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373: The Investment that Keeps on Giving (Even When You Die)

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Buck: Welcome back to the show, everyone, today. My guest on Wealth Formula podcast are well known to this group. They are the Wealth Formula banking folks named Rod Zabriskie. And we also have Brenyn. Brenyn, you haven’t been on this show before though heavier. It’s usually Christian.

Brenyn: Yeah, I think man I’m trying to think if we did one episode before Rod or am I thinking of a webinar we did.

Rod: But we’ve done some stuff in. Yeah, Brenyn’s joined us at some of the meetups and stuff, so he’s been around.

Buck: Okay, So no, I’ve definitely seen you around in the meetups and that kind of thing. But anyway, welcome, welcome to Wealth Formula podcast again, guys, and it’s about Happy summer to you, as you can tell, if you’re watching this on video. I am extraordinarily informal today. Just got back from a kickboxing exercise morning here and got the Wealth Formula hat on. Instead of trying to, you know, try to look nice for people. So repping.

Rod: Repping the brand.

Buck: Yeah, that’s right. That’s right. So, guys, I’m glad you made it on. And, you know, I was thinking about this show the last few weeks because it’s like, you know, we got to we’ve got some rough waters on the investor side. And it made me start to think about, well, you know, where where do you deploy in times like these? Because there’s always places to deploy capital and that kind of thing. And the obvious one to me seem to be, you know, something like what you guys are doing with Wealth Formula banking and, and, you know, various permanent insurance things. And so I thought let’s back up, let’s tell the story here, because this is historical. This is something that has been an issue throughout history where people have fallen back on to the permanent life insurance thing. So let’s talk first let’s back up way back up. How did the concept of permanent life insurance come into existence in the first place? And what is it? That’s the other thing.

Rod: Sure, yeah, So I can answer that one life insurance. I mean, as it was originally conceived, was what’s called annual renewable term. And all that means is I pay my premium. If I die this year, my insurance pays out. If I don’t die this year, then next year they’ll they’ll bill me again and I’ll pay a little bit more because as I get older, the cost gets higher. The statistically, I’m more likely to die. And so they’ll pay me. They’ll charge me more for the insurance.

Buck: It’s just like, is this American stuff that you’re talking about or is this like going back to medieval European history and that kind of thing?

Rod: Yeah, well, I mean, I think it goes back to the Middle East.

Buck: Right? Okay. Got it. Got it.

Rod: So and it’s just pooling risk, right? Like buddies get together and say, hey, I don’t think I’m going to die. But if I die, you know, I’d like to have something for my family. And everyone else agrees. And so they say, well, let’s all pony up, you know, a little bit. And then if any of us dies this year, then that money goes to that family, right?

Buck: Like captive insurance. I mean.

Rod: Yeah, it’s like self-insuring. But I don’t want to self-insure. I want to pool it with a few. So then the insurance companies, the way they are now, it’s just like millions of people pulling together and saying, hey, I don’t think I’m going to die. But just in case, you know, here you go.

Buck: Right. So, of course, it has evolved over the years. And so tell us a little bit about that over the terms of policy structure and benefits and all that. And, you know, at what point did the concept of term insurance come up and what, then what, you know, just in general.

Rod: Sure. So that model works great for a little while if you’re in your thirties and you say, well, I need a million bucks of insurance and I pay whatever my 300 bucks for that, then that’s great. But the older you get and that million bucks of insurance is going to cost more and more. You get into your seventies and eighties and that could be a hundred grand of a premium because there’s only ten of you left. Right in the pool or whatever. So at some point, you start asking yourself, is it worth me putting? I’m just going to end up putting more than $1,000,000 into this thing before I die and get any kind of benefit back out?

Buck: Right?

Rod: So that’s where permanent life insurance was conceived, where they said, okay, what if instead when we start with the 30-year-old, they just put in a lot more money into the policy than they have to just for the pure cost of insurance. Right. So instead of 300 bucks, it’s 3000 bucks or something. But as long as they put in that $3,000 every year for the rest of their life, then we can build up this underlying cash value so that later on in May, when he gets into his 67, his eighties, there’s this additional pool of money that’s going to help not only cover the cost, but there’s growth. Yeah, right. On top of that money that’s sitting there. And so that can make it so that he can pay an even premium for the rest of his life, 3000 bucks a year. And it takes care of that whenever he dies, no matter when that is, a million bucks goes to his family.

Buck: When did that start permanent life insurance? Do you have an idea?

Rod: Couple of hundred years ago is really I think where that started kind of coming about and becoming a thing. So and you know, the way we know it now, it’s obviously evolved, you know, more to where different types of insurance if it’s whole life we know how the cash value grows based on a guaranteed interest rate and a dividend.

Rod: If it’s a what’s called variable universal life, that cash value is actually invested in the stock market. So your cash value fluctuates depending on how the stock market is growing or not. And so there are different types of that. But but ultimately, that’s the idea. That’s the reason cash value is even a thing inside of life insurance.

Buck: Right. So I want to talk a little bit about, like, you know, not that we’re in a global depression or we’re headed to one right now or something like that. But it would be helpful if you could provide some insight into how global events, you know, like world wars, economic depressions, pandemics, how have they impacted this industry?

Brenyn: Yeah, I’ll take that one. That’s a great question. And really one of the major benefits of specifically whole life insurance is the stability, predictability, and the guarantees that it’s very well known for. And so when you’re looking at global events, world wars, depressions, even high-interest rate environments, they’ve all come and gone, and whole life insurance has just continued to plug along as expected. And maybe to clarify that, there are two ways that a whole life insurance policy grows. You’ve got the guarantee, which will be anywhere from 2% to 3.75%, depending on the company. And then with mutual insurance companies, you have the dividend. So that doesn’t mean that the dividend doesn’t fluctuate because it does with those different global events. However, those fluctuations are very small adjustments because of the long-term outlook that an insurance company has. Now, if you take other products like variable universal life insurance policies, those are largely affected by global events, mainly because variable universal life will fluctuate with the market and can easily go negative. So in a depression or any event that changes the performance of the market, you can see big swings in those kinds of policies. And that’s really how the index universal life policy came about, or the ideal because it has always used an index in the stock market to track the performance. But there’s a flaw so that if the market goes negative, the client doesn’t experience any of the negative years in the market. And because you have that flaw, the insurance company gives you a cap on your gains. So you have the ability to capture the majority of the upside, but it’s capped on the upside as well. But you do get the protection on the downside.

Buck: Maybe you guys need to back up here because we’re throwing around a bunch of terms like variable life and ideals. It’s probably a good idea to clarify. What are these different things and when did they come up?

Rod: Yeah, so originally I was describing whole life insurance, which has been around for a long time. But variable life insurance is a relatively new thing. It wasn’t around during the Great Depression. Whole life insurance was featured in movies like “It’s a Wonderful Life” in the 1920s and 1930s, highlighting its cash value.

Buck: So that saved him.

Rod: Yes, the cash value of the life insurance policy saved the character in the movie. There are other stories like JCPenney and Walt Disney using the cash value of their policies to start their businesses. Whole life insurance became less exciting, so people wanted their cash value to grow better. They started tying it to the stock market, introducing volatility.

Buck: When did that happen?

Rod: It started in the 1970s.

Buck: From what I understand, during the Depression, people valued whole life insurance, but their children forgot about it and got attracted to the stock market. So the insurance industry wanted to make their products more appealing and introduced variable universal life (VUL) insurance.

Rod: That’s also when the 401(k) retirement plan came about, moving towards more use of the stock market.

Buck: So how did VUL perform?

Rod: In the 1970s and 1980s, with high inflation and interest rates, whole life insurance seemed boring. VUL became more popular because it was tied to the stock market, which was seen as a way to combat inflation and potentially earn higher returns. However, relying on the stock market for cash value can be risky, especially during market downturns. Right. In the 1990s, people may have become overconfident, and in the 2000s, they underfunded their policies, which put them at risk during market downturns like the dot-com bust and the real estate crisis.

Buck: So mechanically, this is like having cash accounts invested in the stock market. You live and die with the stock market in this case. The problem is when there’s a crash, people’s portfolios suffer, and suddenly variable life insurance doesn’t seem like such a good idea anymore because you’ve lost a significant portion of your portfolio. This perception has made people skeptical about life insurance and has given ammunition to those who profit from managing people’s assets. But then there’s the concept of overfunding. When does that start?

Rod: Overfunding refers to putting more money into the policy than just the premium for life insurance. Initially, there was no mechanism for this. However, companies developed a rider called paid-up additions that allows additional money to be put into the policy. By overfunding, we can get more benefits and more cash value inside the policy. For example, if someone puts $100,000 a year into their policy, $20,000 might be for the core insurance, while an additional $80,000 goes in to build cash value and receive benefits. This strategy aligns with the concept of infinite banking, where the policy’s cash value grows, earns a return, receives tax benefits, and can be accessed and used.

Buck: So let’s clarify. With whole life insurance, it’s more of a fixed return, right? It’s relatively stable.  With whole life insurance, you have a fixed return, and additional distributions based on the profitability of the insurance company. Now, we can overfund it. What’s the value of overfunding at that point?

Rod: The value of overfunding is that you have more money to take advantage of the benefits such as guaranteed growth, dividends, and tax benefits.

Buck: And then you can borrow against it.

Rod: Yes.

Buck: The main focus of wealth formula banking is not just the impressive returns, although they may be looking good right now. We are more interested in borrowing against the policy to amplify other cash-flowing investments.

Rod: Exactly. We compare it to other options for an opportunity fund. If you use a bank account or a money market account, you put money there, take it out to invest, and it stops earning. But with this strategy, you set the money into the policy, it grows tax-deferred, and when you borrow against it, your money continues to grow, creating value in multiple places simultaneously. You’re investing in the same things as before, but this is a much better opportunity fund than a regular savings account.

Buck: So effectively, you’re investing the same money in two places at the same time. Not only does it amplify your returns, but it also provides protection for your heirs. That’s why wealth formula banking is compelling. Now let’s shift back to the concept of variable life insurance, the one that took a hit in the stock market on Black Monday or Tuesday in the 1980s. Variable life insurance doesn’t sound like a good idea after losing money. But then indexed universal life comes along. How is that different?

Brenyn: Indexed universal life was designed to capture most of the upside of the market while avoiding the downside. It uses similar indexes as those available for investments, but with a floor of zero or 1%. Indexed universal life (IUL) is designed to capture the majority of the upside of the market while avoiding the downside. It uses similar indexes as the stock market, but with a floor of 0% or 1% and a cap of around 10% to 14%. So if the index goes negative, you don’t experience the loss, and if it goes up, you capture the capped percentage.

Buck: The leverage component comes in when the market is performing well. Even if you’re capped at a lower rate, you can still leverage the returns to achieve higher overall returns. So by adding leverage to the capped rate, you can potentially outperform the market. It may sound too good to be true, but that’s the power of leverage.

Rod: We call this the wealth accelerator or velocity plus. By using leverage, we can amplify the growth rate of the policy. For example, if the policy generates a 5% return, with leverage, we can turn that into 11%, 12%, or 13%, which is equivalent to an 18% to 20% rate of return in other taxable investments.

Buck: It becomes an attractive option because you’re effectively investing the same money in two places simultaneously. You receive protection for your family, and the investment is stable. Indexed universal life with leverage allows you to achieve higher returns than what the market offers, while still having a floor of 1% or higher to protect against losses. However, people often question how insurance companies can provide these benefits and remain financially stable. These insurance companies have been in existence for over 150 years and have consistently paid dividends. So how do they do it?

Rod: Insurance companies have a long-term perspective when it comes to investments. They invest in long-term bonds and notes, typically spanning 30, 40, or 50 years. This approach smooths out short-term fluctuations in the economy. So even when interest rates are high or low, the insurance company’s long-term investment strategy allows them to provide stable returns over time. When people ask if rising interest rates affect the wealth accelerator, the answer is no. In fact, rising interest rates can benefit the policy. Higher interest rates give insurance companies a larger budget to purchase options in indexed universal life policies, which increases the caps. It also leads to higher dividends in whole life policies as insurance companies earn higher returns on their investments.

Buck: So the insurance companies have well-diversified portfolios and are able to adapt to changing market conditions. For example, Penn Mutual, which has been around since 1847, has never missed a dividend payment since 1849.

Rod: That’s correct. These insurance companies have a long track record of financial stability and consistency in providing returns to policyholders.

Buck: Yeah, they were trying to figure themselves out, but since 1848, 49 or whatever, they paid out a dividend to what is a company like Penn Mutual actually invested in that allows them to have such continuity in times like the Depression, hyperinflation wars, and the pandemic is still rock solid. In some ways, it’s more stable than historically than any bank out there, if you think about it.

Rod: Yeah, well, I think that’s helpful to make that comparison. And I have a really funny story for you. So here a couple of months ago when Silicon Valley Bank was falling apart, a couple of weeks later, I got a call from one of our clients, a large business owner who had life insurance policies for a long time. He asked when his next anniversary comes up so he can put more money into it. He wanted to send a check for $300,000. He said as long as they deposit it, he’s good because he doesn’t want it sitting in his account. He keeps large amounts of cash in his life insurance policies and accesses it regularly. He sees it as a stable place for his money. My point is, he’s looking at the comparison of life insurance companies, and he clearly sees that it’s a much more stable place. So now back to your question, why do banks have the capital and liquidity they show on their books? It’s like a 10 to 1 or 10% liquidity. For most of them, that’s a high point because they engage in fractional reserve banking, loaning out the same money multiple times. Life insurance companies, on the other hand, have more reserves for every dollar they have promised out. Penn Mutual, for example, has around $1.13 in reserves for every dollar promised out.

Buck: Well, they probably have old bonds from way back when they were high.

Rod: Yes, they do have those and a lot of short-term bonds as well. But the point is, there’s no run on an insurance company like there is on a bank.

Buck: Right.

Rod: The majority of people who have money in these policies leave it there. There’s no such thing as a run on a life insurance company like a run on a bank. If everything goes wrong, life insurance companies are the last companies standing in the United States.

Buck: Yeah, sometimes when we talk about this, it just seems too good to be true. But these are reputable companies that have been around for a long time. So what are some common misconceptions or misinformation about insurance? When I came out of residency, someone told me not to buy permanent life insurance and to buy term and invest the rest. But then I saw wealthy business owners using various types of premium finance, and I realized there was a discrepancy. What’s the confusion?

Brenyn: I think a lot of it has to do with what people are used to seeing when they talk about whole life or index universal life policies. They’re used to seeing policies with an extremely high cost, and they’re sold on the death benefit. But the policies used by the wealthy are structured to maximize cash value that can be utilized for investing, leveraging, and tax-free income. People are used to seeing high costs and just a death benefit, instead of a very efficient policy that allows for utilization while living.

Buck: One of the things that I recently did was converting a wealth formula banking policy to a wealth accelerator policy. I realized that I deploy capital quickly and wasn’t utilizing the banking policy loans as intended. I wanted exposure to the stock market and decided to move forward with the wealth accelerator.

Rod: So your whole life policy, the wealth formula banking policy, wasn’t being tapped into as planned. You wanted to do more with it and make it grow. This is an opportunity for people who have overfunded their policies but haven’t utilized them effectively. It’s a good time to capitalize on the policy and let the money work for you until opportunities arise.

Buck: That’s right. If you have cash sitting around and want to avoid idle money, the wealth accelerator is worth considering. Could you explain how it works?

Rod: With the wealth accelerator, we take the cash in your policy and put it to work by financing it through the bank. The cash value will continue to grow at 5%, but with leverage, you can expect a higher return. Additionally, we stack additional policies on top of the original one to make the bucket bigger. By leveraging and building the policy, you can benefit from a larger death benefit for estate planning purposes.

Buck: Some people might be concerned about using leverage, especially with rising interest rates. How safe is it to use leverage in this context?

Rod: We use conservative leverage as a tool, not going overboard with it. With the wealth accelerator, the cash value in the policy will always be higher than the loan balance. It’s important to note that banks like this approach because it’s a predictable cash equivalent asset.

Rod: The same reason you talked about that you like it, that the banks like it as collateral for a loan as well. So, so all of those principles work for you in kind of building this additional benefit, but it’s doing it in a way that is very calculated and conservative so that we don’t have to worry about.

And I’ll give you an example, because people say, well, what banks are using right now for this and interestingly, we’re actually not using banks at this moment. We’re actually using the insurance companies in a way, because when we use if we were to use the banks right now, we would be paying seven and a half, 8% interest.

Whereas if I’m on the whole life side, it’s a 5.7% interest rate on us, so it’s a 5% interest rate. So we have, because of the instrument itself, the cash value line of credit, it just gives us a lot more fluidity to be in the right place as it relates to how we’re using the debt. So and like I mentioned earlier, the rise in interest rates is going to mean that the policies will produce more growth moving forward than they would if interest rates hadn’t gone up.

I like the fact that the interest rates went up. I know it gets creating havoc in a lot of other places, but as it relates specifically to life insurance, I think of it as like an interest rate reset when interest rates were low and had been low for so long. It just makes it tough for the insurance companies to think that they can keep paying higher a, you know, reasonable dividend or end or with the other have reasonable caps, but with interest rates going up, that helped put us in a healthier place.

As it relates to that. And the interest rates on the loan side are not going to stay high. If you go back to the eighties, they weren’t really high 18, 20% at their highest in like 1980, 81. But by 1985, 86, they had dropped to five or 6% again. But the effect of having had the high interest rates and the insurance companies going out and buying 30-year bonds at those 18% rates means that the insurance policies were bolstered for the next, you know, decades.

Buck: So when we did mine, I didn’t speak to the mechanics of that because you again we started with a whole life policy. So presumably you can’t switch, can you? Can you?

Rod: Yeah. It’s not that you can’t, but it wouldn’t be smart at this stage to do that. In other words, the costs are higher in the in year one and two of the policies. You’re already past that point. We don’t want to go back and start over with that on the cost side. So keeping the whole life that you have as your starting point and then when we start stacking the policies, then we’ll go heavier on.

Buck: So what we do there again, mechanically, I want to make sure we everybody kind of gets an idea how this works. We, you say we take the loan. So the nice thing about wealth accelerator or two is like you’re not you don’t have to do something every year. It’s in effect, it’s like a one-time deal. You can you can do it every year if you want, but you’re not required to do that because I think that’s one of the things that’s kind of nice about it is you’re not putting yourself on the hook for, I don’t know, 100 grand a year for five years, and then all of a sudden you

Brenyn: Yeah, I think that insurance companies we use have been around for 150 plus years. So, you know, we’ve covered that. They’ve gone through different global crises and they’ve been able to navigate those very well and consistently continue to pay dividends to policyholders, which means they’re profitable every single year. So, you know, one thing that I take away from that is that it may not be the most exciting thing to have, but it’s definitely going to be here for the long term. It’s conservative leverage. It’s the ability to use your money in two different places at once. And the underlying asset is something that you can count on.

Rod: And maybe just to build on that, it’s taking the tool of life insurance and setting it up correctly, like in this case to minimize costs, maximize the growth of the cash value, to use whole life where it makes sense, like in the world from the banking, that’s where you use whole life, right?  Can you use. Well, yes, you can. We choose whole life because of the predictable growth that we get inside of it. You don’t worry about what’s happening in the market at all because there’s no correlation to the market with that. Whereas with the wealth accelerator velocity plus we use IUL, well, we actually use a combination of both whole life and IUL because we want to take advantage of the strengths that they bring to the table without having issues with some of the weaknesses. They balance each other out in that sense. So when you talk about what lessons do we learn, we learn that when set up in the right way and used as a tool to grow wealth, they can actually be very effective at doing that.

Buck: Thanks, guys. I appreciate you being on Wealth Formula podcast again. Thanks again, guys, Brenyn and Rod, for being on Wealth Formula podcast. You know, I think this is something that people need to be thinking about right now or should consider, especially if you’re worried about the way things are going. This, again, has been a savior for people in the past. And, you know, it’s one of those things, you know, sometimes boring is good and boring is kind of like what we’re sometimes saving on or on a rainy day. So if you’re interested in these things, want to learn more, go to wealthformulabanking.com. There are a few webinars there where you can dig down deeper, and then ultimately if you’re interested, you know, contact Rod and Brenyn or Christian through that by filling out a form. Again, guys, thanks again for being on Wealth Formula podcast, and love to have you on again soon. We’ll be right back.