05: What is whole life insurance cash value?
005 What is whole life insurance cash value?
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[00:00:00] Think about buying a house. Everyone is, of course, familiar with that idea. You make monthly payments and build equity over time. But what if you could build equity that was guaranteed to grow every single year and could never drop in value, and you could access it whenever you needed it? Well, that's exactly what happens with whole life insurance cash value.
You know, no one would bat an eye if you mentioned wanting to buy a house, but try mentioning buying whole life insurance and people just lose their minds. Well today we're going to put some of that noise to bed and help you understand what the real deal is with whole life insurance cash value. This is StackedLife, the podcast that teaches you everything you need to know about the Infinite Banking Concept, Whole Life Insurance, and the strategies that make it all work.
And I'm John Perrings, an authorized Infinite Banking practitioner. I've implemented IBC for hundreds of my clients and educated thousands more with original content from my podcasts, articles, and courses at [00:01:00] www.StackedLife.com.
By the end of this episode, you'll understand exactly what whole life insurance cash value is, how it works, how you can get to it, why you'd even want to, and why it might be the perfect foundation for building your financial platform, whether you're new to whole life insurance and infinite banking, Or even if you already have a policy, I think you'll gain some valuable insights about this powerful financial tool.
So let's get into it.
Whole life insurance is a lot like real estate
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Going back to the real estate analogy I just mentioned a second ago. I've said this in, in some of my courses and previous podcast episodes, whole life insurance is actually a lot like real estate in a lot of very important ways. But let's talk about the first place where this is true, and we'll talk a little bit about comparing term insurance and whole life insurance.
I think this is important to understand. `You really have to get this to understand life insurance cash value. So comparing term insurance and whole life insurance, term insurance is like renting an apartment. You pay your rent over time, and when you move out of the [00:02:00] apartment, you don't get any of that rent money back.
Whole life insurance, on the other hand, is more like buying a house. Every time you make A premium payment, you build equity in that asset. You build equity in the value of that policy. And the value is really the death benefit amount. Every time you pay a premium, you build equity in that future death benefit.
So what that means is if you ever wanted to stop having this policy, meaning you'd want to either get rid of it or surrender it or sell it, there's an actual cash value. That equity has a value that is guaranteed by the insurance company and also has a value that's recognized by outside parties.
Whole Life Insurance is considered a cash equivalent asset. And the equity in this policy is really where we're getting this cash value.
The Technical Defintion of Cash Value
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Let's define cash value, technically cash value is called cash surrender value, and it's the amount of money that the insurance company will pay you if you ever decided [00:03:00] to surrender the policy. So kind of like if you owned a house and you wanted to no longer own that house, you could sell the house. And you'd get to keep whatever equity you built up in that house.
The difference with life insurance is you don't have to put it on the market. The insurance company themselves will guarantee a cash value for surrendering that policy.
We call the cash value "equity," but that's really just sort of a helpful way to think about it.
If we want to be correct about it, what is actually happening with cash value is it's the net present value of the future death benefit, less any future premium payments. So, with whole life insurance, it's guaranteed to pay a death benefit when you die, not if you die, like term insurance. And so there's this guaranteed future cash flow that's going to happen with the policy.
And so if there's a future value, especially a guaranteed future value, there's obviously a present value associated with that. And that's what the [00:04:00] cash value is. It's the net present value of that future death benefit, less any future premium payments. So there's a real economic value to whole life insurance policies and again, that's why these, that's why whole life insurance policies are called cash equivalent assets.
How cash value relates to the death benefit
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And so now that we know that cash value is really just the net present value of the death benefit, it's really important to keep that in mind as we go out into the marketplace and start to evaluate how whole life insurance can fit into our financial lives. And the most important piece to think about here is that cash value _is_ the death benefit, essentially. A lot of times people talk about cash value as if it's this kind of separate thing from the death benefit, where you want to minimize the death benefit and create more cash value as if they're not related.
It is true we can talk about minimizing the death benefit and increasing the growth of the cash value in the early years, [00:05:00] but it's not because they're separate things. It's just a policy design decision where we maximize more of the paid up life insurance, which decreases the death benefit, but because the insurance is paid up, that increases the cash value. Unfortunately, what's kind of happened in the general parlance out there of like how to talk about these things is people explain it as if they're kind of two different things.
There's no reason to be afraid of having a death benefit. We're not minimizing the death benefit just to get cash value. We're really minimizing the death benefit so that we can focus more on paid up additions in the early years. But actually that death benefit is really going to start doing a lot of heavy lifting in terms of building cash value after just the first few years of the policy.
So, what I want people to understand is not to miss the forest for the trees kind of thing where if you get too focused on cash value in the early years you're [00:06:00] essentially trying to make life insurance not life insurance and I don't think that's a worthy objective. We want to buy life insurance because of all the things that life insurance does and cash value is just one of them.
And the cash value is not going to be as effective long term if we completely ignore the fact that what we're actually paying for is a death benefit, and the cash value is just the present value of that future death benefit.
Another way of saying this is: of course, cash value is important, especially for the purposes of implementing Infinite Banking. But the cash value's importance is derived from the death benefit.
Accessing cash value
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Alright, so how do we start accessing our cash value? How do we get to it? The main way we do that in, in Infinite Banking is through policy loans. And we use policy loans because it gives us the ability to take over the banking function in our own lives. If you look at what a bank does, they bring on depositors and then [00:07:00] they pay depositors for the use of their money and then they lend that same money out to borrowers and they make a spread on the difference.
In our world of IBC, we capitalize a life insurance policy, we use that cash value as collateral to get access to credit from the insurance company. We pay the insurance company for the use of that money, and then we deploy that money into some, hopefully some manner that is profitable.
creating a spread for us and that spread can come from paying off debt more efficiently. It can come from getting leverage and buying other assets. You know, there's a lot of ways for that to happen, but the main way that we access cash value for the use of IBC. Is through policy loans, we can borrow up to, you know, somewhere in the 80% ish, all the way up to like 99% of the value of our current cash value.
So if you, if you have $100,000 in cash value, it depends on your carrier, you can borrow [00:08:00] $80,000 to $99,000 from a policy loan against the cash value that would act as collateral for that policy loan.
It should be noted though, that you can also withdraw cash value. Now, when you withdraw cash value, we can call it a withdrawal, but what it actually is, is a partial surrender of the policy.
What you're actually doing is you're reducing the death benefit. You're surrendering a portion of that policy, which is a reduction in the death benefit that allows you to take the cash value out without creating a loan balance on it. But when you do it this way, that's a permanent decision.
You can't put it back in. And this is not a savings account. It's not a brokerage account. If you withdraw, that's a permanent decision because you're reducing the death benefit and you can never get the death benefit back without going through underwriting, at the best case scenario and a lot of times you can't do that on the same policy. You'd have to go back through underwriting on another policy and that's just because of the way that the [00:09:00] contract works. So, you can withdraw and sometimes that's a valid way to get access to the cash value. Like if you're if you're using the policy for retirement income, for example there's not necessarily anything wrong with withdrawing cash value.
Using partial surrenders, and you can, you can withdraw that cash up to your cost basis, which is the amount of premium that you've paid into the policy. You can withdraw up to your cost basis tax free because that's the, that's the cost basis. That's what you put into the policy. And since all this money goes in after tax you can get it out without paying any tax on it.
So that can be a valid way to get, to get income in retirement. You know, some people talk about withdrawing up to basis and then using policy loans to get continual tax free retirement income. An argument could be made that it might even make more sense to just pay the tax on it by withdrawing it if you are using it for retirement income because that way you're not getting a loan balance accruing on it.
[00:10:00] So those are all things you have to keep in mind. But again, for IBC, we mostly use policy loans to get access to our cash value.
Cash value growth factors
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And now we use Whole Life Insurance as the platform for "becoming our own banker." The platform we use to capitalize and create the cash and liquidity that we use to then go out and do other operations. Why do we even do it? Well, one of the reasons is because of the growth that we get on it. And a lot of times the growth we get in whole life insurance cash value is better. And a lot of, a lot of times even significantly better than what anything else you could put it in that has the same cash equivalent properties. And so let's talk about where the growth comes from. There's, there's really two components. There's the guaranteed growth.
And a lot of people will try to ask what the interest rate is on the growth. And it's true. There is an interest rate calculation in there. But they actually will back into this. The growth on a whole [00:11:00] life insurance policy is an actuarial calculation. So if you're kind of looking for, you know, the, the rate of return, so to speak, everything is going to be based on your age and health.
And so the, it's actually not a correct way to do it, to you know, calculate interest on it. There is an interest rate, but that's baked into the actuarial piece, and that's why we have illustrations for whole life insurance that show us in black and white the numbers that we're going to get. But there is a guaranteed growth component.
Whole life insurance cash value is guaranteed only to go up. You know, obviously, you know, Taking out anything like outstanding loan balances and things like that, guaranteed only to go up on a guaranteed basis. Then the only other component is really the non-guaranteed dividend. The dividend gets applied every single year. It's an application that the board of the insurance company [00:12:00] decides on on an annual basis. We don't know what it's going to be in a year, any given year. We don't know if it'll even happen any given year. However, you know, some of the insurance companies that I mentioned in episode four, you know, they've all been around for over a hundred years, 150, 170 years.
And they've paid dividends. I think all of the ones that I mentioned have paid dividends every year. So highly reliable mutual insurance companies. But that being said, you know, it's still not a guaranteed event. However, once it does happen, something that's pretty interesting, I think, is once a dividend is applied to your policy it then does become guaranteed.
And so when you look, when you get a life insurance illustration, there's usually a guaranteed ledger and then a non guaranteed ledger that includes the dividend. And as your policy matures, every year you can do what's called an in force illustration. When a policy is in force, that means it's an active policy, the premiums [00:13:00] being paid and the insurance company is on the hook to pay a death benefit.
Every year you can run an in force illustration that shows what's going to happen with that policy based on what has already occurred with premiums and dividends. And what you'll find is that the guaranteed ledger starts to get better and better every single year because then now that dividend is locked in, whereas when you first bought the policy in your original illustration.
No dividend was paid yet. So that guaranteed ledger doesn't look, you know, quite as compelling, but it gets better every year that the dividend gets paid. The guaranteed ledger starts looking better and better and better. You know, cash value grows tax deferred, but you can get to it tax free. We mentioned the ways you can get to a tax free through policy loans because it's a loan.
You don't have to pay any taxes on it. You can always withdraw up to your basis tax free. And you know, most people still want to know even though, you know, there's, there's [00:14:00] really not a rate of return or interest rate that isn't part of the actuarial calculation. But if you were to calculate an equivalent rate, the growth on whole life insurance cash value, and it just, again, it depends on your age and health. It depends on where interest rates are. In recent history, it's going to be somewhere in the 3-5% range, somewhere in that neighborhood, all in, and that's net of fees, taxes, commissions, costs, all that stuff. It's all baked in and everything you see on an illustration is net of all of that. So that's just to give you an idea. It's going to be somewhere in that 3-5% range and that includes the dividend.
What can we do with cash value?
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So let's talk a little bit about what you can do with this cash value.
You've got it in there. We now, now we know what it is. We know how it grows. We kind of have an idea of how, how much it's going to grow by. What can we start to do with it? Well, again, we use cash value as the platform for IBC. And we use Whole Life because we get similar use of the [00:15:00] capital which is the banking function.
Banks pay depositors to essentially rent their money that they then lend out to somebody else and they capture a spread on the difference. That's exactly what we do with IBC using whole life insurance cash value.
And again, we can find some acceleration there by more efficiently paying off debt, by buying other assets, preferably income producing assets. That really starts to accelerate everything that we're doing. And what's great about it is, because we can pay the loans off to the insurance company.
Once we pay the loan down, every time we do that, it frees up our capital again to use over and over and over again. And it's really that, that piece that allows us to stack layers of assets on top of each other, essentially using the same money over and over and over again. And that's really what creates some massive acceleration in our life.
And what's amazing about it, it's all backed by the present value of our policy, Which [00:16:00] is guaranteed by the entity we're borrowing the money from.
Policy design considerations
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So what are some things that affect how the cash value grows? You know, if you, If you just do a cursory search on Infinite Banking on YouTube, social media, really anywhere, the main thing people talk about is policy design. And they talk about getting a "correctly designed policy" for IBC.
And while it's true, there are some design considerations that we'll talk about here. I mentioned in Episode 4, I don't think anyone should be afraid to buy whole life or be afraid of getting the wrong policy design. Because as long as you're buying whole life, there's really no way to mess it up.
But let's talk a little bit about some policy design. When we're building cash value for IBC, a lot of weight is put on the PUA Rider. That stands for Paid Up Additions or Paid Up Additional Life Insurance. And so there's Two main components. There's the paid up additional life insurance, which is a [00:17:00] rider that is on top of the base whole life insurance policy.
And that, that base whole life insurance policy has a, what we call base premium. So there's a base premium component. And then an IBC, there's. More often than not, a Paid Up Additions component, and those two components can all be folded into your monthly premium, where if you're paying $1,000 a month or $10,000 a month, it doesn't matter, there's going to be a portion of that as base premium and a portion of that as PUA.
That can all be built into the, to that monthly premium that you're paying. So what is Paid Up Additions, PUA, Paid Up Additional Life Insurance?
What actually is that? The best way that I've been taught to explain it is it's like a little baby insurance policy gets tacked on to your, to your base policy. When I say it's tacked on, it's tacked on, but it's also what's called paid up. When you look at an insurance policy, most [00:18:00] whole life insurance policies are what are called paid up at age 100.
There are different types out there that could be paid up at age 65, you know, paid up at Paid up in year 10, paid up in year 20. There are a bunch of different ways to, to a bunch of different time periods, I should say, when a policy could be paid up, but what paid up means is it's paid for. Paid up means it's paid for and no more premiums can be paid on the policy.
So it's a completely paid for policy and what that means is it's still active. You still have a death benefit. The policy is still in force. You have cash value that's going to continue to grow. You can use policy loans. All it means is you just can no longer pay any more premium on it. So paid up additional life insurance are these little bits of life insurance that are tacked on and paid up, which means no future premium payments are due on that additional death benefit that you acquired.
And [00:19:00] since there are no future What premium payments due on that death benefit, it has a higher present value, which is what helps grow the policy cash value faster in the early years. That's all paid up additions are. And so again, it's all tied to the death benefit. It's not extra cash you're putting into the policy.
That's how it's sometimes described, but you're actually buying more death benefits. That just happens to be paid up, which means it has a higher present value because no future premium payments are due on it. And so PUA is an important piece that helps grow the cash value.
But the thing about PUA is it really actually only does the heavy lifting for building cash value in the early years of the policy. And I'm talking like the first few, maybe five years of the policy. That's when PUA is the most effective. And so what I see happening out there are people that Design [00:20:00] these policies to be super, super PUA heavy, like 90% PUA.
But what happens is the, that portion of the premium actually stops becoming as effective as early as like early as five years. And so you. After five years, yeah, maybe you had a little more cash value in the, in the early years of the policy, but by the way, it's not that much more. It's not that mind blowing.
You had more cash value in the first few years of the policy, but then what about the next 70 years? And so you've, now you've got this That's a policy that's kind of hamstrung in terms of efficiency and building cash value. Because what happens is that base premium portion actually starts creating a higher annual return on the premium to building cash value than the PUA does.
So that's a, I think, critical piece to understand, just having a rational view of how policies should be designed. All things being equal for IBC, we definitely want to have a [00:21:00] PUA Rider on there. So, you know, I'm, I'm trying to explain PUA and I'm, I'm not saying PUA is ever bad. It's, it's always good. But if you, if you put too much of it and you focus too much of it in those early years, it's just going to cause some things that are suboptimal in the future.
Everything's a trade off with insurance. Everything's a trade off between cost and risk. And When you have the trade off of that super high early cash value, the other side of that is that it's going to be less efficient, potentially significantly less efficient for the duration of the policy. So you got a few years of benefit and the whole rest of the time you have that policy, it's suboptimal. So we, we want to pay attention to that. Now, the other thing with PUA, when we design these policies and we use the PUA Rider, you know, we are looking at that cash value and we're looking at that early cash value.
We want to have significant cash value in the early years. We just don't want to go [00:22:00] too far with it where you get those negative trade offs that I just mentioned. But the other piece of it Paid Up Additions are always optional. So let's say you've got $1,000 a month premium, just to throw a number out there, $500 of it is base and $500 of it is PUA.
That $500 PUA, you could always not pay that. And that actually gives the policy some flexibility that if you have a, a tight month or a year or whatever, you can always opt to not pay the PUA. But what needs to be understood is that PUA, again, it does all the heavy lifting in the early years of the policy and building cash value.
So if you don't pay that the policy cash value will grow significantly slower than what you anticipated and what you saw on the illustration. So, what I see is a lot of times people are sometimes coached into this idea that, Hey if we make the PUA 90%, your base premium could be [00:23:00] $100 and then you've got $900 of PUA.
And If you ever needed to, you could just not pay it. But the problem with that is if you stop paying that, the cash value is only going to be 10 percent of what you anticipated. So, my opinion on policy design is finding the right balance and finding a premium that you feel really comfortable that you can, you can pay for a long period of time.
I don't like, personally, the idea of just saying, Hey, make the PUA your stretch goal because if you don't meet your stretch goal, that, that policy is going to perform significantly less than what you were hoping for. So that's a little bit about policy design.
Misconceptions about cash value
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Let's get into some misconceptions that I hear a lot about cash value. One of the big ones is I get this quite a bit where people have this assumption that you can't get to your cash value for years. So a lot of times the form this takes is they'll read about the MEC [00:24:00] limits and that seven pay test, which is a test that's a rolling every seven years.
And they, and people kind of conflate that piece of it with not being able to get to your cash value for seven years. And that's just, that's not the case. You can get to your cash value immediately. There might be like a minimum, you know, Say $500, once you have $500 in cash value, you can get to it. And I'm just throwing that out there.
It's going to depend on the carrier. But once you have that minimum, you can get to that cash value immediately. And really the minimum is pro is more of a function of the minimum loan amount that the insurance company offers so that they're not processing $5 loans, that kind of thing. All that said, the, you can get to the cash value immediately.
There's really no delay on that. Now the one delay you will have is during the capitalization period. So again, during those early years of the policy, if you're paying [00:25:00] $10,000 a year in premium, you know, you might only have 4, 5, 6, $7,000 in cash value available. Again, some of the people try to promote having 90 percent of your cash value available.
I'm not a huge fan of that because of the massive trade offs that it has. But you know, there is that period during the first few years of the policy, but the break even point happens more quickly than you think where You know, maybe even in year three or four, every dollar you pay in premiums starts creating more than one new dollar of cash value.
And so if you're, it's like taking a dollar from your left pocket and putting it in your right pocket. Every time you pay a premium, there's no loss in liquidity and that happens very quickly. You don't need to go super high with your cash value to do that.
And when I say super high with your cash value, I mean, you don't have to have a super high ratio of PUA to make that happen.
What's another common one? Whole life insurance gets a horrible rate of return, right? And you know, check out [00:26:00] my free course, Supercharging Growth by Adding Financial Certainty. You can get to that at www.StackedLife.com/supercharge. And right there I do, I get out the calculators and one of the modules on that, it's a nine part mini course. It's like an hour and a half of a video. I go deep into the calculators and I show you the capital equivalent of whole life insurance cash value, which is essentially saying you'd have to earn 7, 8% in another type of asset to match all the things you get with whole life insurance, believe it or not. And so we always say whole life insurance is not an investment, but it ain't no slouch either. So it's, you know, for what it is, it gets an incredible rate of return as a cash equivalent asset with all the guarantees and liquidity of a, of a cash equivalent asset.
So we can. We can cross that one off the list. The other, the other big one that you hear out there from the financial entertainers of the world is that "the insurance company [00:27:00] keeps your cash value when you die," your family only gets the death benefit. And I always just kind of chuckle at this one.
It's just Such a low bar of analysis. I mean, all we have to do is just go back to the real estate analogy that we used in the beginning here. If you were to buy a house and you made all your payments and you built equity in the house, when you're done making the payments on that house and you own the house outright, your equity equals the sale price.
And even when it doesn't equal the sale price, when you sell the house, you get what you get when you make the sale, you don't get to keep the sale price and the equity. And so again, that's why I kind of like the equity analogy and real estate analogy because it, it really kind of has an all encompassing understanding of how whole life insurance works.
The cash value is just that equity. In the death benefit. But the, the great part about it is, is that's what we call a "living benefit." You get access to that cash value all along the way [00:28:00] while you're still alive. How could that possibly be construed as a bad thing? So you know, those are just a few things that about cash value specifically that, you know, we can just, you know, cross right off the list.
Additional resources
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Alright, so that's our episode about whole life insurance cash value. If any of this stuff is resonating with you and you'd like to learn how this could apply in your life specifically, just head over to www.StackedLife.Com. You can book a free 30 minute consultation with me right there and we can talk about you specifically. Or if you want to just get access to all my free resources, head over to www.StackedLife.Com. I've got everything right there on the front page. You can get access to my free mini course that I just mentioned, Supercharging growth by Adding Financial Certainty. You can get my full soup To nuts IBC mastery for $77 right there on the, on the website. And you can also get my free newsletter where I talk about current events in the news through the lens of IBC and everything we practice here at StackedLife. [00:29:00] All right. Thanks for listening. I'll see you on the next one.
