“We are 63 and 67, and just finished a 20 year term spending 35K over the term policy. Wish I had known about this 20 years ago.”
One of the attendees of a webinar I hosted on Sunday evening on “Infinity Banking” sent me this message when they submitted a request for a consult. This comment was super impactful for me, and prompted me to write this blog.
For a long time, I really did buy into Dave Ramsey’s “Buy Term and Invest the difference” philosophy until I got more educated on the subject and did a lot of reading. I got so interested in this topic especially after getting exposed to the concept of using a policy like a bank, that I even got my life insurance license to dig more into it. Here are some of thoughts on the issues this statement does not address and why I think that Ramsey’s outlook is very shortsighted.
MOST PEOPLE BUY TERM & SPEND THE DIFFERENCE
A vast majority of people don’t save and invest the difference but instead spend the difference. Just see the number of TV boxes that were found in apartment dumpsters after the first set of stimulus checks went out. If people aren’t saving in the midst of a crisis, they sure as hell aren’t saving in normal times. The US culture isn’t a savings-oriented culture, It’s a consumerist spending culture. If you’ve heard about the Pareto Principle (also called the 80/20 rule), more than 80% of the people are better off with a savings component to their life insurance that forces them to pay up and allows them to build their savings and take advantage of the long-term compounding growth of a permanent life insurance policy.
Even for the folks that do save like us investors, we aren’t always invested in a deal and we can have a lot of cash reserves sitting around in the bank earning a whopping 0.25%! Opportunity cost is just as important. High cash value policies structured right can provide great returns on your cash reserves while providing liquidity and access to funds when needed.
PAYING TERM IS LIKE PAYING RENT
Term policy holders pay a ton of money over the entire term of the policy. This is money they will NEVER get back. Flushed. Gone. Much like renting instead of paying down your mortgage. I love my renters because they work to pay down my mortgage! Not THEIRS! Do you choose renting to owning your house for a lifetime? That’s quite similar to paying term that is cash lost. A lot of people complain about the cost of insurance. What you need is a well-structured policy that doesn’t eat itself up (like a lot of IULs do) in insurance costs. Over time as policies get “seasoned” they become more and more efficient.
HIGH COST OF INSURANCE IN LATER YEARS
When an insured person outlives the duration of their term policy and they are now older, any policy they setup after their term expires is going to cost them many times more than what it did 20 or 30 years ago. The insurance companies are not dumb, they don’t take on the risk on insuring someone in their later years without being well compensated for it. Term at 70 will cost much more even if the insured doesn’t have any health conditions simply because of the risk that the insurance company takes on insuring at this age. These companies have been around since 1800s and their actuaries are smarter than that. Term costs will be so prohibitively expensive in the later years that it most likely will not be worthwhile. Now try getting term being a senior in the COVID environment…
QUALIFYING FOR A POLICY
Say you had a term policy for 30 years and you outlived that. If you wanted to place life insurance so you might leave a legacy for your heirs you might NOT even qualify for insurance if any medical issue comes up in your later years. You’ve taken away a huge benefit you can pass to the next generation! With the incidence of cancer, heart disease and diabetes ever-increasing you need to well insure yourself early on to protect your family and not have them needing a GoFundMe campaign for your treatment. Besides you have accelerated benefits on most policies that cover these critical illness conditions that can help you and your family while you are alive. As a parent, that is definitely a safety net for me for my child.
THE POWER OF UNINTERRUPTED TAX-FREE COMPOUNDING
Where life insurance can shine is in the power of compounding in a tax-free setting over a long period of time.
One might argue that this can be done in a tax-deferred account like a Traditional 401K as well. But can you when needed borrow or withdraw from your 401K when you need the money for an investment or for your business or for your emergency cash spending? Usually not! Besides some new provisions in the CARES act – which is a pandemic related benefit for 2020 only.
Life insurance on the other hand provides an account that not only allows you to get some uninterrupted compounding of your money in a tax-free setting, liquidity besides providing safety and protection to create a strong stable base for your financial life. For folks who think the IRR in a life insurance policy is really low and they can invest better, the table below illustrates what the equivalent IRRs MUST be for a savings account and a managed investment to match the net returns of an insurance policy.
Quickly, you can see that there is no savings account that will give us 8.26% and there is no managed investment that will consistently give us a 10.14% returns every year over our lifetime. This is just assuming you don’t bank with this policy. Just let it sit there, pay your premiums, paid up additions and let it compound. If you start exploiting the banking potential of it. Things start getting even more interesting!
Personally, as an educated investor I now 100% disagree with Dave Ramsey on a lot of topics which I can address one at a time in other posts including his thoughts on being debt free. There is good debt and bad debt. I take lots of good debt and will continue to do so. As an investor leverage is one of the most powerful tools available to us to increase the ROI on our investments. Especially as cheap as debt is right now why would you pay off your house and lock your money up to grow at the measly 3% or 4% that you were paying your mortgage?
To give him credit where it’s due however, I do believe his philosophies have helped people get out of debt. They simply cannot help a person get wealthy or build generational wealth. They can help them get by in life, live a modest living and stay out of debt. But that isn’t the baseline most of us are shooting for.
Let’s face it – Cutting lattes isn’t going to get your wealthy, it might keep you out of debt because those darn Starbucks lattes can get pricey! But as an investor I love my “Skinny Vanilla Lattes” and guess what, I believe in creating enough assets that cover the liabilities and generating passive income to support my lifestyle WHICH includes those lattes! Thank you very much!
I tend to be verbose, hang in with me here! Coming back to life insurance It took me a while to see the value of whole life insurance and concepts of infinity banking but once I learned how to use it effectively and how the wealthy and super rich have used it for more than a hundred years through Great Depression and more and consistency made those returns in the worst of times, I was a convert! I was not only JUST a convert I saw so much value in it that I decided to get an life insurance license, educate myself more and not only do my own policy but also help my investors set theirs up to invest into real estate and use it like a high-yield savings account for their investing and retirement.
I highly recommend the book “Money, Wealth and Life Insurance – How the Wealthy Use Life Insurance as a Tax-Free Personal Bank to Supercharge Their Savings“. The book was my a-ha moment that changed my perception of Life insurance because let’s face it life insurance has a bad rap due to sleazy insurance salesman that push products on you for the commissions.
A well-structured high cash value life insurance policy can provide a great place to park your money with high-yields, in-built asset protection without any expensive asset protection strategies, liquidity for those emergency reserves that you can access in 3 days besides providing a great way to invest into real estate and other higher yield opportunities. Who says the money has to be STUCK in life insurance? That’s the whole concept of Infinity Banking – maximizing the opportunity cost of your capital and putting your money to work for you in multiple ways.
I hosted this webinar with my mentor and Wealth Strategist Gary Pinkerton of Paradigm Life a few days ago and this turned out to be my longest webinar yet lasting 2 hours because there was so much audience engagement with Q&A. I encourage you to watch a recording of this webinar to get an idea of this concept and see if it can help you amp up your investing with your money working for you in your life insurance account and also in your higher-yield investments at the same time!
I would love to hear your thoughts and comments!
