires listeners to go back to their insurance professional and really sit down and take a new look at life insurance. Again, term is appropriate in some cases; permanent, of course, in other cases. Viewing it as an asset class and realizing all the powerful benefits that life insurance can provide, working with quality insurance professionals, working with a quality company, obviously evaluating their claims paying ability, all those things are important considerations, so thanks again for joining us and sharing your wisdom today, John. 28:46 JOHN WHEELER: Well, thank you. 29:01 JIM: Thanks for joining us this week, and tune in again next week as we explore another phase of the Real Wealth process, and remember, if anything you heard in today’s show you’d like to get more information about, contact your Real Wealth advisor. Also, if you feel that any of this information will be helpful to a friend or family member, just click the forward to a friend button. JADE: Please be advised that a taxable event may occur if a permanent life insurance policy is allowed to lapse and a loan on the policy is outstanding. Policy loans reduce the death benefit dollar for dollar. Life insurance guarantees are based on the claims paying ability of the issuing company.