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Good morning. Welcome back to the Money Advantage
Podcast. This is Rachel Marshall and Bruce Wayne.
Today, we are talking
about a popular
life insurance strategy called bi term
invest the difference.
Now, if you are in any way at
any point in your life, if you've ever
looked for
whole or for life insurance in general. If
you've ever said,
let me figure out how to get a
life insurance policy
that will pay out to
take care of my kids if something happens
to me. If you ever
addressed that concern, then you've probably encountered this
mantra. This
idea called by term invest the difference. Today,
we're unpacking what that means
and where it came from and really what
the concerns are or the pitfalls of this
popular strategy.
And so, Bruce, I'm really excited for this
conversation today. I think this term alone by
term invest the difference 5 words has caused
more confusion in the life insurance space than
I would like to admit. I think it
very quickly leads people to form a very
brief opinion about something that they really don't
understand or have not thought through fully. And
so our goal today is really just to
be able to help you think through
what your options are, what the opposite of
buy term investor difference is and really what
the,
implications or the
results are in your life if you go
down this path of bi term invest the
difference and really what that means and what
you can
what can happen as a result. So, Bruce,
I'd love your thoughts before we kinda dive
into what the lay of the land is
and and this conversation in general.
I think if you... If you go back
in history, the origin of this, many people
believe is from Art Williams.
And Art Williams,
in the...
It was either the late sixties or early
seventies his father died,
and we've talked about this on the show
before.
It was commonplace.
Prior to
the,
advent of the 04:01 k that people stored
money in cash value life insurance.
Specifically whole life.
And
a Ar William's father died
prematurely,
and he had did have a whole life
insurance,
policy.
And
Art was to very disappointed. And and to
some extent, I understand this,
because he saw his mother struggling because the
death benefit from the whole life insurance
was considerably less than if he would have
had a... Term insurance policy. And as Art
said, it was the lot... It was a
lot cheaper that he could have purchased. So
he said the insurance agent,
sold him the wrong policy,
and he made it his life mission to
eliminate every whole life policy,
out there,
no matter what the strategy was and replace
it with term,
and then coincidentally,
you know, you gotta under... You gotta wonder
his motives.
He also then
partnered up with a mutual fund company, and
thus,
the entire thing of by term invest the
difference into mutual funds
was actually born.
And he built this huge company up, then
later sold it
and
that Mantra continued through the eighties,
that company now is not quite
as prevalent as it used to be, maybe
because Art no longer owns it and they've
lost some little steam, but that's kind of
the origin of the bi term investor difference.
It was really because of 1 man,
that felt like,
his particular father and mother were... They had
the wrong strategy and caused them
turmoil. And it and it did. It did,
but it doesn't mean that
of...
That's right for everybody or then the... That
the strategy could have been tweaked just a
little bit, and you would have the best
of both worlds.
You know, this reminds me of the idea
that
if you look at 1 piece of a
puzzle and then try to
say this 1 thing fits for everyone else.
You're gonna end up bleeding people astra. And
I was specifically thinking about
in my devotion. We were diving into just
some concept. Where if you look at... Well,
Jesus healed a particular way he laid hands
on somebody in 1 case. Well, you could
say, well, that's only way that you're supposed
to be able to bless others is to
lay hands on them. You could say, well,
he had this person he's spit in their
eyes, and that's what caused them to become
healed. You could say, well that's only way
it can happen. And if you take a
tactic or a method and then try to
say this is the 1 way that everyone
needs to do it, You're only following the
wrong
piece
and you're not really understanding the bigger picture.
So,
bruce, I really appreciate you sharing that story
because we can never take 1 person's experience
and say this is what needs to happen
for everyone. So if you are
in this position of
considering the life insurance. Let's just give a
very, very quick overlay of, what exactly buy
term investor the difference, what those terms
actually mean and kind of what is behind
that. So,
Bruce, as you said, a lot of people
used to
invest or not invest Let me just take
that word out of my vocabulary here. So
a lot of people used to use whole
life insurance as a savings tool, and this
has been for over a hundred years,
through
many
economic cycles,
booms, bust through the great depression through challenges
and hardships, people would save
in
tools that allowed them to have safety where
their money wasn't gonna drop in value, and
they had access to capital. And so
Life insurance, whole life insurance specifically was a
primary tool that people used to do that.
Now whole life insurance, generally, if you think
about what the idea of whole life insurances,
it lasts your whole life. If you purchase
it today, and then that policy will be
in effect your whole life, and
provide a death benefit at the point you
die, if you die along the way. And
if you're still living at the end of
that policy, which today
put that at age 121.
It used to be age 100. But if
you die before that, you will get the
death... Your family. Will get the death benefit
payout. If you are still alive at that
end of the policy, they'll pay you out
the death benefit.
So you're going to get a payout with
full life insurance. There's also an equity component
where you're building up cash value inside the
policy.
Now,
when you look at,
that as a savings tool, people were using
it also for the living benefit or the
cash value.
What happened then is Bruce, you mentioned this
story
of, on, this gentleman who found out that
he could have had a cheaper policy with
more death benefit and that's where he was
saying, well term insurance would have accomplished that.
What his term insurance. Term insurance has a
short time frame can be 10 years,
20 years, 25, 30 years, 15 years, there's
a short window of time that you're purchasing
coverage so that if you died during that
time,
then the death benefits
payout out to your heirs or to your
family. There's no equity components so you cannot
access any of the cash value. There is
no cash value to access and use,
along the way. So the the
conversation or the dialogue, the the if... I,
I'm sorry, the comparison of the contrast we're
looking at here is
whole life insurance
versus
term life insurance and
use the savings to put into
investments. Now there's a whole lot of additional
history that Bruce will uncover and unpack in
another episode. We've talked about this as well
in the past, but through the seventies and
eighties, some of the
conversations and the challenges that were around life
insurance and some of the new products with
variable life and universal life and indexed, or
equity indexed, life insurance, There was so many
different types of insurance that were
that came on the scene during that time
frame, we're gonna leave that for mostly another
conversation. But when we look at 2 ends
of the spectrum, we have whole life term
life, and that's the comparison that we're really
talking about today. Whole life being put a
lot of capital into a policy,
build equity, and then get the death benefit
payout whenever you pass away. Term life,
short time frame,
way lower cost of premium,
death benefit that pays out if you die
during the timeframe frame, no
equity.
So that's the contrast. And when the
conversation comes about, the idea is well, if
the 2 things are equal.
If we're just looking at get a million
dollars of death benefit, which policy costs more.
Well, whole life is gonna cost you a
lot more for a hundred or for a
million dollars of death benefit then term insurance.
But if that's all we're looking at It's
easy to say well term would be cheaper.
We're gonna save money if we buy the
term policy, and then let's go ahead and
use the savings and put that over into
investments.
And the idea with that is, well, if
you can get a higher rate of return
over here on your savings that you save
from not putting the money into the life
insurance policy,
put that somewhere into investments, you're gonna end
up ahead in the long run with a
higher rate of return
more capital in the end, better ability to
retire, and there is some idea and some
merit to this when you say, well, If
I'm great at investing, and I am really
excellent at choosing wise investments, and I can
lower that cost of insurance or the... Premium
put into a life insurance policy, separate out
the 2 issues and say, let's put our
our
insurance money here, and let's put our investments
beside that.
You could
do very well with investments. But what we're
gonna do today
is unpack what that difference that that contrast
between whole life insurance over here and term
life insurance plus investing over here and really
what those pitfalls are of that very popular
mantra that's become, like a buzz word in
our culture and society where people just say,
whole life insurance, nope, buy term invest the
difference. And that typically generally means, oh, well,
I'm just gonna accept at face value, that
it must be the more logical route because
I'm gonna save money on premium for the
life insurance, and I'm gonna have all this
money to invest. It's... Clearly or seems as
logically
a
superior strategy, and it's not really so. So
we're gonna talk about why it's not really
so today. Bruce
Anything else you wanna add to that that
scope or the lay of the land, What
is the the contrast? What is the debate?
Well,
before I go there, I think
a lim, which is the life insurance regulatory
authority.
They actually compile statistics and 52 percent of
Americans,
have life insurance.
However,
of those 50
52 percent,
they feel
that's,
78 percent of that 52 percent feel more
financially secure that... Because they do have life
insurance. Mh. So the first thing I'd like
to say is that
It's interesting that people feel more secure by
a lot if they have life insurance, but
only 52 percent actually have life insurance.
So
it would seem that then why doesn't... Why
don't more people have life insurance. Well the
first thing that L found out through questions
is that 82 percent of all people that
are ask about the cost of life insurance,
overestimate the cost.
They think it's a percent more 82 percent.
So they think it's a lot more expensive
than it what it actually is. Mh. I've
always... You know, I've been doing this since
the eighties.
And excuse me. And I really believe that
people
when they are looking at life insurance they
believe they should have life insurance. Just like
they know they share Think... Should have car
insurance and homeowners insurance
and renters insurance and all these other insurance,
but
life insurance, I believe is the hardest 1
to buy
because you have to face your own mortality.
Mh. And when you face your own mortality,
you do not want to
of think about the possibility that you're going
to die.
And so I think that's 1 of the
most more difficult things on this.
So
I think the time period
so that people understand that,
the buy term and invested difference only works.
If you actually invest a difference.
And this is a problem that I've heard
from advisors
that actually do this
strategy
that they complain that, and they don't even
know
that it's kind of it's kinda weird that
they're complained about this,
that that their people are not investing the
difference.
They they changed their goals. They decide offs,
It's really
buy term and spend a difference. I was
gonna say because of Parkinson's law that we've
unpack on this show, the idea that if
you have this extra come, it's...
Very easy for your expenses to rise to
meet that income if you don't have an
a superior strategy or if you don't have
an alternative plan already in place.
Now does that mean that
that shouldn't be the
the strategy? No. It just means that you
have to you have to have a better
adviser.
But I think the the number 1 problem
with buying term and investing a difference
is that
people assume they're going... Their investments are going
to get to a point where they call,
they're calling self insured.
I no longer need an additional
death benefit of a million dollars 2000000 dollars
3000000 dollars.
First of all, I think that's kind of
odd because
it's not that you need it, but you
may want it for your loved 1.
There's no such thing as being self insured
because your investments
are not guaranteed to stay where they are.
And we've seen that and
in a a variety of recessions, the great
recession being a great 1. So let's just
say
in
2008,
you were coming up at the end of
your 20 year term or your 30 year
term, and you feeling really good about
because your investment portfolio,
was... Let's just... So I can put numbers
to this. Let's say your investment portfolio was
2000000 dollars. And now your 2000000 dollar term
was going to lapse.
And it and it was going to go
away.
And let's say it even did go away.
You said, hey, look at this, It's a
nice 2000000 dollars, I don't have to worry
about this anymore. I'm not gonna pay my
term policy. You didn't pay it.
And now 3 weeks later, the recession hits
and your 2000000 dollars
turns into 1000000 dollars because many people did
lose
50 percent of their portfolio at that time.
Well, now
if you even thought about the strategy, I'm
gonna go back and get firm until I
build it back up,
you are now 30 years older,
term insurance is gonna be a lot more
expensive if you can even get it.
And if you now die before that portfolio
builds back up
your loved ones will not receive
the amount of money that they thought to
have a comfortable life. That's why
you can never say you're self insured.
Because insurance is a guarantee
for you and your loved ones where the
investments are not. Mh. Now I'm not saying
it can't happen because if you if you
did the strategy
and you retired in 2015,
then the strategy actually worked.
If you're just thinking about buying term and
having all the money possible to put in
investments. I'm still not saying you can be
self insured, but I'm saying that strategy actually
worked.
So you have to look at the time
period
of when you're actually doing this strategy. And
I I just had a client just yesterday,
that said she's extremely nervous with her half
a million dollars of
money in the market.
And she said, I don't wanna lose half
of it.
And so this is this is what people
have to overcome.
Because that is not a sure thing. Your
investment accounts are not a short thing.
Now remember, we always talk about safety liquidity
and growth
So you don't get
all 3 of those in 1 particular investment.
So that is why the investment part of
it
does not have the safety aspect of it.
And that's why this strategy
hand work
But most of the people,
I would say, just like they say, feel
more secure, 78 percent of people feel more
secure with life insurance.
Well, knowing you have whole life insurance means
you're gonna have it for your whole life.
So that means you're going to have it
for whole your whole life and feel the
most secure. And then our finally, I'll just
say our friend, our podcast for friend, doctor
Wade val has actually done,
mathematical research on this.
Plus qualitative
research from interviews with
people,
and having a well
whole life insurance policy,
will actually enhance
your equity portfolio
because of sequence of return risk. And we're
not gonna get into that. We actually have
a podcast on that, and you can talk...
You can listen to doctor Wade files podcast
with us, and it's a better
explanation. But I think those are some of
the thoughts we can actually build on right
now, Rachel.
Absolutely. I mean, there's so much in this
whole conversation. And so let's go ahead and
I'm gonna cover a couple of additional pieces
here because What's really interesting is that if
you look at the idea of feeling more
financially secure. The reason you feel more financially
secure when you have life insurance in places
because you have that guarantee.
The guarantee
that there will be somebody else taking on
your risk of passing away at any point
in time and guaranteeing that they'll pay out
the death benefit as long as you fulfill
your into the contract and pay your premiums.
Now what happens is that
if you look at it logically, let's just
imagine a short term life insurance policy. If
you had a term policy for 5 years.
So you're healthy 25 year old right now.
And you buy a 5 year term life
insurance policy.
The likelihood of you passing away during that
time frame, especially if you go through underwriting
and you get preferred or even a standard
rating, the likelihood of you passing away is
very low Now the insurance company looked at
that and they call that a mortality risk
and they assess that. And so they're going
to say, well, you are not going to
have to contribute very much into the pool
of
premiums that everyone's paying in order for us
to hedge or to back up our guarantee
that will pay out this death benefit if
you die during that term because we think
it's really unlikely
they're looking statistically and and at all of
the health factors of the people that they're
insuring, and they're saying the likelihood of death
is low. Now if you extend that out
for 20 years. And you say what is
the premium that's gonna be required for that
term in insurance policy. Let's just say it's
the same death benefit. A million dollar death
benefit. You're getting either for 5 years or
you're getting a million dollar death benefit for.
I don't know what I said, 20 or
30. We'll gonna say 20 years. The longer
the timeframe frame, the more likely you are
to pass away because it's extending towards
the end of someone's lifespan. And the longer
you progress through life, the higher likelihood of
death is, and we know that that's a
statistical fact because
people have an average age of passing away
and it's usually not very, very young. And
so if you can imagine then, extending, say
you're 25 years old and you get a
policy that's a 50 year term policy, which
I have never seen that. Have you seen
that, bruce? 50 year term?
No. No. I think so. I believe I...
The the longest 1 I've seen offered is
40 years.
Okay.
But
doesn't mean that doesn't exist, but I haven't
seen 1.
Sure. So what we're seeing is if you
said, well, let's get a 50 year term
policy that doesn't really exist, But I'm 25
now. 50 years, I'm gonna be 75.
The likelihood of passing away during that term
is much more likely than the likelihood of
dying during the first 5 years. And so
the insurance company is gonna say, Well, I'm
going to charge you more for that. And
the way that term insurance premium is set
up is that you pay if you're purchasing
whatever that term is, you're gonna pay, a
fixed amount of premium during that
time frame of the policy that doesn't mean
that
the risk is equal
throughout the lifetime of that policy, but it
means that you already know upfront. When I
purchased this time frame of a policy,
I'm going to pay the same cost every
year or every month until the end of
that term. And what happens at the end
of the term is that if you wanted
to renew that
term insurance policy, you're gonna pay a lot
higher premium beat because the time frame that
you're within is much closer to the end
of your life.
So when we look at that whole idea,
it makes sense why term costs less because
less people are passing away during the time
of their term policy. Whereas
everybody who owns a whole life policy throughout
their entire life is passing away, during the
time frame of their policy. And so that
is simply
just not even apples to apples comparison when
you look at the idea of the short
time frame versus the long time frame of
whole life insurance. And the main thing that
I wanna point out with that is because
term ends
and whole life lasts
because of that reason, you're in a position
where when you have the whole life insurance
coverage you have that security for the whole
for your whole life, which then means that
that security that feeling of financial security. You're
able to make better decisions. You're able to
have more guarantees
during that timeframe frame, and you have the
option of maintaining the coverage because you've already
that coverage in place whereas if you
have a term policy, your option to keep
coverage in place your whole life and maintain
that long term, put complete life guarantee that
no matter when I die along the continuum
of my years from now until the end,
I'll get paid out. There's not a guarantee,
that you'll have the same
amount of premium with that term policy. I'm
not sure if I'm communicating that clearly, but
not only are you having the longer
span of financial security. You also have the
guarantee that your cost is not going to
increase during that time frame in order to
keep it in in place.
Yeah. Our friend Todd Lang has actually run
comparisons on this, both the cost of the
insurance, term insurance.
And the possible payouts. He's also then said,
don't forget with the investments you... And you
also have to pay taxes on the investment
where you can access whole life insurance
cash value tax free.
So he... And then when you die,
the investments,
could possibly, depending on what type of investments,
they, you could get a a step up
in basis
of them if they're actually in a qualified
plan,
the secure act 2 actually made it a
much more onerous
taxation,
on the next generation. So You also have
to take those in into consideration of what
you're trying to accomplish.
I actually prepared something today, Rachel, from really
relate to what you were saying is
I don't think people realize that,
at the very beginning,
term insurance was just 1 year insurance. So
it's what was called 1 year renewable term.
So the act
actually said a 25 year old has this
a probability of dying. So we're gonna... We're
gonna actually... What's charge x amount.
The next year then, that they said the
26 year old, it's a little bit more
likely to die, because they're closer to mortality.
We're gonna charge x plus a little bit
more and so on and so forth. And
so it it actually was like a reverse
pyramid, the premium payment kept getting larger, larger
and larger.
And what the insurance companies founded, at a
certain point, a people said, well, I'm not
paying this big insurance
cost anymore
because it's just too much in my family
but budget, and they would drop it, so
they were losing premium coming in. So they...
That's when they actually went to the the
10 year, the 15 year, the 20 year,
the 25, the 30 year.
Because what they then, they they then determine
is they, yes, they're gonna have to charge
more at the beginning.
But because they got more at the beginning,
they didn't have to charge as much at
the end. Well, guess what? That's exactly what
whole life does. And that's why it's much
more
expensive relative to what people think
at the beginning because the cost of the
base premium does not change for your whole
life.
And so I would argue
Yes. Whole life is more expensive at the
beginning, but it gets ridiculously
inexpensive
towards the end.
And because they have actually
had more of the premium at the beginning
to actually then,
make it work for
the company, which then the mutual
holder policy holders actually benefit from that. Mh.
I've said this before, and it it got
missing on the podcast.
What whole life insurance companies really do is
they buy term, and they invest a difference.
They invest your your premium dollars,
they invested in a fixed income, and that
fixed income then is going to develop a
dividend for you, oh and by the way,
it's a tax free dividend,
So it has the same kind of characteristics.
But what I wanted to show people if
you're on Youtube, now I can share this,
and you can stick it.
This is a 39
year old
female,
and it was a 20 year term,
and you can see that the premium is
1150
dollars. For 1000000 dollars.
And and frankly,
this is this is 1 of our clients.
This is 1 of the money advantaged clients
for and they were actually did a whole
life policy, but then they said I wanna
add term to it
because I wanna get closer to my human
life value.
And the idea is, this is actually a
little more expensive term than you can buy
on the open market
because it has another aspect of it. You
can convert it at any time before age
65,
without any medical underwriting. So it has an
additional
feature to it, So it's a little more
expensive
then if you were just go by a
term that didn't have this convert pop possibility.
Then as we,
I don't mean to derail the whole conversation,
but the convert is... So valuable because you
don't have to go through underwriting again to
be able to convert. So even if you
had health concerns crop up during the timeframe
frame between
starting that term policy and the desire to
convert it over into whole life. You don't
have to go through underwriting, you can just
convert off a chunk of that term policy,
and you have that I mean, you could
almost call guaranteed underwriting because you've already gone
through underwriting before, and you don't need to
go through it again. So super powerful strategy
if you're adding on term insurance.
Yes. And then let's say you don't even
convert it.
Now you get to age 58,
and that's that's where the 20 year term
ends.
The next year, the premium goes from 1150
to 12000 dollars,
then the 13000 dollars, and then this 14
and so and so forth. We get all
the way down here to
8 78
and it's 87000
dollars. We get some mortality, pass mortality.
Now all of a sudden, if you notice
at age 81,
and Your cumulative premiums are actually more than
the death benefit.
And people say people will say see. I
told you this isn't a good deal.
Well we agree. That's why that's why we
say you shouldn't do it like this.
But however, this is actually this actually happens
to a lot of people.
When they have this, we actually had a
dentist out out in Es California that actually
called the money advantage, and I had a
meeting with them. And he was 74
years old and his term had
run out 4 years prior at 8 70,
and we started doing an analysis and he
had some health issues,
and he couldn't get anymore. So he was
actually paying over a hundred thousand dollars a
year
for 800000
dollars of death benefit. And then it kept
going up. And as you can see,
just in this time period between here
and here, that's 1000000 dollars of premium
in only
6 years or 7 years. 7 years.
But Believe this
In this case, you would be penalized for
living longer.
If you wanted to maintain term coverage and
you lived until age 91 or 95.
Or a hundred and 2, You would be
in a position where it wouldn't make sense
because financially, you'd pay more to keep your
coverage than you're gonna get paid out in
debt benefit.
Well, you could say, yes, it doesn't make
sense. If if you if you start that
from your the original strategy. But when you
get to age,
84 and you've already put in 1600000.0.
If you just stop, you don't get anything.
But if you then say, well, I'm gonna
put in another 250000
because lease, now I've paid in 1.8.
If I just stop, I'm gonna lose 1.8,
but if I continue, at least, I'm gonna
recoup a million dollars of the 1.8.
Mh. And that's... And that is the example
I've given with the hot air balloon. This
is what happens with these term policies.
It's like a hot air balloon it's going
up. The premiums getting higher and higher and
higher,
and now I'll sudden the hot air balloon
catches on fire.
And you're like, well, I can't stay in
the balloon
because I'm gonna die from the fire, but
I can't jump out because I'm I'm too
high off the ground, and I'm gonna die.
So you're really in a position where neither
situation, neither decision is really good for you.
Mh. And that is that is why when
you do term insurance,
especially at a young age, a lot of
people cannot
visualize,
that they are their own mortality, and they
may they may need or frankly, they may
want to have a death of benefit.
And the other thing that they have always
heard is well over a long period of
time,
the investments are gonna average 7 8 09:10
percent.
But once again, now we come back to
the time period. What is your time period.
Not over the long period of time, what
is your time period and that is called.
Speak with of return risk.
Yes. I feel like there's so much more
we could unpack Bruce. Was just such a
powerful
visual to be able to see those actual
numbers. And I want you to take 1
thing away if you're watching and listening. We're
not saying term insurance is bad because you
want to be in a position where you're
getting as much... Death benefit as you can,
and you're using whole life insurance to be
able to build up that cash value and
have accessible capital during your lifetime and also
making sure you have enough death benefit that
if you were to pass away, you're in
a position where your family's gonna get as
much as possible to cover your human life
value. That's H v or economic, human life
value. What that means is the amount of
money that you would have made if you
continued working in your
capacity that you're in right now throughout the
rest of your life, making sure that all
of that economic value is transferred to your
family,
if you were to no longer be here
to produce that on your own. So let's
talk really quickly about the idea, bruce you
touched on here with the sequence of risk
returns.
When you put money into a whole life
insurance policy, you have a guarantee
at a very minimum, especially, I wanna clarify
something. If it's specially designed and ideally designed,
you're going to have even more advantages and
benefits, but just even a bare bones
typical whole life insurance policy. You are going
to have a rise cash value that's guaranteed
to be a certain dollar amount or more
at a particular point in time. And when
you use the buy term invest the difference
strategy. There's no way you can guarantee
the dollar amount that you'll have in your
investment strategy. So you can guarantee if you
pass away during the time frame of the
term insurance strategy that you'll get the death
benefit payout, but you cannot guarantee
the amount of dollars in your investment strategy.
And that's because of the
just the different levels of risk. So when
you have volatility,
you have the potential of loss, you don't
necessarily even have a guarantee that you're going
to have more,
then you've invested
or
equal to what you've invested. You can lose
money. You can actually go backwards from what
you've put in your or your seed capital,
your your
your inputs into your investment strategy. And so
when you look at that, I think there's
something that we've talked about multiple times on
the show before, but there's a difference between
a historical average, which is then usually said
something like, oh, well, you can get 8
percent or you can get 12 percent or
you can get 7 percent average because the
stock markets performed average
in the past depending on your timeframe frame,
what that historical average is that averages arrived
at by adding the positives,
subtracting the negatives and then dividing over the
time period. So
whatever the returns are positive or negative. You're
just doing a simple mathematical plus minus calculation,
and then and then dividing over whatever it
was 20 years, of those returns, and that's
a mathematical average. You can't take that number
and expect your investment
to perform on a guaranteed basis with that
positive number every single year, and it's it's
very
malicious. Is that a word? It's a fallacy.
I'm making up words here. It's
it's a problem
to
have its faulty logic. It's
it's improper reasoning
to think that you are going to get
an average, going forward or to assume even
that a positive
average
historical rate of return means that I will
generally average this in the future going forward.
And
I think the easiest way to think about
this is that if you take a hundred
dollars.
And you
get a 100 percent return in the first
year.
That's gonna be we're now 200 dollars.
And now we have a 50 percent loss.
Now we're back to
a hundred dollars.
We've just broken even. If we had returns
of plus 100
negative 50.
We'd be in a position that we would
say, well, this is,
let's look at the the rate of return
on that. So plus 100,
minus 50. That number is 50. Divide that
by the 2 years, of that time period.
That's a 25 percent rate of return.
So I should have more money than a
hundred that I put in right because it's
a 25 percent average rate of return
wrong, we just said we went from a
hundred to to 200 back to 100 dollars.
You have exactly the same number of dollars,
the amount of money that you put in
in the first place, and it could be
argued that you even have less if
inflation has occurred, and you're in a position
where that 100 dollars buys even less 2
years later than it did when you originally
put it in, it was nothing like a
positive 25 percent rate of return.
So as it's very challenging to use historical
averages to
make conclusions about what you think your investments
are gonna do, especially when you don't control
the investments, and you're not actively investing. It's
not something that you are in the... You
you have boots on the ground and you
understand the investment landscape.
So, Bruce, I know that you have a
lot that you probably would add to that
with the whole sequence of returns risk.
So how can we think about that from
a healthier perspective?
Well, I think if you go back to
what... Doctor Wade fa was talking about is
that
there are periods of time
in in investing in traditional investing that you
do not get very good rates of return
or any rates of return or negative rates
of return.
This is very prevalent in the 2 thousands
when you had the dot com crash,
in the early 2000 and the great recession
in 2008.
And if you look at the S and
P 500 over that time period, I believe
it was about 0.79
over that 10 year period, per year, 0.79.
So then if you... In a retirement,
situation or just because you need money
to to to do other things,
you actually take money off your portfolio at
456
percent and it's only growing by 0.79
percent, then it's actually going backwards and you
actually have to make a heck of a
lot more money to overcome the losses just
to get back to even because you're taking
money off of it also. So you have
to to summarize that, you actually have to
the stock market,
or the investment has to make up for
the loss, and it has to make up
for the amount of money you're taking it
off of that particular.
And that is really detrimental in somebody's
portfolio if they're just going into retirement.
So they have x amount of dollars. They
lose a lot early. It's hard for them
then to make up that loss over the
next x amount of years.
However, if the sequences,
you've gone through retirement for about 20 years,
and then you have a major
drop.
Now because you're closer to mortality,
it's not gonna hurt you as much. So
what Doctor Wade says is And he's proven
it with 50
monte carlo simulations, which is really just a
way to back test and see how these
investments have done over the last...
X amount of years. He says if you
would've have not have taken money out on
the down years,
then you're actually
can mitigate the risk of sequencing term risk?
Well everybody should be shouting at the podcast
right now And said, yeah, but I need
my money out of my investments at that
time?
And he said, no, what you have done
over the... Your career is you've actually saved
money
in whole life insurance.
And now on the down years instead of
taking out of your investments, you take loans
against your whole life insurance, and you live
off of that,
That way, now the the stress on the
investments is just to overcome the investment loss
is not the additional money you take out.
Now if you're an astute person, which our
buddy fritz always is listening to the podcast
is,
you would say to yourself. Now wait a
minute, But if I would have had that
extra money that I put in into whole
life insurance, and I would have been putting
in it into the investments,
I would have even more money.
And doctor Wade Faust is wait a minute.
That actually is not true because what I
can teach you now is
you can actually...
Do
more equity or are not a safe of
of investing
because your safe investment money is in your
whole life insurance.
And that it can actually recover faster that
way.
So he had thought of all those different
variables in his research. And I think that
is really what comes down to. We're not
saying buy term and invest the difference can't
work.
We're just saying there's... Sequence of return risk
brings that into
a reality that it may not work for
you. And there is an alternative
to mitigate that sequence of return risk. Mh.
Bruce, I think there's so much to this,
and I think...
As we continue to explore the conversation. I
mean, clearly, you and I are proponents of
whole life insurance, but it's not because of
any other reason, then it is a very
powerful strategy for
overcoming a lot of these challenges and really
being able to put people in a better
position with more guarantees and more confidence for
the future. And so I think it is
challenging
to
maybe shift a mindset that you have already
if you're in a position of saying well,
whole life insurance just isn't for me or
it's too expensive or I should, you know,
just put my money into determines instead, and
invest the difference. So we're helping you be
able to think through what that actually means.
There's 2 other things I want to bring
in really quickly as we're, coming to a
close here, but
Bruce, you mentioned this before that the returns
in your investments may be taxable.
So often when you do see a rate
of return that you're going to get in
some
mutual fund or stock portfolio, you're in a
position where you're seeing, maybe the historical average.
So we've already showed how that historical average
can be really misleading. It doesn't mean you're
gonna get a positive growth of that number
every year going forward. But also what it
means,
in addition to that, that you might have
low down years in the beginning, which are
really hard to
overcome, it also means that you're probably not
seeing in that number, management fees or the
impact of those fees that are gonna be
taken out. And so you're not gonna experience
that full rate of return, if also isn't
usually
showing how that
investment is taxable. So if it's taxable, you're
gonna have to reduce again
what your projected return is. And when you
look over at whole life insurance. We're not
gonna get into a lot of the details
of the taxation, but it's a powerful tax
tool, there's a lot of tax advantages. As
this cash value is growing,
tax deferred.
You'll pay tax in the end if you
take out more than what you've put in,
more than your cost basis. But the point
over here is that you can look at
your cash value growth and know that that
is
the
return or the amount of cash that you'll
have after tax. If you pay tax on
the seed with whole life insurance, you'll not
and you use the policy properly. You won't
pay tax again
on that money. So what I mean is
that you... Had it grow tax deferred as
long as you use it properly, you will
be able to access that capital tax free,
and then you also have the death benefit
payout to your heirs income tax free. So
you have a tax advantage on the insurance
side, where if you look at the cash
value amount that you'll have, that is
already accounting for... It's a net net net
of all of the things that the investment
returns
have not yet taken out, things like taxes
and fees.
The other thing I wanna mention is that
with
a whole life policy versus your investments depending
on where you're putting your investments.
You may, on the investment side, have to
pay additional fees if you wanna access your
capital early. Usually, this is in plans. And
if you're accessing before the age of 59
and a half where you're
withdrawing,
you have to pay a qualifying early withdrawal
penalty on that capital. Whereas with cash value
and a whole life insurance policy, you have
access to that capital,
in multiple ways. The ideal way is to
borrow against your policy.
Again, we'll leave that for another
conversation if you're not familiar with that topic.
We'd love to be able to unpack that
In future episodes, we've done that in the
past as well, but you are able to
look at the cash value dollar amounts and
recognize that that is
already accounting for things like taxes and fees.
You don't have to reduce them out of
your cash value dollar amount. So that is
something that gives you a powerful
advantage
to then say,
what...
If by term invest the difference has all
these problems and challenges. What is the opposite?
What can we do instead? And what we
would suggest is to think
about insurance,
not just as
insurance only. Because the cool thing is or
maybe it's cool, maybe it's profound
is that if you use whole life insurance,
that doesn't mean you are
prohibited from investing. It doesn't mean you only
put money into a life insurance policy. You
have the ability to use that as capital
to
fund
investments. So you're in a position where you
can use that capital in 2 ways. It's
an and asset you can put your capital
into a life insurance policy
you can borrow against it and use that
capital in outside investments. And so Nelson Nash
is really the beginning,
sought leader on this whole idea called becoming
your own banker, and I think a better
mantra,
rather than by term investor the difference would
be become your own banker.
And I'm just gonna give that back to
Nelson Nash. He
really made this known and popularized and brought
it out to the public to say, you
can put cash into a whole life insurance
policy and not just think about the insurance
component, not just think about the fact that
you'll get a death benefit payout whenever you
die, during the span of your entire lifetime.
But the most important thing is that you
have a need for capital and accessing cash
all throughout your lifetime for any kind of
purchases
and if you have a tool to store
capital powerfully, this savings tool is more valuable
to you when you think about your entire
personal economy. And when you put guarantees around
that tool of savings. You're in a position
where you have access to capital, and that
puts you in a much more advantageous position.
So
bruce anything that you want to add to
that as we wrap up here?
The last thing just because I...
I haven't talked about it, and it was
kind of impressive.
Death benefit claims with life insurance.
And annuities
in 2022
according to Lim
were 797700000000.0
dollars in 1 year.
So that's a that's a almost 8 tenths
of a trillion dollars.
So,
once again, I think a lot of people
have this negative attitude about insurance because they
think all these insurance companies are never gonna
pay it. I've heard this
before. A lot, especially during the Covid regime,
you know all, they're not gonna pay. There's
only 1 time
that,
in the contract,
that they they say they're going to not
pay it. It's not even in every state
is if you commit suicide in the first
2 years
And
any other way you die, whether it's
a complication, whether it's your fault,
whether... They pay the death benefit. It's into
the contract.
And so...
I've often heard people say, well, that... You
know, I'm not... I'm not chan the insurance
company, not paying me. And I think that
is in rational way of thinking.
You
Absolutely.
I do wanna bring a few comments in
here, Fritz. Thank you for joining in. We've
got Becca Will height as well. So...
A few here, on Fritz as mutual. Insurance
company does not see a whole life insurance
policy to funnel dividends by accident, the mech,
the mechanics of a whole life.
Is the reason why the company chooses a
whole life to do so.
If you think life insurance is expensive, the
inflation tax because of reserve banking should wake
you up. Yes. That's absolutely true.
Another podcast. I know.
We'll screenshot this and we'll we'll talk about
some of these in the in the future
for fritz. Thank you for your fodder for
additional conversation.
He also says you lose time value with
short term thinking and short term strategies I
mean Nelson nash always just said,
think long term. Think long range. Think as
long as possible. And, yes, of course, if
you make a decision for what's best for
you, Right now, this year only, this month
only this week only, you're not going to
really
consider that
implications of that decision, and whether it was
really the best decision or not. So if
you think about what would be the greatest
benefit to you 75 years from now, whether
you're living or not. What would be the
greatest benefit to your family, you're probably gonna
be thinking
more proactively and in a better position.
Fritz also says in an economic downturn capital,
squeezed out of the economy with insurance cash
value, you will have capital
advantage. And then Becca Will says buy whole
life, and invest the cash value. So there's
a new mantra, buy whole life and invest
the cash value because you can do that.
And you can do it powerfully, and it
can improve
all of your
financial outcomes and make you wealthier,
make your family wealthier in the future. And
so you're planting seeds that will reap a
long term harvest.
Of wealth in your family. So thank you
for being with us on the podcast today.
If you want to apply these strategies and
be able to think through your own life
insurance needs Go ahead and book a call
with our adviser team. You can do that
at v money advantage dot com, and we
will talk with you about everything that you
have on your hopes and dreams and goals,
what you're working with and come up with
a strategy to make sure that you are
equipped for optimizing your finances.
Going forward on a long term basis.
So with that, let's close here, Bruce
in in closing, if you're listening, please remember
success leaves clues. So model the successful few,
not the crowd, and build a life in
business you love. We'll see you next time.
Thank you for listening to the money advantaged
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