116: How Whole Life Insurance is Predictable and Flexible

116 How Whole Life is Predictable and Flexible

[00:00:00] Hello, everyone. I'm John Montoya and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life podcast.

John Montoya: Hiding in Plain Sight, Predictable and Flexible Whole Life Premiums. Hello, everyone. Welcome to the Strategic Whole Life podcast. We want to welcome you. Thank you for listening. Today we're going to be talking about something that maybe I think people who already have whole life might take for granted, but if you're new to learning about whole life, having predictable and flexible , Whole Life Premiums is uh, is kind of a uh, thing that we're not accustomed to. And I had a conversation earlier this week with someone who was starting to learn about whole life for the first time. And. We happen to talk about the other types of insurance that are available out there. The three most common ones outside of life [00:01:00] insurance that we tend to pay for are auto, home, healthcare, and what they all have in common is that each one of these types of insurance, All increase in premium over time.

It's like death and taxes. It's like a third inevitable outcome. We just come to expect it. And here's the thing. Nobody likes it. Nobody likes inflation. And sometimes when I'll get on social media. I'll see a thread and the theme of the thread is insurance is a scam and then life insurance gets thrown into that as part of this scam to weasel money out of people and people don't like it because, it's common sense it's just natural.

I think no one likes paying money into something. And getting nothing for it. Think about all the auto insurance premiums that you pay. And if you're a really good driver, there's nothing to show for it. And you know, it's there for protection. It's there to cover your liabilities. [00:02:00] It's there for a reason and it's good to have it.

Same with your homeowner's insurance. Most people can't afford to repay or repair their house if it burns down. So, uh, It's a necessity. Healthcare insurance. Well, you know, that's, That's a whole uh, A whole lot I don't want to dig into, but. Insurance premiums get more expensive every single year. But here on one end, we have a whole life insurance policy.

And it's the opposite of what you experience with your auto home and healthcare insurance. You get to one, lock in a premium for the rest of your life. And number two, you pay these premiums, but you actually have the ability to access this money. , cash value, as it accumulates every single year for the rest of your life.

So it's not like your auto insurance premiums or your home insurance, or even your healthcare, where you might be paying [00:03:00] an increasing amount of insurance over your lifetime and never actually get any benefit from it. A whole life insurance, you get your fixed premium. It's locked in. And you get to benefit from it while you're still living in an infinite amount of ways.

That's why Nelson called it the IBC, you know, Infinite Banking Concept. So it's just a complete mind shift from how people think about life insurance. And it's such a beautiful thing to have this fixed premium. And oh, by the way, there's a lot of flexibility And in these whole life policies, when you add in the PUA Rider too.

This episode we're going to touch on the predictable nature of these fixed premiums and the flexibility that comes along with it when you have that Paid Up Additions Rider what do you think, John?

John Perrings: Yes, there are a lot of reasons that other types of insurance premiums tend to go up every year. And a lot of it is [00:04:00] regulatory. Life insurance is probably the least affected by, some of the other types of regulatory pieces that are affecting things like your auto insurance, health insurance. One of the big problems with most types of insurance are individuals or buyers of insurance are not allowed to buy from companies that are outside the state where they live.

So the competition is very low. This is true with health insurance. It's true with auto insurance. And so the, A lot of the politics behind things that are happening create these massive increases in cost. We're obviously experiencing a lot of that here in California where, people are having trouble finding homeowner's insurance.

I've had to switch my auto insurance a couple of times now, a lot of these insurers are just pulling out of California because of the type of risk they're having to cover. Life insurance, on the other hand, is a little bit different [00:05:00] because it's not subject to the same problems that some of the other types of insurance are subject to.

So, like, Wildfires aren't really a problem from a mortality perspective on the broad scale. Things like that where the wildfires here in California, however, are causing massive run ups in homeowners insurance because of the costs that they're experiencing there.

So life insurance, they don't have some of those problems, but I think the one thing we want to hit home on today, in this podcast, is the fact that premiums are locked in once you have them. So with a whole life insurance policy or with a level term policy, they're locked in for the duration of the term.

And so rather than having these rates that keep going up and having to risk losing a policy, these are unilateral contracts with whole life insurance. And so the. [00:06:00] The rates are going to be the rates. The premium price is going to be the premium price for the duration of the contract. And that's a pretty big deal when you start looking at things like, having a contract for 70 years and having that price be the same and guaranteed for the entire duration of the contract.

John Montoya: Yeah, one of the analogies that I like to use with new listeners or people that are potential new clients is explaining the benefits of this guaranteed fixed premium, because for most people, if they're shopping for life insurance, if they don't already own a home, they're thinking about buying a house and they're shopping for mortgages, and I'll ask people If you already own a house, what type of mortgage did you get?

Was it a 30 year fixed or was it an adjustable rate mortgage? Like a one year adjustable rate mortgage, which did you choose? And 99 [00:07:00] percent of the time it's a 30 year fixed rate mortgage. And I'll ask them why did you choose that? You could have got the cheaper. Payment. And the answer is typically it's stable and it's predictable.

And I know exactly what my payment's going to be for the life of the mortgage. And bingo. You're, that's exactly the same mentality you should have. When you're shopping for your permanent life insurance, all those reasons that you just gave me are exactly the same reasons why you want a guaranteed premium with your life insurance.

And that's only really accomplished with the whole life policy because. Like you said, John, it's a unilateral contract. So once it's issued to you, it is yours. It's a private contract and the life insurance company cannot raise that premium on you. Absolutely cannot do that. And you have this other type of life insurance that we've talked about on [00:08:00] other episodes Universal Life, which is based off of one year renewable chassis.

And you don't have that. that guarantee for the rest of your life of knowing what your premium is going to be. It's basically going to, underneath the hood, you might not see this, for a very long time, but what's happening is that the cost of insurance is rising on you. And it's one of the reasons why it's it's a bit of a lobster trap. I know we call 401ks lobster traps. But those UL chassis they suck you in.

And you're led to believe that this is actually a lower cost type of insurance, but it's not the truth. And. If you're ready to learn about the only type of life insurance product that can offer you a guaranteed premium with an increasing cash value for the rest of your life there's only one it's a whole life policy.

So you, you want to shop for your life insurance exactly the same way [00:09:00] that you would shop for the mortgage in your forever home, because literally this policy is going to cover you your whole life. So you want that fixed premium. It's as simple as that. But maybe now we can transition to the other side of the table when it comes to the optional flexible premium, PUA Rider.

John Perrings: When people think of whole life insurance or, permanent life insurance, they a lot of times get a little confused about being locked into a premium for the rest of their life. There are some misconceptions about how that actually works. It's actually one of the things that is used to sell universal type products, that so called flexibility in the premium that you pay.

We've covered that before where they tell you, you can pay as much as you want, basically, but there are major ramifications to not fully funding a universal type policy. [00:10:00] But what. A lot of people don't know about whole life insurance is there's actually quite a bit of flexibility in how a premium gets paid in whole life insurance as well, especially the way that we design it.

 for the Infinite Banking Concept, where we use a PUA Rider or Paid Up Additions Rider, the Paid Up Additions Rider basically buys little tiny chunks of life insurance that are added on to the policy and don't require any future premiums for that death benefit. That's why it's called Paid Up Additional Life Insurance.

Paid Up just means there are no, no more premiums due on it. And because it's already paid up, that's what helps build the cash value. In most cases, the PUA portion of the life insurance policy is not required. And so when we design these policies, we have, some base whole life, maybe some term a little bit of term insurance folded in there and a PUA rider.

You can always opt to [00:11:00] not pay the PUA portion, meaning you can reduce your scheduled premium at any time if you have. You know, You come upon hard times for a month or a year, whatever it might be. Now it does affect the performance of the policy, because if you've designed the PUA into that scheduled premium, it's going to perform differently than what you saw in the original illustration, but that's going to happen anyway, because we never know what the dividends are going to be. But you do have that flexibility to reduce your premium without making any changes to the policy. And so. You know, There are some caveats there where, you want to make sure you're paying attention to any minimums that are required. You want to make sure you're paying attention to basically how not paying a PUA might affect how much PUA you can pay in the future.

Different carriers handle their PUA Rider in different ways. For example, one company that we work with if you don't hit a minimum over a five year period, the PUA [00:12:00] Rider drops altogether. Another carrier that we work with if you pay X amount of premium, say you only pay half of what you could in your PUA Rider for a certain number of years, then that becomes your new max that you can pay for the rest of the duration of the contract.

There are just different ways that those are handled in a qualified agent can definitely help you figure it, figure that out, but where we're going here is You do have some flexibility to pay less, and you also have some flexibility to pay more. And those are usually how we design the policy, and a lot of that has to do with the PUA Rider.

John Montoya: Yeah. So there, there's something called a catch up provision. So if you're not able to fully fund your Paid Up Addition Rider, PUA Rider, In the current policy year, you can catch up the next year. So catch up provisions are important to know about and to stay on top of that way. You do maintain your PUA Rider for the length of time you plan on [00:13:00] funding your policy.

And just when you get your first policy, one of the things that you should always be mindful of is how much you can put into that Paid Up Additions Rider. Each and every policy year, you want to be very mindful of that. I had a question from a current client this week. He was asking, since he has a loan outstanding whether he should repay the loan or max out the PUA Rider.

So I wanted to touch on that just a bit. The thing about a policy loan is is that the life insurance company does not dictate terms on the period of time when you're supposed to repay it, because there is no supposed to with a policy loan, you can pay back a policy loan. I tell people over two months or 10 years, or maybe you're using it to supplement your income.

So never at all in the death benefits going to take care of it. But the important takeaway here is that you get to determine. How you're going to repay a policy loan [00:14:00] and it's ultra flexible. Whereas the Paid Up Additions Rider there is a period of time to utilize it. So when it comes to prioritizing your repayment of a loan versus maxing out a PUA Rider. Me personally, I will prioritize the PUA Rider, knowing that I have an indefinite period to repay the loan. I'm still going to repay the loan, but I am going to prioritize maxing out that PUA Rider each and every year as much as I can, because I want to stay on top of it so I can utilize that Rider.

For as long as possible.

John Perrings: I think that's a good way to look at it. And, the whole thing is the PUA Rider is allowing us to increase the foundation that we're building. And so every time we make a PUA payment or really any premium payment, it's really not just about the PUA. In the early years, it is, but as a policy matures, all the premium we pay just goes towards building the foundation.

But that [00:15:00] PUA Rider is the, because it's optional, um, building the foundation by paying the PUA will create a situation that when you do pay the loan off once the lien is off of your cash value You're going to have a much bigger base of capital to then go do the next thing with.

John Montoya: Yeah. And another analogy I'll use with people, I go back to the mortgage and I ask people, what do you do if you want to pay off your mortgage early? You send in more principal, right? That's exactly what that Paid Up Addition Rider is. You get the ability, the option to contribute more principal and it creates instant equity in your policy. Now, the big difference here is that when you repay your mortgage with extra principal, do you get access to it? No, not unless you sell your property or you ask for permission to refinance, or maybe you've got a line of credit with a whole life policy. When you [00:16:00] send in extra principal towards that PUA, you have the availability of that cash value in the form of a policy loan, but you're creating this instant equity in your whole life plan.

So I tend to think of that PUA Rider as overpaying your premium, but still having access to it, and then reaping the benefits of collateralization, the policy loans, and Even more death benefit protection for the family that, like you said, John, it's fully paid up. It's a wonderful benefit and it's all optional, but that's where the flexibility comes in with with these whole life policies.

It's through this PUA Rider.

John Perrings: Yeah, I would say the other difference is instead of paying extra principal to have equity in the same value, because the value of the house is the value of the house. When you make a PUA payment, you're actually increasing the value of the policy. So it's a, it's even better than just adding equity to to a contract, you're [00:17:00] actually increasing the value of the contract by making that PUA payment.

So it's a little bit of a double whammy on the positive side.

John Montoya: Yeah. And for that reason, for people who are sending an extra principal to their mortgage, I'll tell them this is actually the better place to park that money, to allocate that capital because it's ultra liquid. It's always compounding and benefiting your family. Whereas if you're paying your mortgage off sooner, all you're doing is putting your bank in a better position.

John Perrings: Yeah, exactly. Todd Langford talks about this, the creator of the Truth Concept software. He talks about how, the closer you get to paying off your house the Actually the worse position you are with the bank because it's easier for them to just fire sale your house.

If you end up missing a payment or something like that. So the closer you get until it's actually paid off, you're actually in a worse position with the bank. So why [00:18:00] not? Have them on the hook for as long as possible and put yourself in a better position financially because of, when people pay extra on their mortgage, they're really just looking to be out of debt.

Is it. Is it bad to be, to have debt and be able to cover the debt versus just trying to get out of debt and not having any stability on the other side? To me, it's just like, you know, build the stability on the other side so that you never have to worry about missing a payment versus just being at the mercy of the bank all the way through.

John Montoya: A hundred percent. It's something that we've said on the podcast a lot of different times. You'll never be in a worse position by having access to cash.

John Perrings: Oh, yeah.

John Montoya: So the next thing I wanted to get into are the pros and cons of the different billing modes. And the important thing that I want people to understand here is that you can change the billing mode.

On your whole life policy at any time. I really get asked [00:19:00] this quite a bit and I haven't mentioned it before on the podcast, but you can change the billing mode from monthly to annual or vice versa. Really anytime that you want. There's also quarterly and semi annually, but those typically don't get used as much.

It's predominantly monthly or annually. And there are some pros and cons there. If you are set up for monthly. It's like a set it and forget it, which is real nice. And if you have a really predictable income W2 type income you don't even have to think about paying the premium, it just automatically happens for you. So monthly is very convenient. But there is a cost savings time value of money if you are paying annually. And the insurance company passes that on to you. It's not. It's not massive but over a long period of time, and especially if you have a [00:20:00] large policy, you can start to see a difference over, especially over, 20 years, 30 years, 40 years of paying an annual premium versus a monthly premium.

So if you're one of those people that are very disciplined and you could put the money away a year ahead of time it actually behooves you to pay in annual mode vs. the monthly mode. I'm not a big fan of the quarterly option because they have to mail you an invoice and, I don't have the statistics on this,

I just know from experience, most people, if they're, if they lapse a policy, even accidentally it happens accidentally most often on a quarterly premium because they go on vacation and they don't look at their mail. And you typically have that 30 or 60 day grace period. But it goes by the wayside.

And then all of a sudden they're scrambling and calling me and I'm like, Hey, John what can I do? I've got to pay this premium. And I just opened my mail. That's what happens on a [00:21:00] quarterly basis. So I always recommend monthly or annually. And to take it a step further I'll share with you what I do on my policies because you have that minimum premium on the policy, the base premium, and then anything above that really is going to go towards the paid up addition, the flexible portion that we've been talking about on this episode.

What I like to do is set up the minimum annual amount for annual mode. And I will save the premium for my anniversary date and pay it in a lump sum, the minimum required. And then I will have the optionality to contribute to paying the PUA premium. For the next 12 months. And I personally like doing that because I do get the time value cost of savings that, that a little discount in premium in annual mode.

And also [00:22:00] because my income fluctuates on a month to month basis. When I have more cashflow, I can decide how much of that PUA. To make a premium for, and I gamify it where I try to pay the paid up addition, the max amount by the sixth month. So six months after the anniversary date, I kind of check in with each policy and see where I'm at, but that way in gamifying it, the, at least the PUA Rider, I'm able to stay on top of how much do I need to contribute in order to max it out for the remaining six months?

So that's how I do it.

John Perrings: Yeah, I do something similar, except I just keep everything monthly. For me it's much easier being in our business, we never know what the income is going to be month to month. So I just like going. the minimum every month, and then I'll at will, I'll just anytime I get something larger that comes in, I'll just put that into PUA.

And I also agree with you [00:23:00] about quarterly payments of all the, all my clients, the ones that I have to remind the most to pay their premium are the people that pay quarterly. I'm sending, emails out. There aren't too many of them, but that's absolutely something that's happening.

Another way to look at annual versus monthly is really all premium is annual premium. And you're not actually, I would say you're not actually getting a discount to pay annually. What's happening is they're basically fronting you the annual premium, and then they're charging you a little bit of interest on the monthly payment.

Because if you look at the, Breakout in a policy, you're actually paying extra when you pay monthly because the premium is just an annual premium.

I have a lot of different people that pay in different ways. My preferred is just pay the monthly and have it come out of your auto draft. Montoya is absolutely right that it's more efficient to pay [00:24:00] annually. I just find that when people pay annually, they always need the most reminding.

Like I always have to go back and remind them when it, when you're on the auto draft on a monthly thing, it's just. Happening for you automatically. And there, I think there's something to be said about that. That's my preferred method and I'm okay paying a little bit extra just to have that bulletproof set up where I never have to worry about it.

John Montoya: Yeah, and the beauty is you get to decide and you get to change your mind. So if one works for you or one isn't working for you, you can change it up. So it's nice to have optionality. The last thing that I wanted to cover in this episode are the options available. If for some reason you can't make your minimum fixed premium. You can reference what we're talking about here in episode 17 that we recorded August of 2020, but just in a nutshell, the premium, even though it is a fixed premium and it's locked in for the rest of [00:25:00] your life, you actually have some optionality, especially if you are doing a great job of paying your PUA Rider.

Building up the equity, the cash value in your policy, you're accumulating more paid up death benefit every single time you send in more PUA premium. And even if you don't, you're still accumulating cash value over the long run. It's just a PUA Rider turbo charges it in the early years. And so there's this optionality that exists.

And I use the example with my clients. That's really relevant because I had a few business owners that experienced a complete shut down other business when the COVID lockdowns happened, but prior to that, they had been overfunding their policies as much as they could. And they had built up significant cash value on their policies and it gave them the option to do what's called a temporary offset [00:26:00] of premium, where basically we uh, reduced a portion of the paid up death benefit that they had accumulated to cover the minimum premium for the next 12 months, the next policy year. And that gave them really a lot of breathing room to say, okay, all right. Revenue is what it is business wise. It's in that case, it was non existence for non existent for a while, but it gave them the breathing room to not have to worry about.

Coming up with the money to pay that premium for the next 12 months. So that is always an option. And of course you do have the optionality of taking a policy loan if you wanted to cover that minimum premium. So there are options that exist out there and most people really don't know about it. One of the major misconceptions about whole life is that you have to pay a premium every single year.

Or you lose it. And that's not true. As I [00:27:00] just pointed out with this example, there's a lot of flexibility with your whole life policy that exists. You just have to be aware of it, but that's why we have the show. It's why we do our best to educate each and every one of you that we work with options do exist and whole life policies are absolutely flexible.

Along with that predictable nature that comes with it. So it's a beautiful thing to have in your overall portfolio and building that foundation for your whole life.

John Perrings: Very nice. And if you're listening out there and any of this is resonating with you, and you'd like to learn more about how this could apply in your life specifically, head over to StrategicWholeLife.com. You can schedule a free 30 minute consultation with us right there.

And we can talk about you specifically and how this could work for you. Alternatively, if you're the type of person that just likes to learn as much as you can before talking to anyone, we have an online course just for you and you can get that at [00:28:00] StrategicWholeLife.com and it's right there at the top of the website.

All right, John, good info today. Thanks for meeting up again.

John Montoya: All right. Thanks, John. Thank you, everyone. Take care.