86: Whole Life Insurance is Not an "Account". It's Better Than That.

086 Whole Life is Not an Account

John Perrings: [00:00:00] Hello, everyone. Welcome to the newly named Strategic Whole Life podcast. If you're here looking for The Fifth Edition, you're still in the right place. We recently renamed it to Strategic Whole Life to help people find us a little more easily. W ith that quick reminder out of the way let's get on with the episode.

Episode number 86, whole life insurance is not an "account," but it's something even better than that. And so today we're going to talk a little bit about a commonly held misconception about whole life insurance, where a lot of people think of whole life insurance and the cash value in whole life insurance as an account . We'll talk about why that's not the case, but we'll also talk about a couple of examples of where that misconception can kind of lead people astray a little bit.

And then we'll get into the fact that even though it's not an account, so to speak, um, the superpowers of whole life actually are there because it's not an account. So it's actually even better than an account.[00:01:00]

Let's dive into this.

All right. So what do we mean when I say it's not an account?

Because we practice the Infinite Banking Concept, right, where we use dividend paying whole life insurance as the platform to become our own banker, We might lean towards thinking of the cash value that we're building up in the whole life policy as an account. Because after all, when we bank, when we go to a regular bank, we're going in there, we're opening an account, we're depositing money in the account, and then we're withdrawing money from the account.

So it's, of course, easy to start thinking of things in those terms. But what we have to understand is that, um, whole life insurance is not an account. It's an insurance policy. And the cash value in that policy is really just the net present value of that future death benefit. So it's like the equity in the policy.

And so, because of that, we can't just go in and, deposit cash and withdraw cash at will [00:02:00] because in order to get that death benefit, which is what creates the cash value, not the other way around. In order to get that death benefit, we have to commit to the insurance company, on a series of premiums that are going to be paid in the future.

That's what creates the death benefit. And then there's all the actuarial math that goes behind that, which is what happens when we go through underwriting. And so, um, it, it's important to understand this concept of. The cash value being created by the death benefit. If there is no death benefit, there's no cash value, right?

Let's talk about a couple of examples. So like, if, if you were to withdraw your cash value, from the policy, what you're actually doing is a, what's called a partial or a full surrender. So a full surrender would be like, you're giving up the policy, you're taking the cash surrender value as the technical term for cash value, and you're done with the policy, no more death benefit, no more policy, you just have the.

Equity that you [00:03:00] built up in that policy. If you do a partial surrender, that's where you could withdraw some of the cash value, but not all of it. And what would happen is you would reduce your death benefit. You'd still have an inforce policy with what's left over, but that's why you can't, um, you can't just withdraw cash value, just like you can't actually deposit cash value. That premium that you're paying is what creates the death benefit. And that's what creates the underlying actuarial math to provide that death benefit.

When a policy is underwritten, it's underwritten at the then current age and health, and you cannot actuarially put the death benefit back into that policy if you take it out. So if you do a full surrender or a partial surrender, because the underwriting was based on when you qualified, you can't just put it back.

And so it's a much different process because it's a much different, financial product than an account where you [00:04:00] cannot easily withdraw and then put money back into it. Once you have the policy and you do a withdrawal, it's pretty much a permanent decision. There's some caveats to that, but for the most part, that's a, that's a permanent decision.

Another example is, let's say you want to get to that cash value, but instead of withdrawing it from the policy, you're actually going to use the policy loan provision where you can borrow against the policy.

Well, in that scenario, if you happen to have been late paying your premiums and the policy is now in some form of a lapsed state, where the extreme scenario would be the policy is completely lapsed, you can't then go and get a loan from that policy. A lot of times, even if you're in your grace period where you're in a, what's called a pre lapse state, um, what's happening is, you know, you've got a policy that is almost non functioning where the death benefit's going to go away because you didn't pay your premium.

The only thing that's keeping that death benefit there is the fact that you're paying [00:05:00] premiums. Now, I don't want to get sidetracked. You can, you can opt to not pay premiums and keep your death benefit, but you have to you know, consciously make that happen. Whereas if you just stop paying premiums, the policy will eventually lapse.

The death benefit will go away. Even though the cash value is there and it theoretically could be borrowed against, because the policy is in a lapsed state of some sort, the insurance company is not likely going to actually go through the process of creating a policy loan on a policy that is either lapsed or close to lapsing.

So, you know, going back to the account analogy, people will see that they have cash value available. And so they'll kind of think to themselves, well, I have this money in the "account." Why can't I use it or borrow against it? And the reason is in this scenario is because the policy is about to lapse.

And so that cash value, it's there and you, you will get it if the policy lapses net of any other [00:06:00] outstanding loans. But, the, Insurance company is not going to start the process of a loan initiation on a policy that is close to lapsing. That's in a pre lapse state, or of course, if it's completely lapsed, you'll get your non forfeiture options, whatever you choose there.

 And then you would just get the actual cash surrender value, but so, sometimes people have forgotten to pay a premium payment. Their policy is in pre lapse. They need to get to that money via a policy loan, and they're unable to do it because the policy is about to lapse.

So what does this mean for people practicing IBC? Of course, these were just a couple of examples. And when we talk about these limitations, so to speak,, you might be thinking to yourself, is it really worth it going through all this trouble to get a whole life insurance policy? When in reality, this cash value that I'm supposed to be getting doesn't.

actually act like an account that I would open up in a bank. And I would say resoundingly, yes, it is absolutely worth it [00:07:00] because it's actually the fact that a whole life insurance is not an account. That's what gives it its superpowers. The superpowers come from the fact that it's an actuarial product, meaning it uses the law of large numbers to provide value that can't be created really in any other asset.

There's not a whole lot else that I can think of out there that gives you the completely respectable growth that a whole life policy provides with guarantees, with liquidity and with the ability to leverage, the cash value in the policy so that you can use your money in multiple places at the same time.

There's really nothing else that. Does that like Whole Life Insurance does. There's no such thing as a free lunch. The insurance companies certainly couldn't provide all of these benefits and certainly not the guarantees, um.

In a, in a product where you didn't have that commitment to pay the premium. [00:08:00] Remember, Whole Life Insurance is a unilateral contract. The only thing the policy owner is on the hook for is paying that premium. And they can decide to stop paying the premium. So all that's where the risk transfer comes in.

All of the risk is transferred to the life insurance company. And all the insured or the policy owner has to do is pay their premiums.

So while. Life insurance cash value is not a quote unquote account. , it can operate similar to an account with a few caveats that, once you understand that what those are, you can absolutely operate and practice The Infinite Banking Concept, in a responsible and safe way.

So super short episode today for a reason. This doesn't really need to be harped on. It's really kind of a, it's a small point, but it's an important one. And once you understand how whole life insurance works and why it works that way, it's very easy to avoid this kind of mindset problem where we think we can just withdraw and [00:09:00] deposit in and out of this.

But because we can't do that, that's actually what Again, gives Whole Life Insurance its superpowers and does so many things for us all at the same time. Thanks for listening. And if you find this information helpful, and if any of it's resonating with you and you want to find out how, how it can help in your life specifically, head over to our new URL, StrategicWholeLife.Com. You can book a free 30 minute consultation with us right there and talk all about you and how these principles could apply in your life. And of course, if you're like me and want to do all the learning you can before you actually talk to someone, we have an online course just for you. You can find it at the top of strategicwholelife.

com, there's a link to the IBC mastery course right there for you. All right. Thanks. And we'll see you next week.