164: The Hidden Benefits of Life Insurance with Jim Bowman
Jim Bowman is the President of Life Operations at Advisors Excel, and someone I’ve known for many years. I’ve spoken to him for many hours about today’s topic – life insurance – well before we ever decided to record this podcast and his deep knowledge on the topic has proven hugely valuable to countless advisors – myself included. Life insurance isn’t just about ensuring that your family has cash flow in the event that you pass away or sustain a career-ending injury. It can also be used as a powerful investment, a source of tax-free income, a way to cover long-term care, and for cash management. Today, Jim joins the podcast to discuss the major misconceptions surrounding life insurance, how to use life insurance as a protective policy and an investment tool over the course of your life and career, and the many different ways to put this asset class to work for you.
In this podcast interview, you’ll learn:
- Why so many people hate life insurance – and why so many people fail to look at it as the asset it is.
- The different types of life insurance assets and how one can use them to see a return on investment.
- How life insurance can be used to cover long-term care expenses.
- How to plan for taxes when using life insurance assets.
- Why it may be right to purchase life insurance for a parent or close relative.
- “People have always looked at life insurance as an expense versus an asset.” – Jim Bowman
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Casey Weade: Jim, welcome to the podcast.
Jim Bowman:Hey, Casey. I'm thrilled to be here. Thank you very much for inviting me.
Casey Weade: Well, I'm excited to have you here. Preparing for this interview was a little different. I've known you for many, many years. You've taught me a lot throughout the years. We're talking about a topic that we have discussed together quite extensively and we've had hour, two hour long conversations, so this should be pretty natural.
Jim Bowman: Well, let's hope so. We definitely have strategized for your clients in different areas where life insurance, which is really a different asset class that most people don't realize how special it is and how it should be in their portfolio of assets.
Casey Weade: As I open this discussion to our podcast live audience… Those of you that are catching this on the podcast, you could have caught a live version of this and presented your own questions here to Jim. If you just go on over to the Howard Bailey Facebook page and like that page as I open that up, I said we're going to be covering everybody's favorite topic: life insurance.
Obviously very facetious because that is not the reality that I am normally confronted with. I feel like life insurance has a bit of a hate by many. There's others that are indifferent. There's very few that say, “I love life insurance.” I’m one of those individuals that loves life insurance. I have many different types of policies and I enjoy buying it. I think I'm unique in that respect. Jim, why do you think there is kind of a hate for life insurance? Or at least some individuals have this hate for life insurance. Maybe you feel differently.
Jim Bowman:Well, no, I do think… Especially when I started in the business, I'd go to a dinner party with my wife and she'd say beforehand, “Do not tell people what you do. It will kill conversation.” I get it. There’s people who don't want to talk about their mortality. People have always looked at life insurance as an expense versus an asset. I think that's the real key is you've learned that it's an asset. This isn't just an expense that you’ve got to write a check to. There's so much value that can be brought to the table with this special asset class called life insurance.
Casey Weade: There's one misconception, I guess you would say. Why would we ever call an insurance policy an asset? I can't think of another insurance policy, at least a basic insurance policy that's out there that we would call an asset.
Jim Bowman:From my perspective, it's an asset class because it can bring a lot of value. It can bring enhanced value from the money you put in because it can grow just like a mutual fund can grow, just like an annuity or a stock can grow. It can bring value from a retirement perspective. The largest owner of life insurance are banks. Banks use this as an asset to support employee benefits, defer compensation plans. Banks own more life insurance than any other institution. They buy it because of the value it can bring to their balance sheet.
Casey Weade: I don't think we think of life insurance in general as an asset class, but I often say, “Who's got the largest buildings in the biggest cities in the country?” It's usually an insurance company or a bank. It sounds like they're working in tandem.
Jim Bowman:Well, perhaps. A bank will buy it because they can get a return on their money, a very safe return that is not at risk. Again, they have to support their depositors, so people who put money in the bank getting a return. The bank has to have a place to put money in as well.
Casey Weade: Now you're saying to me that these banks are buying life insurance for return? They're not buying it as an asset that will actually protect their risk in some way? It's more for the actual return they're getting on their investment within the life insurance policies. I guess I feel like I need to back up here a minute. Can we just define what life insurance actually is? Because now I could feel there'd be a little confusion by the audience.
Jim Bowman:Absolutely. I think that's a great place to start. First of all, life insurance is an asset first and foremost for the protection of a loved one. You buy life insurance at the core because you want to have somebody you love have a quality of life if you're not there. That's why the tax code— which is going to be very important in the actual discussion of life insurance— the tax code says, if you pay a premium, you get a tax-free benefit to the beneficiaries. No income taxes, no capital gains taxes. That's what people mostly think of.
There's another part of the tax code that says, “Listen, if you put money in excess of the cost of insurance and fees to manage the policy, you can put that into a…” I'll call it a bucket today. “You can put it into a bucket and that can grow tax deferred.” I’ll take it a step further: it can also be withdrawn without paying any capital gains taxes on that. because you're going to borrow your own money. As long as you do it properly, you can actually use this as a supplemental retirement tool.
Casey Weade: Now, is that an evolution in the use of life insurance? I'm going to play kind of dumb here. I want to make sure we get to the core of these things. Is that an evolution in the use of life insurance or has that use been around forever? Even when I started in the industry, I had this feeling that life insurance was just a… Yeah, it could be called an asset, but it was really something to guard risk in case you passed away. I never would have thought of it as something that you would use for tax-free income in retirement. Is that an evolution? Is it being utilized more for that these days than it used to be? You've been in this industry for about 30 years now, so you've seen some major changes. What's that looked like throughout the years?
Jim Bowman:When I started, I started back in 1986, so, yes, I've been around a long time. What it is, whole life was the original vehicle that companies would offer. It would have a cash value component. Money would grow and companies would pay a dividend to their policyholders, because most whole life companies are by mutual companies, not stock companies. The policyholders would own the policy, own the company conceptually, and the profits would be paid back to the policyholders in the form of cash value. Then that person could withdraw that money and use it without paying any taxes.
It's been around a very long time. Then different forms of policies have come about, whether it's universal life, variable universal life, which is tied to the stock market in as far as specific mutual funds might be offered in that type of product. Then the more recent innovation of it is indexed universal life where it's tied to an indice, not to any particular fund in a variable account.
Casey Weade: We've got kind of three different types, it sounds like, of life insurance of which we could get a return on our investment. It sounds like there's whole life, there's index universal life and variable universal life with really three different varying degrees of risks. Would that be a good assessment?
Jim Bowman:It’s a great assessment. Now, I do want to be cautious here, Casey, because life insurance at its core does have the life insurance component, and that's really the need that somebody would want to satisfy. Then you can take advantage, if you will, of the other components.
Casey Weade: Why is that? I think there's regulations out there that say, “Hey, you cannot buy life insurance as an investment. You can't sell life insurance as an investment.” Yet there's this whole thing underneath the surface that is acting as an investment. It's very confusing, I think, for the consumer, but it's also very confusing for the agent that's selling a product like that.
Jim Bowman:Yeah, I totally agree. At its core, I could only speculate as to why there's this battle, regulatory versus investments in life insurance. I think, again, back to its core, you get these special tax provisions because you're taking care of a loved one. At its core, life insurance is designed to take care of somebody who may not be able to take care of them in the quality of lifestyle should you not be there, whether it's a wife supporting a family, a husband supporting a family, grandparents supporting children, grandchildren. At its core, it's still about leaving a legacy, leaving something so people can maintain a quality of life. Then the tax break for that excess bucket, if I would say, is a benefit probably to encourage you to do this.
Casey Weade: Okay. The government wants us to buy life insurance for the reason that it was actually designed for. They want us to be buying life insurance for the death benefit and then they allow these other incentives for buying that life insurance. Now, you just talked a little bit about cash value policies: variable, indexed, whole life. That begs the question, I [term? 00:09:56] and invest the rest? How do you feel about that?
Jim Bowman:I think it's one of those things that on paper makes a lot of sense. Listen, I want to get the lowest cost for my insurance possible. Then any excess dollars I'm going to put to work in another asset class. The problem in my career is I've never seen anybody actually do it; to have the discipline to then go ahead and execute, number one. Number two is where do they put that? Who's giving them the advice and counsel so that gets maximized?
There's a couple of issues that I've seen consumers have with that marketplace. Then what people don't realize is that cost of insurance, if you, let's say, start at 40 and it's a dollar 1,000, by the time you're 75-80, it may be $80, 1,000. I'm making up numbers at the moment, but you see the increased cost of insurance to the point where then people let it lapse. That's not good for anybody.
Casey Weade: This sounds like, and the way I view it is there's kind of an evolution in our financial lives. We get started, we have a young family, you need to buy a term policy. It's all you can afford. Go ahead and buy that 10-year term until you can afford something that can build cash value and be more permanent. Even before that, you're making your contribution to your HAS, you're making a contribution to your Roth. Now you've got your term, your HSA, your Roth.
Now you've got some excess cash and you're not sure what to do with it. Then those additional dollars, we want to find a tax advantage place for it. Tax-free income can be generated from life insurance. We kind of replace that term with a permanent cash value policy that can give us a return on our investment. I'm just wondering— and please, if you see this differently, argue with me— but where do you see evolution in one's financial life where maybe term does make sense and then they evolve into these different types of products?
Jim Bowman:I think you started on the perfect path. I’d go back to Jeannie, my wife, and I. When I was younger I needed to make sure I had death benefit protection, God forbid something happened to me. I wanted Jeannie and our two kids to be able to have a great life, go to college, everything else. Term was very, very important and it's still important. It's still an important part of my financial portfolio.
As I got older, made more money, I wanted to have a dependable vehicle that would allow me some real tax efficiency down the road. Down the road for me is when I retire. I want to be able to have access to a pool of cash that I can pull out when I want and not have to worry about, “What's my income tax rate going to be? What's my capital gains tax rate going to be?” That's where life insurance can be very critical as you get older in life towards retirement.
Casey Weade: I can only imagine how confused one could be in listening to this conversation off the top. They go, “Wait a second, this isn't what I thought life insurance was supposed to be used for.” I see there's life insurance that can be there for liquidity and access to cash, better return than the bank. There's life insurance that can be there for tax-free income in retirement. There's life insurance that’s designed for long-term growth. Then there's life insurance designed for long-term care. There's life insurance designed for legacy purposes. How do you simplify just life insurance in general? Hopefully it'll help someone make a better decision.
Jim Bowman:Simplify is probably a hard thing because it's something that you and I live every day. Typically, people look at life insurance and they make a decision, and they put it in the drawer and they really don't remember why they bought it. When I sit down with an advisor or a client, my first question is always, “What are we trying to accomplish? Are we trying to leave a legacy, which means I want to take $1 and turn it into $10 for the next generation?” Okay. “I want to buy a permanent policy, but I really don't care about that middle bucket. I don't really need the cash value. I'm trying to maximize what I leave behind.” Okay. There's a policy type in 25 companies that are playing that space, and we'll find the most efficient one there.
Another client may say, “Listen, I'm sitting with a ton of money in my IRA. It's going to get killed in taxes. It's going to get killed in taxes over the next 20 years.” “Well, what if we repositioned some of that money into a vehicle that would provide a legacy but also a place for it to grow tax efficiently? You can pull it out when you needed it, but you didn't have to worry about required minimum distributions. You don't have to worry about what capital gains taxes are going to be in 15-20 years.”
By the way, you've touched on it briefly but this is huge today is, what about your long-term care medical expenses? How are you going to cover that? I know we're getting probably a little confusing for the person who's not into this every day, but long-term care medical expenses are very important in the financial picture, and life insurance policies now allow a living benefit off the death benefit. You can tap into that should you not be able to do two of six of your activities of daily living. Now we've just totally changed the game of what people think life insurance is about. It's about an expense and my family. Somebody else is going to have a big party while I'm in a box. Well, it's not that way anymore.
Casey Weade: Well, I think my kids have enough. Yeah, but there are these other uses: tax free income, as you've said, long-term care, cash management and then just simply legacy. There's more than just one use for these different types of life insurance that are out there. I think that you have to seek guidance in this area. It needs to be someone that has extensive experience. Let's kind of go down that road.
If we were sitting here going, “Okay, well it does sound like maybe there's some opportunities to incorporate life insurance in my plan that I have yet to think about. Now where do I go?” I think one of the biggest problems in the life insurance industry is the compensation structure creates some risk. It does create a potential issue for the client. When I've seen a problem with a life insurance policy that's been placed in force by another agent it's been because they've pushed the death benefit too high for the cash value typically, and now the policy is heading towards collapse or now the client has to put in substantially more dollars into the policy in order to fund it. They wanted it for a legacy. It's got too much cash. They wanted it for tax-free income, it's got too much death benefit. How do you make sure you're getting the best deal?
Jim Bowman:Well, a couple of things. One is I think you want to work with an independent advisor who doesn't represent one insurance company. I think you want somebody that has the breadth of knowledge to look at the whole marketplace of the 100 insurance companies out there to be able to find best in class at that point in time. Then somebody also that understands the investment world as well as the insurance world, because to do a plan right you’ve really got to marry those things together. On top of that, taxes. We are in a great time, from a tax perspective, today, but with all the stimulus money— which is needed and it's great that the government’s looking to help everybody during what I call the COVID challenge— but we're going to have to pay the price on that at some point in time. That's not free money. How do you incorporate taxes in this so you can control the amount of taxes you pay better than by not planning at all?
Kind of a long-winded answer, Casey, but I think you want somebody who's holistic in their view of financial planning and who understands the investment and the insurance world and does life insurance. There are a lot of advisors out there who, listen, they may not believe in it, they're not experts in it, so they focus in on just managing the money. When I make the argument that a life insurance policy is a tremendous vehicle to enhance the financial stability of a client and their family.
Casey Weade: Yeah. That reminds me of a conversation I had with Professor Wade Pfau not long ago around his newest book, the Safety-First Approach to Retirement. There was a really interesting study that he put right at the end of the book. He finally incorporates life insurance and he shows that we can have even more spendable income in retirement and leave more legacy behind by incorporating life insurance into a strategy. That's why you say you need to work with someone that's looking at it from a comprehensive standpoint. He says, “Investments, still valuable. Life insurance, still valuable. Tax planning, still valuable.”
As you said, we need to go to an independent. Now my question is, why do you have a job, Jim? I think there's some individuals that I go to, “Who is this guy and why does he even have a job?” Why doesn’t Casey just go straight to the carrier? What is the point of Jim here and the relationship that we have, or Advisors Excel for that matter?
Jim Bowman:Funny question. It's not always simple to answer, but I'll try. It's a distribution supply chain issue. Just like Amazon or any of these aggregating stores, Costco, any of them, a lot of the manufacturers… In this case you don't think of it, but a life insurance company is a manufacturer. That manufacturer has a decision to make when it comes to distributing their products. Do I want to pay my own sales team and distribute directly to the consumer? Or do I want to go to a source and let them distribute my products? It's a variable cost to the manufacturer because we only get paid if there's something sold versus being on their payroll.
Insurance companies make a distribution decision. Some of them create what we call a captive. They’re a career… it should be career, not captive. That's more of a industry term, but it's a career. It's a career to be with this one company and represent them in all of their products. That's honorable and they do a great job for their clients.
Others say, “Listen, I don't want that expense. I want to be with independent producers. I can reach more. This is how I want to do it.” Our job is really to be what’s called a managing general agent. We're general agents for 45 different insurance companies. We have access to them, to their product people, to their underwriting staff, to their admin staff, their in-force support. We have total access to work with that company and represent that company once we sign a contract with them. To your question, why do I have a job? Well, because 45 companies decided that they wanted to outsource their distribution versus managing it directly themselves. That makes sense, Casey?
Casey Weade: Yeah, it does. It takes me back to when we finally started doing life insurance business with Advisors Excel. We used to just work with one carrier. We weren't captive with that single carrier but all of our life insurance business went to that single carrier. I felt like we kind of had blinders on. We didn't really know all the other opportunities that were out there because we had a relationship. We had a singular relationship and we thought, “Well, this is the best thing out there. There's nothing else.”
I think a lot of insurance agents have that problem, whether they're independent or not. Probably more the captive or their career agent is going to have that issue. I've been captive with a couple of different firms when I first started out in this business, but I think that creates some blinders. I don't know if you find that with the relationships that you have with advisors, especially as you're onboarding.
Jim Bowman:Definitely. We definitely have. I’ve faced that in my career. I started with a company that I only represented them and it was a place to learn and train. Quickly I learned, when I was talking to consumers, that my square policy didn't fit the round problem that they had. I had to expand and learn more. As I've done that, I've seen that companies go through phases. It's no different than… Talk about a car company and all of a sudden they have a hot model for three years. Next thing, technology changes and now there's another hot car that everybody wants to have.
Insurance policies are the same thing. Somebody is really good at this marketplace for a death benefit because their cost is better and their guarantees are better. Well, two years later it might be a different company that's now hot in that marketplace. I always want to be bringing best of class to you, my client, so then you are only bringing best of class to your clients.
Casey Weade: I don't think I've ever had… I know I've never had anyone ever ask, “Who's your FMO or your IMO?” That's what Advisors Excel is. Every independent agent, if they have access to more than one product, they're going to be going through some type of intermediary or general agent such as Advisors Excel. Is this a question that the consumer or the potential client interviewing advisors, should they be asking about FMOs, IMOs, Gas? How do they even go about having that conversation in an intellectual way?
Jim Bowman:I think it'd be good for a consumer to understand who's behind their advisor, their agent. Who are you working with? What's their credibility? Are they only locked into four companies or five companies? Are you getting the best advice and counsel as to in the marketplace? I can give you a simple example: we have a situation we're working on and they want a significant amount of death benefit for a state tax plan. We represent 45 companies. Not all 45 are good in that marketplace. There's probably about 12 that I would say, “Hey, this is the list you want to look at.”
If somebody has got only a support of seven or eight companies behind them, you're not going to get the best opportunity. They may have the best company in that market at that point in time, they may, where with us it's a no doubt. We're going to be able to provide the best product, the best pricing, the best underwriting decisions possible. Is a consumer going to ask that? Probably not. Should they know it? Yeah, they should.
Casey Weade: How many companies should an advisor be able to work with? Advisors Excel has 45 companies. Where's the frame of reference here?
Jim Bowman:I think a frame of reference is probably… From my perspective, I think somebody should be representing at least 25 companies, especially if you are going to really hone in on the life insurance game or the annuity marketplace, which are the two main life insurance products out there today, lines I should say.
Casey Weade: It probably seems weird to some. They go, “Well MassMutual's always been the best,” or “Northwestern's always been the best,” or, “Pac Life’s always been the best,” and they just stick with one company. They say, “Well, this is a good company. I'm going to continue to put my business here,” not realizing how wide premiums vary from carrier to carrier. For a 10-year term policy for I think it was a 40-year-old I had recently, the cost for that same policy was anywhere from $500 a year to $3,000 a year. Why is there such a wide variance of costs from one carrier to the next?
Jim Bowman:Simple answer is some companies really want to be in that business and other companies do the business as an accommodation. The companies who want to be in that business, they're going to be sharpening their pencil every six months. “What's going on? How is my mortality? Can I lower my prices to get more clients?” That's why you want to work with someone like yourself, an independent, who's shopping, who's doing that homework for the client. Other companies say, “Listen, I don't really don't want to be in that 10-year term marketplace, but if I'm going to be in it, here's what you're going to pay me.” It's a different philosophy, I believe.
Casey Weade: Yeah. There are some that are just simply specializing in one area of the marketplace and then they're satisficing with the rest.
Jim Bowman:Yes. I totally agree.
Casey Weade: If we're going to go down this road, it sounds like we've had some good conversations about different types of products. I think it's going to be fun to talk about some unique and weird strategies that are out there. I think most people understand term insurance. We buy a 10-year term policy. It pays or it doesn't pay, and, yeah, we should shop around for the best deal. Then there are some really advanced strategies out there today, from a tax-free income standpoint to an asset protection standpoint, a legacy standpoint. What are your favorite strategies that just aren't very often talked about?
Jim Bowman:I think there's a combination. When you're working with some higher net worth clients, you start getting into a state tax planning strategy; how to discount the estate so you don't have as large an estate tax bill. I think most people don't realize the tax laws have changed dramatically.
At one point in time, if you had more than a, husband and wife, $1.2 million of assets at the second passing, that was taxed to the beneficiaries at 55%. It was a heavy tax burden that the beneficiaries would have. Now it's up to a little over $22 million that you can leave without paying taxes, but every dollar after that's a 40% tax. When you start talking to business owners, people with significant wealth, there are some strategies there incorporating trust that can be pretty exciting for a guy like me who loves this stuff. For other people they’re like, “Jim, you really need to get out more. That's not very exciting.”
On top of that then you start talking about premium financing. “Why do I have to write this bill or this check? Why do I do this? Why don't I leverage my assets and let the bank do it?” You can get some really neat, sophisticated planning done in that area.
Casey Weade: Let's stay on estate taxes for just a minute. I think there's a lot of individual who just aren't concerned about estate taxes right now because as you said, a married couple has about $23 million in exemption before they actually ever incur any estate taxes. If someone has, say, $5 million today as a married couple, should they be doing anything about estate taxes with limits where they're at today?
Jim Bowman:I think they should be seriously considering it because that's the federal level. Every state has its own estate tax and it's usually not that high. I think that's where you have someone like yourself, “Hey, can you just look at this?” I'm sure in your analysis when you sit down and do a plan, you're looking at that, Casey. You look at the state level and say, “Hey, in this state it's 30% over $4.5 million.” I'm making it up to be generic. Everything above that now, there's a half a million dollars subject to 30%. That's $150,000. Where's that going to come from? If you have a larger estate, again, the numbers just get bigger. I think it's certainly a state by state advisor-client issue that needs to be addressed.
Casey Weade: Yeah. One of the most popular ways to take care of estate taxes is quite often to just set some assets aside and do an irrevocable trust and go ahead and utilize much of that exemption that you have, especially with exemptions as high as they are today. I've got very wealthy clients that are going to go ahead and use up their entire exemptions. They're going to go ahead and take $23 million, we're going to stuff them inside an irrevocable trust. They're never going to have access to that 23 million ever again. They've really given up rights to those dollars. Then they're utilizing those dollars to buy life insurance and help to pay for the estate taxes on the remaining estate that will be subject to estate taxes.
I think the biggest obstacle for most, especially when they're in that $5-$10 million range, knowing that estate taxes could come back into play come 2026, we could see the exemption go back to a million. At $5 million for a 60-year-old, you could have $20 million or more by the time you pass away. In order to fix that, we have to give up control of some money. Most people don't want to give up control. There's a strategy you've talked about from stage in the past called private split dollar to try to defend against that without having to give up total control of your assets. Can you talk our audience through that?
Jim Bowman:Sure. Basically, private split dollar is an arrangement where you set up a trust. That trust and you are going to have an agreement about money going in. You're actually going to loan money to that trust. Then every year that trust is going to pay you back interest. You may decide to forgive the interest and leave that money in the trust. You may take it back. That is your option. As the money stays in the trust, it can then do things to leverage that money inside the trust. One of the leverage factors is— the best one for a situation like this is life insurance because 1 dollar can create 5 or 10. Nothing else can do that guaranteed. There is a neat, simple situation where you can leverage the dollars called private split dollar.
Casey Weade: We didn't have to totally give up control of those assets. We loan them into the trust. Those assets will come back into the estate but we utilize them to enhance the estate. One of the strategies that we've talked about here recently is due to such low interest rates, family members are actually loaning assets out to their children at these low interest rates. They're forgiving the interest and then they're allowing the children to invest those dollars. Then those dollars that they loaned are the only ones that come back in the estate. Any growth on those assets will stay outside the estate.
One of the big advantages today is interest rates being as low as they are. You can now loan these dollars. In May of 2020 it was about eight-tenths of 1%. Last year it was 2% in 2019. That gives a pretty good opportunity to some to take advantage of these, not just because of the expanded estate tax exemption we have today but also interest rates. Are you saying that?
Jim Bowman:Oh, absolutely. Where we really see that, Casey, is your business owners. Let's say a business owner has this significant value of the business and they look at what you said as like, “I'm going to put X dollars over here. I'm going to put $100,000 over here to buy this life insurance policy to protect my business so it stays in the family. Well, wait a minute. I'm making 22% margin on my business.”
What if I could say you can borrow that $100,000 and pay one and a half percent? Now you've only out the $1,500. You just put 98,500 back into the business working for you. Now we've financed that and leveraged it. It's still protected the family, protected the business. That's where premium finance gets really good, as you said, because of the low interest rate environment that we're in.
Casey Weade: Yeah. Now we're kind of segueing here into premium finance. I walked a friend through this recently and he said, “You mean you're borrowing money from the bank to buy life insurance and then paying them back with their own money?” Let's simplify premium finance and who it might make sense for.
Jim Bowman:First of all, it's one of those strategies that if a client isn't comfortable with debt, they're not going to be comfortable with a premium finance strategy because it'll just drive them nuts. “Oh, I’ve got to…”
Casey Weade: I get it. But at the same time, I had this discussion with someone recently regarding debt and what's really debt or not. I equate this to my mortgage. I have a cash value policy that you would be familiar with. It's liquid. I can have the money back at any time. I'm making 4-6% a year on the cash value. I can have it back any time. I've got a mortgage that I could pay off at any time that's got an interest rate of three and a quarter, but why would I pay it off if I've got this cash value over here in this policy and I've got an arbitrage opportunity?
I'm getting tax deductions, tax deferred growth, net returns on both sides. Is that really debt? That's what I say about premium finance as well. If I borrow a million dollars from the bank and “Hey, the interest rate’s only, say, 2% today,” and I know I'm making more money somewhere else but I can pay it off in any time, did I really take on any debt? I guess this is more of a philosophical discussion.
Jim Bowman:Yeah, you're spot on with that. It's really the nature of the individual regarding the debt. Are they just people who grew up through the depression era and just say, “Listen, I don't want to owe anybody anything. I don't care what it makes me, I won't sleep”? I always want to understand the client perspective about that.
If somebody is like in real estate and they're a developer and they've had success and they're so used to borrowing money because they get it, it's a tool. It's not debt, it's a tool so I can go make more money over here. Those individuals love the premium finance strategy because really the policy actually becomes like a building for them. “I'm going to buy this $5 million policy.” It's a $5 million building. “Here's what I’ve got to borrow to get the building,” and how they do it. Again, it's all about understanding how to leverage other people's money. That's all premium financing is doing. You're still paying an interest and you're getting a value in that policy.
Casey Weade: We're hitting on some pretty advanced strategies here. We’ve talked about premium finance. We’ve talked about private split dollar. Let's get real advanced right now before we get back to the basics. What about private placement life insurance?
Jim Bowman:Private placement, it's pretty exciting but it's a real, real small niche. That is you have some companies out there that will have the structure of the insurance company and the policy. They're an insurance company. They'll give you a policy. In that component where we talked about growing cash value, whether it's the dividend or with a mutual fund type or tied to an indice. Instead of that being at the control of somebody else, the policy owner can put assets into that bucket. They can manage them themselves all in the tax efficient wrapper that life insurance provides. At its core, that's really what private placement is, so the consumer can still manage an asset.
Casey Weade: Yeah. We're talking about individuals. We get into private placement, we're talking about individuals that have tens of millions of dollars in order to make this work. I know there's some companies out there working on $5 to $10 million opportunities and how they might be able to make that work, but it's so expensive that it does take enough assets in order to make that expense worth it. I love talking about it, because it's just such an interesting part of life insurance. Tony Robbins talked about it extensively in a book that he wrote not long ago and he's a big fan.
Let's get back to the basics. I know I could get off the rails here and go into private placement and these more advanced strategies for a very long period of time. There's a lot of individuals where that just won't pertain to their own unique financial situation. There's one strategy that I used in our own family, and I wonder if maybe you used this strategy as well. It's another one that most people don't think about, but buying life insurance on a parent or close relative. Can you explain that strategy and how it might work? Who it might be right for?
Jim Bowman:Sure. There is, I think it was who recently passed away, Barry Kaye really started the strategy back in the ’80s of taking your money today and instead of investing it, you would buy a policy on your parents. You would have to see a financial loss for the purpose of the life insurance, but then when that parent passed away they would leave that individual with that benefit. It can be very powerful from a guaranteed rate of return perspective because you know exactly what your costs are going to be, you know exactly what your return’s going to be. You just don't know when it's going to be. These people who've done it, I was just talking to a gentleman yesterday who did it. He talked about, “Listen, my parents are going to pass away anyways. Why wouldn't they enjoy leaving their family and their grandchildren more money, especially if it's going to be tax-free and they didn't pay for it either?” Because the kids are paying for it in that situation. It's no different than a grandparent buying life insurance on themselves for the benefit of the kids and the grandchildren. It's just who's writing the check? A simple strategy.
Casey Weade: It's a simple strategy. It's one that I wrote an article for The Wall Street Journal on years ago, and I caught a lot of flak for that. I had some criticism saying that it was very morbid. “Why would you ever do that?” My dad, he saw the value and he wanted to leave something behind. If something happened to dad, he needed long-term care, that would be eating into inheritance. I would be the primary caregiver. Same thing for mom. I own policies on both of my parents knowing that they're going to pay out someday. The return’s either going to be extremely good or it's going to be good, and it's going to be tax free. When you run out of places to stuff dollars on a tax-free basis, it's just another tool. It's one that can fill in some real risks for you and your family that maybe you haven't thought of yet.
I just mentioned long-term care. I think some are going, “What do you mean, life insurance and long-term care?” That's another basic strategy. I think this is one that's more recent for the life insurance space. Can you talk through how we might utilize life insurance for long-term care purposes?
Jim Bowman:Sure. There's really two ways to do it. The first one is just about every life insurance company today provides what they call a chronic illness rider on their policy. Some of them have a little extra cost. Some of them you don't pay for until you access it, and then there's a fee when you access it. It's not free.
What it is, let's say you have a half a million dollars in death benefit, and you cannot do two of six activities of daily living. If you can't do that, instead of writing the checks out of your own checkbook or selling other assets, you can go to that insurance company and say, “Listen, I would like to access some of those $500,000 as a form of a living benefit,” which is what the chronic illness rider is versus waiting for the death benefit. The companies we usually use, it's pretty much about 60%. If it’s half a million, over the course of four years you can withdraw $300,000 most likely. Again, every policy is different, age is different so I'm being generic, but you can pull out $300,000 to pay for those long-term care medical bills. In these situations, you don't have to show bills. You don't have to show anything. It's a right to the policyholder to access it as long as the physician will certify you can't do two of six ADLs.
What we do with a lot of clients who have money that they're sitting on and they're like, “This is really for that rainy day. It’s really for, I don't know, my long-term medical expenses,” what we do is we say, “Listen, why don't we reposition this over into a life policy? We'll buy the half a million dollars, so that'll go to your kids. If you need it, there's $300,000 here for long-term care medical expenses. Oh, by the way, there's some cash value that might grow as well.” We're going to cover the legacy and the long-term care medical expenses and not do it dollar for dollar. We may end up paying $200,000 into that contract to get $300,000 or $500,000, all tax efficient. Now we're back to leveraging the dollars and using life insurance to provide real value and peace of mind to a family.
Casey Weade: This is a big difference between traditional long-term care insurance and utilizing life insurance for long-term care use. You've got a lot of different variables here. One obvious is that you have a pretty substantial death benefit. At least you know those dollars are going to go to someone if you don't utilize them for long-term care. You’ve also talked about cash versus reimbursement. A traditional long-term care insurance policy is going to be reimbursement based versus getting the cash. Can you tell me why someone…? That all being said, I'd rather have cash than reimbursement. I'd rather have the death benefit versus no death benefit. Why would someone choose traditional long-term care insurance over a life insurance solution?
Jim Bowman:For the life of me, the only reason they would do this is they weren't informed on other opportunities. When I was in the corporate world, I ran an insurance company's distribution and we had a long-term care division. It made me sick when we had to raise a client's premium 40%, 50% on an annual bill for a husband and wife. That was meaningful. It impacted their retirement and it drove me nuts.
We actually got out of the business. We made a decision to corporate to say we weren't going to offer individual long-term care. I like this approach so much better because the client can decide how much coverage they want to take on. How much of the risk do they want to cover? They know the numbers. They’re not worried about a new bill coming next year. To answer your question, I think if clients truly understood their options, I don't think they'd take the individual option at all.
Casey Weade: I think most individuals, they seek predictability in retirement and to eliminate as much unpredictability as possible. Buying a long-term care insurance policy just injected a whole lot of unpredictability in your future expenses because you don't know what that premium might be 5, 10, even next year into the future.
Jim Bowman:The other point, you made it earlier but I think it needs to be repeated. It's like your car insurance. You're paying it every year. If you don't use it, if you don't get into an accident, you don't get any of the benefits, right? An individual long-term care contract works the same way. You could put $100,000 in over 10 years and you get nothing if you don't use it.
Maybe that's awesome that you didn't have to use it versus an approach that we're talking about. You put that $100,000 in, you might get $300,000 tax free back to your family, and you have the protection of that policy for your long-term care bills, your chronic illness bills. I just think it's a better approach. There's much more value to the consumer and to their loved ones.
Casey Weade: All right, Jim. We've talked about long-term care, life insurance policies now, premium finance, private split dollar. My personal favorite has been a cash alternative. I started with a term policy. After a term policy I bought kind of a tax-free income strategy. Then after that, I ended up buying myself a cash alternative or a bank alternative. Can you talk about that? I think that's going to be a very unusual conversation for most to hear is that you could put money into an insurance policy and have it back at any time. How do these things work and how do we go about finding if it's right for us?
Jim Bowman:It's a great policy, the one you're talking about. It's only offered by two companies to get to the value for the consumer. What we typically see is a client that's been sitting in cash. They like having cash. It's been sitting in a money market or a CD, maybe even a bond where it's sitting there. There's really no purpose of the money because you're not getting a lot of return. Bank of America, where I bank, I think 0.3%-0.4% return on my money sitting in the money market. To add a little salt to the wound, now I’ve got to pay taxes on the little amount that I got interest on. It's really not providing any value other than it's a safe place.
If I said to you, “I can put you in a contract that is going to give you some meaningful growth opportunity for the 6%. It'll be tax deferred. If you pass away, we’ll double it for your loved ones tax-free. If you can't do two of six ADLs, I'm going to give you $150,000 off my $100,000 example of chronic illness protection.” They’re not giving you a lot more value than what the bank’s giving you on a taxable, but they're giving you safety and they're giving you liquidity.
Then, “But also I'll give you your money back.” Now it's not ATM you'll get it back within 30 days, two weeks. It's just not ATM liquid, but it gives so much more value. We recommend a lot of our advisors— and you've been great with this, Casey— to, “Hey, take a portion of that cash and let that work for you. If you need it, it's there. In the meantime, let's put it to work. Right now it's sitting on the couch doing nothing. Let's go put it to work for us.” It's a great alternative for people sitting in cash. Now, you always want to have an emergency fund. We're not recommending taking all the cash or anything like that.
Casey Weade: Yeah. Quite often I'll get the response, “That just sounds too good to be true. You mean I have the opportunity to make three, four, five times annually what I'm getting on the bank and it's got liquidity, I’ve got a death benefit, I can use the death benefit for long-term care purposes, it's tax advantage?” What is your response to that?
Jim Bowman:Well, the only cost of entry?
Casey Weade: Why are the returns so much higher than other fixed instruments?
Jim Bowman:The cost of entry is you have to be healthy, one thing. You have to go through financial underwriting. The cost is really in your cost of insurance and expense fees. The rest goes to that excess bucket where you're tied to an S&P 500 or other choice. I think there's like 10 different choices. That’s where you’re going to get the opportunity to get some meaningful growth.
By the way, this contract, specific one guarantees two and a half percent to the policy holder. If your cost is, one, you're guaranteed one and a half. Then if the indice you pick gets five, six, seven, it's capped at eight and a half, you've hit a home run on money that's just sitting there doing nothing anyways, and you get the other value with it.
Casey Weade: You also mentioned that it was tax deferred. Earlier you said that cash value growth inside of a life insurance policy is generally tax free, or it can be utilized tax free but this is tax deferred. What's the difference between, say, a policy that's been built for future tax-free income and one that's built for liquidity today?
Jim Bowman:Earlier in our discussion, Casey, you talked about why life insurance as an investment? The internal revenue code looked at life insurance and said, “Hey, this is too much of an investment, so we're going to put a couple of rules in place.” They created what's called a modified endowment contract. I'll call it a rule. It basically says, “If you space out your premium, your payments into the contract typically over seven years— you can do it over five— if you do that and leave the money in there, we'll let you borrow your money without paying any capital gains taxes.”
As a cash alternative, we're not doing that strategy. We're just saying, “I'm going to put in a $100,000-$250,000 into this contract one time because I want all this other value.” The government says, “Listen, we're going to now treat you like it's an annuity. We're going to tax it just like you would a deferred annuity,” which is every year if it's there you don't get a tax bill, but when you pull the money out we're going to give you capital gains tax on your growth. That is the big distinction there. I'm glad you caught that and brought that up.
Casey Weade: Yeah. It's one that I think is often quite confusing. I think this is a problem many advisors have, especially CFPs like myself. If you take a CFP exam, you take your CLU exam, mostly it's certifications. If you answer that you should MAC a policy or create a modified endowment contract, overfund the policy past those IRS guidelines then you're going to miss that question on the exam. We're not taught that it's okay to ever overfund and turn a policy into a modified endowment contract. Do you find that that is something a lot of advisors have a trouble or it's an obstacle to get them to see this as a good tool?
Jim Bowman:Oh, absolutely. It's an education that we do all the time to get advisors to understand the power that this asset class has. It's just not a cost and a death benefit. There are so many other intricacies, which is why I can't believe we're almost an hour in talking about life insurance. I think the people who are still on the call listening to us… I'm sure there's hopefully a couple 1,000. There's so much value that this asset class brings to the table. That's why you have to work with somebody who understands the investment world and the insurance world, I believe, to truly bring the whole scope to a client.
Casey Weade: To my advisors, they'll say, “Casey, why would you put this money into a mac?” I say, “If I make 5% on the cash inside the policy, let's say I pull my earnings out in that 5%, I'm going to pay a 10% penalty tax. I'm going to pay ordinary income tax on it. My 10% penalty tax is only 0.5%.” I still netted four and a half percent versus allocating those dollars to a CD at the bank making one and a half percent. Even for someone that's under 59 and a half, it's still a valid option, especially I think due to the low interest rate that we find ourselves in today.
Jim, boy, we’ve talked a lot about life insurance. Like you said, hopefully there's some that are still as excited about this conversation as you and I. As we wrap up here, let's shift over to a couple of philosophical questions about retirement. Jim, I don't know your age at this point but I've always assumed you’re around retirement age. I know you've done well enough that you could retire if you wanted to today. What keeps you working? Will you ever retire? What does retirement mean to Jim?
Jim Bowman:It's a great question. It is one Jeannie, my wife, and I are asking these days. I love what we do, Casey. I don't know that I'm ready to retire. I love what I do, what we do together. It's exciting. It's fun to see people put this asset class to use and understand it. That's why I keep coming to work. I've got a great team. I love helping people grow. I just don't know what the next chapter would be yet. I don't have the talent at golf that you had, so the senior tour is not in my future. As much as I wish it was, it's just not. You're stuck working with me for a while, buddy.
Casey Weade: I'm glad to hear that. Our tagline is Retire with Purpose. Our podcast is called Retire with Purpose. When you hear “retire with purpose,” what does that mean to you?
Jim Bowman:I love the tagline, by the way. It means, for me personally, what am I going to wake up and do every day? I had a time in my career where I took a year off and I didn't understand what my purpose was. It was great for a little while and my golf game got fairly good, but it's like, “All right, what is my goal? What is my purpose?” I love the tagline. It's just what I said, I don't know what my next goal and mission is. I'll find it. Today it's getting the pleasure of working with people and firms like yours.
Casey Weade: I think there's a good insight in there. You said you don't know what that next thing is. Right now you feel passion, you feel purpose, you feel meaning every single day and you're not sure how you would continue to feel that in this next stage of life if you were to enter retirement. I think the lesson there brings me back to an interview I had with the CEO of The Halftime Institute, Dean Niewolny, a while back. He called it the Tarzan rule. “You never let go of one vine until you have a hold of the next one.” I think that's what you're doing. I'm glad to see it then/ I hope you don't find the next vine too soon.
Jim Bowman:You're very kind. Thank you again for having me. It was an honor and a privilege. The best to you, Chels, and the kids. Never hesitate to let me know what I can do to help you.
Casey Weade: Jim, thanks for joining us here. I know we're going to get together, do a webinar here in the near future. I look forward to connecting there. I look forward to seeing you in the near future as well. Thank you so much for taking the time.
Jim Bowman:My pleasure. Be well, folks.