Drawbacks To Whole Life Insurance - Cash Value (Canada)

As the policy matures over a couple of years, doesn't take that long. Every time you put 20 in, the insurance contract's now giving you 21. And then the next year you put 20, it gives you 22. The next year you put 20, it Gives you 23. It becomes very efficient. Now if you had a savings account and you had access to every dollar you put in, and every year you put 20 in and it would give you more than the 20 back. And then that savings account was wrapped with a giant increasing tax free death benefit, protecting your family for the rest for as long as you take air into your lungs. How many bank accounts like that would you want?

If I have a completely mortgage free home and I have excellent T4 income and I have sparkling credit, I can go over to the commercial bank and I can assign a home equity line of credit to my mortgage free home and the bank will loan me again. Generally speaking, if I'm off with this rich for a line of credit, a home equity line of credit, they'll loan me up to 65% loan to value on that property. Is that fairly accurate?

Drawbacks to whole life insurance, Specifically drawbacks to the cash value. How is that even possible? I don't know. We talk a lot about cash value and the usage of cash value on our channel. If you watch some of our content, you have seen some of that. If you're here, if you're new, make sure you stick around to the end because we've got to, we're going to drop some bombs on the drawbacks of cash value. Now I'm joined today by my good friend Vern. Vernon and I are going to riff a little bit on cash value and what we perceive, the perceived drawbacks that people sometimes have when they're first looking at exploring the concept, the process of becoming their own banker, or they're just hearing now about whole life insurance and that it has a cash value and that you can use it to do stuff, then you're just kind of trying to figure out and explore what does that really mean and, and how can I go about participating in that? So we're talking about that a little bit and we're going to kick it off with what we think are the top three perceived drawbacks of cash value in a whole life contract. And so Vern, why don't we kick it off? What you want to kick us off with? Number one on the list.

Yeah. So Rich, this is really good. I love that you said perceived drawbacks because let's be honest, you Know, when Canadians are looking at the process of becoming their own banker, they're looking at whole life insurance. What I think is a drawback, you might not think is a drawback. What I think is an upside, you might not think is an upside. Like, it's all up for interpretation. So I'm really glad we get to kind of demystify some of these things. And the first I believe, correct me if I'm wrong, the first. And I'm going to. I'm doing it, Rich. The first drawback that we. That we. The first drawback that we identified here is that, hey, like, what's the deal? You know, I'm pulling a number out of a hat here, but I. I put, you know, $20,000 into this Canadian life insurance, whole life contract. And for some reason, Vern, I'm noticing that the total cash value in the policy is only $11,000 today, or $9,000 today. What's up with that? I put more premium into the policy, but I don't have 100% of the value as cash value.

Is that a drawback, Rich?

It could be perceived as a drawback. And, you know, for a lot of people, we're really good at doing this. This in life, and we all experience this. I know. I'll put my hand up. I've done it before. We take a little bit of information and we jump to an absurd conclusion, Right? Like, as an example, I show up in traffic and I see there's a red light there, and there's like 10 or 15 cars lined up. And like, oh, man, I'm gonna be stuck at this red light for, like, 15 minutes. I got things to do, and I'm, like, looking for an exit, and I'm gonna take some back alley to get where I need to go or whatever, because I just don't have the patience to wait in that lineup. Well, is it really going to take me 15 minutes to get to the light? Probably not. I might have to wait for one or two light rotations. Okay, great. Four minutes goes by, and I'm sailing through onto. Onto the rest of my journey. So people do this in our life all the time. I've been guilty of it. Vern, I'm going to put you on the spot, but I'm venturing to guess that you have.

Wish I could say that I haven't, but certainly.

So, so, so people will jump to an absurd conclusion. Often it's because they haven't done enough research or they haven't met and spoke with about what it actually looks like, and they don't understand capitalization. And most importantly, they probably haven't read Nelson's book Becoming youg Own Banker, which is required reading, required reading for anyone who wants to implement the process to become your own banker. If someone's teaching that or you're, you're planning on going down the route of learning this concept and you don't even have the source material, what the heck are you doing? Like, immediately go and order a copy of the book right now and make sure you have that, because you should be referencing and reading from it a minimum of one time per year, because it's the foundation from which the whole concept is built on. Now, here's the thing. The very first year of an insurance contract, again, as your example, Vern, you put in 20,000. Let's say you had, you had 10 or 11,000 available of cash value. Well, the very first year, what do you want? Do you want to have all of your 20,000 of cash available or do you want a payment of proceeds? In other words, you put 20 in and let's just say you had 500,000, a whole life and $500,000 of term insurance. There's a million dollars protecting you and your, your future income and your family. Well, wouldn't you want the million dollars if you kick the bucket and got taken out by a city bus all of a sudden?

Absolutely. Yeah. No, for sure. That, that's the point is that we're talking about implementing the process of becoming your own banker in Canada. We're using a permanent participating, dividend paying, whole life policy to do that. And people need to understand the process. To your point, make sure you do the reading. Make sure you go to watchibc.com that's watchibc.com so you can learn more about the process of becoming your own banker, but you're actually learning about the process of becoming your own banker. And the keywords being your own. You're learning how to implement a process. You're not learning how to buy a product.

Right.

We're using a product to implement the process. But the product is just a tool. So there's other, you know, there's reasons why this tool is the best tool for the job. And one of them is, I could take my 20,000 bucks and put it anywhere where I want to put it rich. I could put it into any bucket, but I want to put it in a savings account. Hey, I have access to the whole 20. I can put it into stock or crypto and I hit the it all put it all on black and all of a sudden I double or triple that money tomorrow. That's great. God forbid I get smacked by a bus, my family's going to have access to whatever's accumulated in that account and maybe they have a fight on their hands to actually access that money. Whereas I take that same money, I capitalize my policy system and I have immediate access to up to 90% of the total cash value. I can. This is a figurative number here, Rich. Okay, but if I put in 10 today, or 20 today and I can access 10, you know, next week, not to mention I get smacked by a bus and my family gets a million dollar tax free death benefit. I don't know about you, but I think that's a pretty darn good deal. I wouldn't call that a drawback myself, but it certainly could be perceived as one. For Canadian.

It's a smoking deal. And here's the thing, that 20,000 that went in, it's the very first year you just started a business that did not exist until you made the first injection of capital. Now if you're watching this and you know anything about business or you're watching any other videos on YouTube about business and how to grow a business, would you believe that those things just don't grow overnight? You got to go and learn a whole bunch where you got to invest time, effort, energy, hours into your education and learning. Really research on the business capital to get equipment, to get a building, to go buy inventory to go hire staff to get a POS machine that you can take payments to hire an accountant. And would you believe in that first year of business you're not going to have your 20 grand either. Probability is you're actually going to be in the hole like a hundred grand and you still had to put up a bunch of money just to get to that stage of the game. And it might take you five, six or seven years to be in a position where the business is generating enough profit that you could actually, actually make that business sustainable over the long haul. Because most businesses fail in the first five years. Well, if you knew that you could, you could participate in a guaranteed business that would produce a profit for you for the rest of your life. And the worst case of getting started in the business is that you died. Which by the way, if you started a regular business with your 20 grand and died, you'd have absolutely nothing except a rack of debt that needs be to, to be paid off and a mess to clean up in this business. You start the business, you have a contract the insurance company is pledged a million dollars of tax free capital for you starting the business. Now would you believe those guys have no sense of humor at all? And if you put 20 grand in and they're on the hook for a million bucks, they won't do that for free. Well, I'll be. You mean you got to actually have an actuarial engineered cost to make sure that they can meet the obligation of this million dollars that they've pledged on the side? Imagine that. It's called the cost of doing business. Now, as the policy matures over a couple of years, doesn't take that long. Every time you put 20 in, the insurance contract's now giving you 21. And then the next year you put 20, it gives you 22. And the next year you put 20, it gives you 23. It becomes very efficient. Now, if you had a savings account and you had access to every dollar you put in, and every year you put 20 in and it would give you more than the 20 back. And then that savings account was wrapped with a giant increasing tax free death benefit, protecting your family for the rest for as long as you take air into your lungs. How many bank accounts like that would you want?

Well, great question, Rich. I'm up to 11 myself.

No, joking aside, you know what I mean? I meet with people all the time. They go, vern, just curious, like, why on earth do you have 11 policies? Now, there's many reasons why I have.

11 policies, but you want to say, why don't you?

Well, yeah, why don't you? I go, look, every single one of these policies is like a little engine that could, man, it's just chugging along every day and every. The only thing it does, Rich, is increase in value. How many of those things do you want, man? Right, like how many of them do you want? Why don't I have one giant big one? Well, the reason why I don't have one giant big one is because I'm blessed to say that my liabilities are declining and my assets are increasing, my income is increasing. So I don't have the amount of capital that I will have in 10 years from now. So I'm capitalizing as much as I can today, but I'll continue to capitalize and continue to grow my system because my assets are going to keep growing. And those assets, that money needs a home. It needs somewhere to be deposited. So I'm going to continue to expand my system. I went on a bit of a tangent there, but I thought I'd just.

Having some fun well, and so that was the first perceived issue with cash value and one of the drawbacks. So, you know, the next one of the drawbacks we'll talk about is this comes up from time to time, is that, oh, well, if I die, the insurance company keeps my cash value and they only pay me the death benefit. I don't get to have both. Okay, well, so it's a have your cake and eat it too situation. And so where does this come from? Well, this seems to originate and in the understandings of what people talk about, usually when they're trying to compare different insurance products. So you, you can go get a universal life policy and which is basically term insurance, which you don't really own, and an investment account attached to it. So it's like term insurance with a wrapper of an investment account. And you take on all the risk. You absolve the insurance company of almost all the risk. In the situation, they don't pay you dividends, you don't participate in the growth of the insurance company. You're on your own. It's up to you to figure it all out. Good luck. Hope you get there. Now in that situation, because you have usually a level cost of insurance that's not increasing. The way that you increase the death benefit is actually by hopefully doing well and increasing the investment, the investment component. So in that case, you get the term insurance that's included, plus the accumulation in cash value, which is really a representation of what you've done in the whole life world. You don't do that because the insurance company is growing the cash value to pay your eventual death benefit. So you actually do get the cash and the death benefit because they're linked. They're the same thing. You can't separate them because they're conjoined twins. They're symbiotic in nature. And as you increase the death benefit, which we teach you how to do, in fact, you can go to watchibc.com, that's watchibc.com you can watch some incredible information, literally walk you through how we do this. You go and understand how we build a contract and then you get one operational for yourself. You leapfrog the death benefit forward and forward and forward. And you know what that death benefit does? The whole life death benefit. Hey, boy, what are you doing down there? Come on. And it, you know, grabs you in like a tug of war and it hooks you with a, you know, with a, you know, like a lasso. And it's yanking you and dragging your cash value butt all the Way up to age 100 so that the cash and the death benefit are matched. They, the contract says that the cash value must, must, must grow to equal the eventual death benefit. And if you're increasing the death benefit, the cash has got to go like holy, I gotta, I gotta keep catching up. I gotta go faster and faster and faster to chase after that end objective. Okay? So that's what's taking place. It's a very, very efficient and very powerful usage of growing capital. Because every time that you get a paid up addition, which is the death benefit, it comes with a chunk of cash value, paid up cash value. And now if I buy a hundred thousand dollar paid up addition and I get 20,000 of cash value today, that has to grow to equal 100 by age 100, which means I've created forced cash accumulation, I repeat, forced cash accumulation by contract. The life company is on the hook. They must perform because they themselves guaranteed the contract. I don't care what's going on in the presidential election or the whoever is up for prime minister. I don't, I don't give a rat's behind because my capital is growing to reach the death benefit. Now if I take a policy loan, I'm taking an advance. I'm basically like using my death benefit as a credit card. I'm going to borrow from Richard's future dead self. I want to go get a minivan for, for my family because we need it to drive around, do everything. Great. I'll take a $30,000 policy loan. I will pay cash at the car dealer. And I just took a loan, a credit card advance from my from future dead Richard. Okay? Now if I'm an honest banker, I will make a payment on that loan. The same, at minimum, at minimum the same payment I would have had to give a car dealer to go access their pile of money. If I don't do that, I'm not being an honest banker now. So what's the drawback of the cash value is that you don't get the death benefit of the cash value, which is incorrect. That's misleading and it's a, it's a perception that's not right. You do get it because it's, they're linked together. They're, they're connected at the hip as they move through time. And really the cash value is a representation, today's value representation of a future death benefit.

Yeah, Richard, you isolated that so well. I always say to my clients, you almost use the same hand movement that I use. I always say, look, I take my Cash my behavior, right? I put it into the contract. I start the contract, I decide to put more cash in the policy that creates paid up additional death benefit. And it's the death benefit that creates cash value. So the question becomes, well, for me to benefit while I'm alive, how do I create more death benefit? Because the cash value is always just chasing that death benefit. And if you do a quick visual here, the life insurance company is the one who has 100% of the risk in this equation. It's their job to grow the cash value and pay the death benefit and all the rest of it. So the life insurance company looks and go, okay, Vern, you're 37 years young. Today you have a million dollar death benefit cash value. That means the cash value has to grow by X amount of dollars per day because they create an actuarial calculation that says the cash flow has to go up every day, every day at that certain amount. Well then what I do is I capitalize more. And to your point, I buy a block of paid up additional death benefit. Well then life insurance company goes, oh, wait a minute. Well we have a bigger death benefit now and we have the same amount of time to fulfill on that. Well, we got to increase their cash value growth every single day. Then the next year I get a little older, I receive a dividend, I capitalize more. And year after year after year I get older. Which you're already doing today. Canadians are already aging, so I'm getting closer to age 100 every single day that I take air into my lungs. But the window of time is actually shrinking for the life insurance company to fulfill on their promise. Their promise is expanding cash value and death benefit to match page 100 promise is expanding and the window of time is shrinking. So to your point, it's forced efficiency. The policy can only get more efficient over time. The more time that goes by, the more I capitalize, the more efficient the policy system becomes. I don't see any drawbacks.

Yeah, and so again, if you are, are a person watching this and you, you know, you want to have everything right now in this exact instant, then you need to recognize that patience is required. Again, just look at it as starting a business. And if you, if you get Nelson's book Becoming youg Own Banker, order a copy. There's a link in the description below, you'll understand. He talks about the grocery store. Now you know, Vern, if you and I co own a grocery store or if you're watching right now and you just think you, you and me we co own a grocery store store. Where would you want my spouse to go buy groceries? If you're not saying our grocery store, you should probably go do a different video because this is not for you. Like if, if my spouse isn't shopping at our grocery store, I'm going to be upset about it. And if your spouse isn't shopping at our grocery store, I'm going to be upset about that too. And vice versa. The same situation, okay. The financial energy that we have to go and transfer should stay within our closed loop ecosystem. And the more of that that happens, the better control we have, the more options created. And it's like opportunity magnetism that we get to build on. Now there's one other drawback of that we can think of. I mean I don't, again, I don't think it's a drawback but there's one other possible drawback that we've heard people come up with around cash value in the whole life policy and that's that well, I don't have 100% access to whatever the cash value is. What would you say to that, Bernd?

Well.

Well, I mean actually I'm going to steal this from you Rich, because you, you, you illustrated it so well prior to us hitting record here. So I have, let's say I have $100,000 cash value in my policy. General rule, this isn't the same with all life insurance companies but the general rule is that I can access up to 90% of the total cash value anytime I ask for it. So I don't have to go through a lengthy credit application. I don't have to approve my income or repayment schedule. A quick sidebar, Rich. I mean you have some experience with real estate just for people to Canadians. I want you to think about how strong of an asset this thing actually is. If I have a complete, completely mortgage free home and I have excellent T4 income and I have sparkling credit, I can go over to the commercial bank and I can assign a home equity line of credit to my mortgage free home and the bank will loan me again. Generally speaking, if I'm off with this Rich, for a line of credit, a home equity line of credit, they'll loan me up to 65% loan to value on that property. Is that fairly accurate as of 2020?

Q1 of 2022 that is accurate. Now you want a little bit more. If you all you can get up to 80% right. But the remaining amount, so if we have 80, 65 in a line of credit, 15 has to be in a traditional principal and interest fixed payment mortgage to get the full 80% loan to value.

Now, keep in mind we're talking general rules, we're not mortgage professionals and we're talking in Canada here. Okay? But the point that I'm making here is let's assume I get approved. I have to go through that same process, but I can Access up to 6, 65% of the equity or the quote, cash in this property, but yet I can turn around and look, go to the life insurance company. Let's assume that I have the exact same amount of value in this whole life contract. And not only will they grant me up to 90% of the, of the total cash value, they must grant me up to 90% of the total cash value. And not to get into the whole thing, but banks, commercial banks, love this tool as well. They love to loan against it. And they'll lend up to, again, you have to get approved and all this, but they'll lend up to 90% of the total cash flow and in some cases, rich, they'll end up 100% of the total cash value. But yet the real estate, I'm not knocking real estate investors. I'm not knocking real estate. I'm not saying don't do that. I'm just saying it's an interesting thing to think about because most Canadians think that real estate is the strongest asset that there is. I don't know, something to think about.

But it comes down to the core quality, the quality of the collateral. What is the, what is the likelihood of getting repayment? The bank knows there is some risk in real estate markets, but they do know that everyone's gonna die. And they know that the payback of the loan is guaranteed with the insurance company as long as the premium is paid. So the amount of risk is virtually zero in relative to the piece of real estate. And so just recognize that, especially if you're a real estate investor, it's all about the quality of the collateral. And so the quality is far superior in the whole life insurance contract. Now just quick sidebar, contrast that to. You know, we've talked a little bit in a couple of our videos, Vernon, about like universal life contracts. The quality of collateral is very different because the life company themselves often will not want to give you 90% of the value depending on what it's invested in. If it's invested in a bag of segregated mutual funds or whatever segregated funds, which it typically is, the life insurance company who made and sold and created that product will not give you 90% on their own funds, they will make you move out of those into some kind of a savings, you know, like a savings account that's earning nothing in order to get 90% off. So again, the quality of the collateral is unmanned matched, nothing taps or matches participating dividend paying whole life insurance for the quality of collateral to be able to access capital. Now here's the next thing. If you're only going to give you, let's just say 90% from the life company.

Would you believe you can ask, tell people to do things and you can suggest things for them to do and they will completely forget everything you said and they'll do something else. Now if you're watching this, have you ever experienced, think of any circumstance in your life where you said, you know Bob, you should go and do blank, blank and blank and here's how that would work for you. And then Bob goes and does something 100% opposite and doesn't end up with a very good result. This happens to people all the time. Now would you believe people forget things that they're told? I don't know about you, but have you ever had been so busy with life and you have money moving and bills to pay that every once in a while you forget to transfer money from one place to another and maybe the bill doesn't get paid the way you want it. Does that ever happen, Vernon?

Absolutely.

It's happened to me. I know it's happened to me. It's probably happened to me more than once, maybe half a dozen, maybe two dozen times, I don't know. But when you have a policy loan, if you don't make a payment or you don't not paying anything back because you don't technically have to, not an ideal situation, it's not what we recommend. But if you're not sending repayments back, if you took 100% of it and then you sent no payments back and interest accumulated, you get into the red line danger zone now of where that policy could be surrendered because the loan exceeds the cash value. If that happens, the policy's over. So the insurance companies built automatic protections in place for your benefit so that you don't break the greatest tool on planet earth. It's that simple.

Amazing, amazing explanation Rich, as to why they do that. So you know this was a ton of value in this video. Again, we'll let you know. To learn more about the process of becoming your own banker, the infinite banking concept for Canadians, go to watchibc.com There's a link in the post description below. Make sure that you check out the playlist beside us here, because we know that you got a ton of value from this video here, but that playlist is going to blow your mind.