AAR26 - How to Use Insurance to Build Wealth w/ Kim Butler

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2:01Go to shopify.com slash beginners. That's shopify.com slash beginners. So let's go back to the example that we worked with earlier. Let's say that they've put in$7 ,000 or$8 ,000. it's worth$10 ,000 and they've got an issue that they've got to solve that's$6 ,000. And on top of that issue, they can't afford the premiums for a little while. So like I said earlier, they call or get online at the company, they get a$6 ,000 loan, solve the immediate issue. And then they tell the insurance company, look, I've got four grand that's still available. Take that$4 ,000, borrow against it, pay the premium.

2:40And that$4 ,000 will now be$5 ,000.

2:54welcome back everyone welcome back to at any rate my name is evan ray and as always we're here to help you make sustainable financial changes without breaking a sweat and today i've got a particularly exciting episode because we are welcoming kim butler to the podcast today kim is the founder of Prosperity Thinkers, the host of the Prosperity Podcast, an Amazon book bestseller for books like Live Your Life Insurance, and is an avid financial educator and has been for quite a while who has helped thousands of people improve their finances for themselves and for their families and their other loved ones.

3:25So it is fantastic to speak today with you, Kim, and I'm sure I missed a lot already in that intro. Oh, you did great. And it's so fun to be able to talk about some very easy things that people can do to really shore up their finances. And it's so funny because us Americans, holy cow, we want to talk about investments first, right? That's the fun, sexy stuff. And yet, I think what our conversation is going to delve into is a lot more about the word save as a verb, like the act of putting money away, and savings as a noun, which I know is the slow, boring stuff, but it's so critical to do before you invest.

4:09Absolutely. I mean, exploring all those different mindsets, because I personally, too, can get caught up in the exciting, sexy stuff of investing and just focus on that because it's cool and exciting. But there's definitely millions of other mindsets and points of view you can have on this kind of stuff. And the more of those mindsets you understand and you hear, the more educated you will be and the more financially educated decisions you'll be able to make. So I'd love to start off these kinds of conversations with kind of an odd question, but a personal question. When would you say was your financial awakening?

4:40When was the time that you personally, you know, maybe not woke up one day, but the pivot point when you decided, hey, finances are incredibly important and I really need to start paying attention to this? Well, the answer is going to shock a lot of people. It was fourth grade when my parents gave me a milk cow. Like for real. Holy, holy. Yep. She was a registered Guernsey. That's a brown cow. And no, they don't give chocolate milk. And in time, I graduated up to registered Holsteins, which is the black and white kind, which just means there's more milk. And because I was in 4-H and I had these cows that were expensive, and I had to purchase expensive grain and alfalfa hay, and then I sold the milk, I was absolutely running a business as a fourth grader with parental help, of course, my sister's help along the way too, because my parents were teachers.

5:41Farming was not even our full-time gig. My grandpa did live on the farm with us, but I, over the course of my childhood, literally from fourth grade to 12th grade worked with so much money, way more than your typical kid ever would. And so I had to get my act together fast. Wow. That is genuinely answering. I was not expecting, and I freaking love that answer. That is fantastic. What kind of lessons do you feel like you learned early on at that point, maybe just from experience or maybe from your parents or other elders in your life helping you along? Yeah. Well, the first one is record keeping, right?

6:22It's a part of your 4-H experience anyway. So, I mean, we are talking pencil and paper in this era. This is in the 70s. There was really no such thing as even personal computers at that stage, but it didn't matter. I kept a record of cash flow in and cash flow out. And that was so, so valuable. And then And I literally had to keep net worth records. I mean, you kept the value of a cow. And then when that cow had a calf, you kept the value of the calf. So I learned the space of what we call today income statements, right? Money in, money out, and net worth statements or personal financial statements, which is that asset and liability.

7:05And I had liabilities. It was often to my parents, but there were still those that were being kept. And my parents charged me interest, which is a fabulous thing to learn, the whole intra-family financing arena. And so all of that was super helpful. And then the second lesson, without a shadow of a doubt, is the capacity and the benefit of saving first, saving before you spend. Yeah, I absolutely, I 100 % love that. And those are fascinating things to learn at such an early age. I mean, as an adult, they sound like, okay, yeah, those are good mindsets to have good things to learn. But as a fourth grader, that is mind-blowing.

7:47And I applaud you and your parents for that fantastic financial head start. So to kind of, you know, with the rubber meeting the road about our current conversation, when I, and I think most people out there, think about life insurance, we just think of simply insurance that we pay to protect our children when we die. And that's kind of the extent of what we think about it. I know that you strongly advocate for it as a wealth-building tool, like you said, saving first and using this as a saving tool to facilitate that. Could you just give a rundown of kind of generally how that works and what some of the benefits are and why everyone doesn't do it?

8:22Absolutely. So life insurance in America is a really interesting space because it literally has been around a couple hundred years. And yet, for some reason, holy cow, people get extremely emotional, not about dying and somebody having money that comes from life insurance, but just the product itself. People seem to either have absolutely no clue about it, which is weird. We know about all other kinds of financial things. Or they will tell me that they hate it, which cracks me up. Really? What did life insurance do to you? nevertheless it may seem like it's a big leap to go from okay we're talking about saving and saving first as a verb and then as a noun the storage of savings to the life insurance space well it's not as big of a leap as we may think because prior to about 1940 in america if you talked about financial planning, it was two things, a mortgage and a life insurance policy.

9:32There was no 401k. There was no stock market even really. People didn't do mutual funds back in the 40s. There was the capability of financing a home. And frankly, there was the capability of financing a life insurance policy because what you do is you buy it on installments, right? Same way you would buy a mortgage. And so the mutual life insurance companies that exist in the United States, so companies like Guardian, Mass Mutual, New York Life, Northwestern Mutual, all been around forever and ever. They're stronger than banks. They're higher rated than banks. And they're a very, very efficient place to store liquid cash.

10:18That savings as a noun asset that all people want on their balance sheets. Now, I'll be very clear, life insurance is not for everybody. If you are super thin, you don't have any extra money, you've just got a little bit to work with, don't even start to look at life insurance. It's not the right place for you. But if you have a little bit of extra every month, then having life insurance as an asset on your balance sheet and even having more than one policy, I find people are surprised that you can have more than one policy, which is true in life insurance, not true in car insurance or home insurance or anything else.

10:55But I own over 20 life insurance policies. I've built a portfolio of policies, just like people build a portfolio of mutual funds or real estate or stocks or whatever their thing is. Very, very efficient way to store cash. That's really, really interesting. So to help, I think, kind of solidify it for everybody, what kind of a tangible example? Let's say you started a life insurance policy and you paid, you know, easy number,$500 a month into the insurance policy. And you were just building up a bunch of cash over time. And let's say, you know, years down the road, you had$10K in that account in total.

11:32If you wanted to pull out, say,$5K of that to spend on something, what would that process look like? Excellent. So I'm just going to change one number in your example so we don't lose track of where we are. So we've got$10 ,000 of cash value and we want$6 ,000 to go do a job because I don't want to get confused five and five, right? Yeah, that's perfect. So you used the words pull out and with whole life insurance, so W-H-O-L-E, that's the kind of insurance that we're talking about that builds cash value like an asset. we're not talking about universal life or variable or index or any of the fancy stuff, just plain, boring, basic, been around for a couple hundred years product.

12:15You call the insurance company or you get online and you say, I want to borrow against my cash value,$6 ,000. The insurance company is going to send you 6 ,000 of their dollars because your $10 ,000 is going to stay in your account and keep on growing unaffected by the loan. It works exactly like real estate. Those numbers are small, but it's fine. If I have a$10 ,000 house, I don't take out$6 ,000 from the house. I borrow against it. Now, I have 10K in my account, not 4K. It's not 10 minus 6 equals 4. It's 10 is 10, and it's going to continue to grow unaffected by the loan, whereas I will owe$6 ,000 at interest.

13:09The insurance company is going to charge me interest because I'm using their money to the life insurance company. And those are usually at fixed rates. And in today's marketplace, they're usually around 6%, give or take. And so I will pay that loan back at some point. And my 10 ,000 is unaffected in its growth all along the way. I'm excited to share our friends over at the Plink app release a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move. Here's the bonus I think you'll love. They also released the Dividend Match, where they'll match 25 % of all the dividends you earn up to$250 a year.

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15:49Just because I think that's an important point of view when you're looking at things to understand that nothing in life is a perfect 100 % benefit to just you or anything. And that goes for everything. That's not a knock on life insurance by any means. But what kind of benefits are there that the company is gleaning that makes it worth it for them? But then what benefits is the person getting that also makes it worth it for them to the beginning. Yep. So you've brought up what I call a win, win, win. So we talk about wins, wins. Those are great, but let's get a triple win, right? So you said it well, not only is the insurance company gaining a profit, we want the companies that we do business with to be profitable.

16:31100%. In addition, the person that owns the policy got the capability to use that money and go do good with it. They either solved an emergency with it or they took advantage of an opportunity with it. So then you also have the beneficiary of that policy because the insured at some point will die. Last time I checked, death is a guaranteed event. And so you've got a third win there that is helpful. So the life insurance company has your 10 ,000 as collateral. Now they've only lent you six and you're going to pay them interest for the use of that six. If you didn't do that, like any good financial institution, they're utilizing your 10 ,000 as an asset on their balance sheet also.

17:22So essentially they're either investing it for themselves of which you're getting the dividends or they're lending it to you and getting the interest, which then can still benefit them in the same way an investment would. So that's the win for the life insurance company. And then as we've already spoken, the win for you is you get a fixed rate loan with no questions asked. All you got to do is pop in online or call them. Money usually shows up in about seven days. And then as already stated, the beneficiary gets the benefit of that as well because the policy is still on the books. It's still going to go forward.

18:00If you happen to die the next day, let's say your death benefit is$100 ,000 as an example. So it started as$100 ,000. Now it's going to be worth$110 ,000 rough numbers because the death benefit grows as the cash value grows. But you have a$6 ,000 loan. So you die, the$110 ,000 pays out, minus the$6 ,000 for the loan to pay the life insurance company back. So they're whole. And your beneficiary receives$104 ,000 because, in essence, you already got the use of the $6 ,000. So it's a fair deal all the way around. Now, I will be frank. There is one time that the life insurance policy as an asset is just, frankly, pretty ugly.

18:44And it's the first year. Because when you start a policy, you have a commission to the agent, and that's not a swear word either, right? Just like we want our companies to be profitable, truly everything in our lives has a commission. We just don't always call it that way. Your food at the grocery store has a commission. Clearly, the car salesperson, the life insurance agent, et cetera, et cetera, et cetera. But anyway, your life insurance setup is you pay one premium,$500 a month in your example. And that insurance company is guaranteeing that if you die the next day, they're going to pay$100 ,000 out.

19:27So that policy is not going to look real pretty in the first year. And so we just have to acknowledge that. You know, it's called whole life for a reason. And that's because it's designed to benefit you for your whole life. It's not designed to benefit you necessarily in the first year. Okay. Okay. That makes a ton of sense. I think that helps clear up a lot of stuff. To compare it to at least what I personally see as its biggest competitor, something like the stock market, or maybe something like bonds or high-eld savings account, those kinds of investments or ways to grow your wealth. What kind of pros do you see that would make life insurance, maybe not the only option over those kinds of things, but something to prioritize in addition to or over those other options?

20:10Yeah, it's a great question. First of all, I would not compare it to the stock market at all in any form because as we all know and forget, the stock market can go down. And life insurance cash value cannot. So you used really good words. It's a cash equivalent. It's a high yield savings equivalent. It's a bond equivalent. Those are all accurate. Now, the interest rate on those accounts is really very similar. As we know today, high yield savings accounts in the 4 % range, bonds, give or take same numbers, cash value of life insurance, give or take same numbers. There is one difference, and that cash value of life insurance growth is not taxed.

20:54I'll tell you a quick story. I had a family that was on the hunt for the best high yield savings account they could find, right? So they're moving banks just a couple of years ago. They ended up with 11 different 1099s, right? You open an account at a bank, the account gets taxed, that generates a 1099 for the IRS. They move their savings account 11 times in the course of a year, chasing interest rates. That makes absolutely no sense. That's a horrible use of time. The life insurance cash value does not generate a 1099 at all. And so literally for the rest of your life, you can now own an emergency slash opportunity fund.

21:38That's really what cash value is, a place to solve emergencies, take advantage of opportunities for the rest of your life. So that's the equivalent. So let's talk about the cons. And there is one more point that I want to make on the pro, and that is that nobody is guaranteed tomorrow. And so while we typically don't talk about that very much, I mean, who wants to talk about death, really? But the fact is, you could start a 401k plan tomorrow. You could buy stocks in the market or real estate investments or whatever tomorrow. You could do everything tomorrow. But you can't always buy life insurance tomorrow.

22:15Either a health occurrence or a death could derail that. Now, that being said, okay, fine, I'm not going to back up the Hearst. The cons of the life insurance are what I already addressed, but is really worth restating, and that's that the first year is ugly. You just have to know that it's a long-term product, which for some people means they shouldn't buy it right now. Go buy term insurance if you're unclear about your job, your cash flow capability. And I will say, young families, I mean, you can start whole life with$200 or$300 a month. It doesn't have to be$500 a month. But please, please understand that it's a long-term product.

22:58And at the same time, please, please also get term insurance, right? If you're a young father and you're earning$100 ,000 a year, you could easily qualify for$3 million of life insurance. Well, you're not going to buy$3 million of whole life. You should buy$3 million of term insurance and maybe a couple hundred thousand dollars of whole life. And so it's a con that the product itself has a little bit of nuance and complexity to it. Not a lot. It's very learnable. But I do find that there's a bit of moving parts. you got to turn your brain on and learn some language. Things like premium builds cash value.

23:43Well, we tend to think of premium as cost, right? Car insurance, home insurance, all cost. Well, with whole life, premium builds cash value. Things like you absolutely want to have a mix of term insurance and whole life. So, okay, you got to have a couple of policies. Well, it's not going to kill you. So there's some other nuanced things like that, that cause it to be a little bit more complex than your basic savings account, but it's so worth it just because you have the ability to have the same kind of growth for the rest of your life without any taxes, no income tax on the growth. Yeah, that is massive.

24:20And there's absolutely, there's always pros and cons to everything. But with that laid out, there's definitely a lot of pros that way. What kind of numbers could somebody expect in terms of the premium, how much cash that's actually building up early on and then further on into the policy, as well as how much wealth they might even expect to have at the end of their life when they're maybe wanting to dip into this more often, as well as what kind of an interest rate could they expect for it to grow at? Yep. So I can answer some of those questions just off the top of my head. Some of them are much more nuanced based on that person and capability, et cetera.

24:56But basically, if you're in your 20s and you don't have any family, whole life can still make sense because it is truly there for yourself as that emergency opportunity fund. And you want to be looking at $200,$300 a month minimum. It can go up there really pretty much unlimited. And it's not about cash. It's about cash flow, right? It's about the ability to put in a couple hundred bucks a month. When you get into your 30s, you absolutely want to be up there at that$500 a month, or it's just not going to make sense. And then when you get into your 40s, you want to be doubling that and tripling that,$1 ,000,$2 ,000 a month.

25:34It's still a function of your income, right? Because if you're making, say,$30 ,000 a year, you're not going to do$1 ,000 a month. That makes no sense. But if you're making$300 ,000 a year, then you should be doing$3 ,000 a month. I mean, that would just be rough numbers, 10%. So maybe somebody is doing 10 % to their 401k plan. Well, then also go ahead and do 10 % to the life insurance. You really want to be always thinking about, I like to call it the house of both, right? It shouldn't be investments or insurance. It should be both because they really can support each other as they grow together.

26:12Now, in today's world, the growth of the cash value is at around 4 % net, net, net, net. So we talk about triple net in real estate. Well, I'm going to add a fourth net. So you've got 4 % growth of cash value. That's after the cost of insurance. It's after the commissions. It's after running the mutual company. So these mutual companies function kind of like a credit union where you're an owner of the company because you bought a policy. And then as I indicated, it's after tax. So for a lot of people, that is like earning a 6 % or 7 % return right now in today's world. Now, it isn't like an investment at all.

26:59It doesn't go up and down. It just goes up. As is already stated, it's not super pretty at the beginning. but really by the time you're in the second or the third year, the amount of money that you're adding every year as premium, and there's another term to introduce called a paid up addition, which just means extra cash. So maybe your premium is 200 a month, and then you're going to do another 300 on top for paid up addition. So maybe we are up to that 500 a month, but optional. That premium plus paid up addition is going to grow with that 4%. And by the third year, for every$500 a month that you put in, you're going to see per month a$500 increase.

27:44So at that point, it's breaking even. That's a term that a lot of people really are hungry for. Like, when's it going to break even? It's breaking even annually or monthly in this case, at about the third year. Now, it's not going to break even cumulatively. In other words, premiums in year one plus year two plus year three, probably till about the fifth, sixth, seventh, maybe even eighth year, depending on how old you are. The older you are, the longer it takes. But again, this is a long-term product. So it's tough to answer your question like, how much are they going to have at the end? Well, I have clients with 60-year-old people, and they have$30 ,000 of cash value, and others have$300 ,000 of cash value, and some of them have$3 million of cash value.