Episode 9: Now Is Not The Time To Overlook Life Insurance

WMT (ep9)
Isaac Wright: Welcome back to Wright Money Tips. I’m just so happy today in the fact that who we have here as our guest today. We’re going to talk about a topic that a lot of you, I know, probably feel like it’s probably boring. But I’m going to tell you, you’re going to want to pay attention to this. We’re going to talk about life insurance, but in a way where I think a lot of you have misconceptions and maybe not necessarily understand life insurance. And let me tell you something, there’s a lot more to it than just putting you in the ground for burial insurance. There are so many more opportunities around using life insurance, considering life insurance as an asset class, almost when it comes to the, let’s call it the lay of the land of what you save for retirement.
But without further ado, I do want to introduce our special guest. Our special guest today is Jim Bowman. Jim Bowman is the President of Life Insurance at Advisors Excel. Jim, you and I have worked together and known each other for years. You have helped hundreds of advisors across the country develop and understand ways to use life insurance effectively and for the best interest of the clients that these advisors serve.
I just can’t thank you enough for joining me today. Looking forward to our conversation.
Jim Bowman: Well, thank you, Isaac, for having me and thank you for the audience because you’re right. This is a topic that nobody really wants to talk about because they don’t understand it. So, I applaud everybody here listening, and this will be a valuable segment.
Isaac Wright: So, let’s go ahead and get right to it because you know, like I said, at the top here, a lot of times, life insurance and the way people view life insurance as, “Well, I don’t want to pay a premium payment or I already have enough money to be put in the ground.” Let’s step back here for a minute because life insurance for the many of you out there listening to this today, the number one benefit of life insurance, I will say overwhelmingly is the fact that if it’s set up correctly, it is an income tax-free and potentially in a state tax-free asset that can be utilized to really accomplish a lot of goals with money that you’re trying to be able to ultimately give out to the people that you love.
Including the money that you’ve saved and how to do that very effectively. So Jim, when we talk about life insurance today, let me just say this, life insurance and aspects of what you and I’ve talked about. We see what’s going on economically today, and the fact that so much money is being given away.
We’ve had all these stimulus packages. I don’t think anybody believes taxes are going down in the future. In fact, I think people are worried, very worried, about where taxes are going. As I said here, life insurance as a tax-free asset class. Let’s expand on that just a little bit. If you don’t mind sharing a little bit about why you’re seeing so much, especially wealthier people use life insurance effectively.
Jim Bowman: So, in my career, Isaac, I have found, and I’ve been in this business over 30 years, I have found that people buy life insurance for one of two reasons and one of two reasons only. The first one, they love somebody as much, if not more than they love themselves. So, they want to make sure they have a great quality of life. Should I pass away, I want to make sure that my wife has the quality of life that we dreamed of, but she doesn’t have to do anything she doesn’t want to do. So, she has that freedom number one.
The number two reason people buy life insurance is that they do not like the Internal Revenue Service (IRS) or paying taxes. It’s that simple, Isaac. It’s really that simple. And you hit on a point of the ability. This is the only product that you can put money in, it can grow and not be capital gains tax. It can continue to grow and you can borrow your own money and never pay income taxes or capital gains taxes. And that’s what people don’t always understand.
Isaac Wright: Yeah, that’s a great way to simplify what I just finished saying in a fashion that’s easier to be understood. And I think Jim, that when we talk about life insurance and the fact that today, if we’re talking about taxes and many people are concerned that all of the money that’s been put into IRAs and qualified plans, and even now, as you just said, with capital gains, I think the laws around whether or not assets may get a step up in basis, if that goes away, I can’t think of a reason why you wouldn’t have life insurance ultimately is the end game in terms of trying to maximize the money you would give to your loved ones.
So, in a way you kind of hit both sides of the fence. You hit the tax situation on the head by minimizing how much Uncle Sam gets out of the equation. And again, you ultimately can decide how that money is going to be passed on. One other thing too I’ll just add, is that money can be passed on directly without going through probate.
You can have it set up pretty effectively if it’s administered correctly as beneficiaries, going to exactly where you want it to go, whether it’s charities loved ones or all the above.
Jim Bowman: And I think when we, you mentioned taxes, we already know the Trump Tax reduction, and I believe it’s 2026.
So, we already know that there’s an increase coming. Right now, with the trillions put aside and also having an infrastructure bill that the economy needs to rebuild our infrastructure. That’s going to be another trillion or so. So, we’re going to end up paying for those things through taxes.
So, you know, our job, my job, is how can I find the assets that will be most beneficial to the clients in minimizing the taxes they pay? And believe it or not, Section 7702 in the Internal Revenue Code talks about this and it says that life insurance is the only asset that can do this without having to pay capital gains or income taxes.
It’s very, very powerful. And it’s a tool that the wealthy have used for years.
Isaac Wright: Well, let’s talk a little bit about a couple of the myths that are out there. I think number one is I think people and we were talking about let’s say somebody that has a decent amount of money saved for their retirement and they look at life insurance. Maybe they feel like either they don’t need it because they’re well off. Maybe they feel like they can cover everything under the sun with what they have saved, even though they may ultimately hurt themselves with how much Uncle Sam will take from them ultimately. But also, I think sometimes people just simply feel that as they’re older, life insurance is too expensive.
But I think what we’re talking about here is not like insurance in terms of a traditional way of let’s call it, getting off the ground when you’re 20 and 30 years old. This is repositioning assets to still operate under the guide of a life insurance policy, to be able to provide money to people that have insurable interest, if you will. People that will use that money that will need that money, maybe for income replacement.
Or ultimately speaking, like I said before, trying to do that in conjunction with minimizing taxes. Let’s talk a little bit about the fact that when people are starting to get in their 50s, 60s, maybe even in their 70s, you have seen an absolute game changing amount of policies geared around people understanding that, “Hey, listen, maybe I need to be able to reposition some money into a policy.” Not necessarily again for a beginning of life cycle needs, but this is really in the end game is again, trying to make sure that you don’t have too many eggs in one basket.
Jim Bowman: And, and that’s a great point. Especially, you talked about insurable interest, it’s still life insurance so let’s remember that. That said, there is a component called cash value where money can go into it. It can be then set into different indexes that can grow with, the S&P 500 or different companies have their own proprietary Index. The goal of that is to insulate yourself from taxes. We’ve seen where clients, and they may have, you know, 500,000, a million dollars of qualified money.
Honestly, do not realize how much that’s going to be taxed. What they also, I think a myth is everybody says, “Well, don’t touch your qualified money until you have to, if you don’t need it for income, don’t touch it because you’re going to create an income tax event.” Well, if you really think about what we talked about before that we know income taxes are going up, we’re not saying we think, we know they’re going to go up because the tax codes already set in, they may go higher.
Does that make sense to look at potentially taking that money out today when you’d have a discount versus what it would be in the future? So, there’s a huge thing. And then, okay, what’s the best place to put it?
Now it shouldn’t all go into life insurance. Some of it might go into a guaranteed instrument. Maybe you need extra income that you haven’t planned for. Some of it you may want to put in the market. Maybe you do think that you know the next Amazon stock and you want to kill it in there. Great. But a portion of it, you may want to build a supplemental retirement pool of money, a hedge against inflation that is not taxable.
And that’s where we’ve seen a lot of people understand where this country is from a tax perspective. And then once they see, “Hey, Oh my God, this is life insurance, but this isn’t my father’s life insurance. I can see it differently.” No, by the way, you can get some pretty, pretty impressive long-term care benefits off of it that if you need, because you can’t do two or six ADL’s that you can tap into to insulate your other assets. So, it is a very diversified and more sophisticated tool or asset class than people realize.
Isaac Wright: No, I think what you said there at the end, Jim, let me be clear, everything has pros and cons.
I think knowing that you have money in different pockets, whether it’s again, IRAs, taxable accounts, savings, real estate, whatever the assets are. The fact of the matter is, life insurance and in the world that we live in today and the tax code that’s likely in front of us. We don’t know when that will take place, but the fact that you can have money go out and you can have that effectively leveraged maybe to where income taxes are not taken out of that because Lord knows what taxes will be like.
Ultimately if you pass away, but even if you’re alive and you have this policy and you’re 75, 85, 90 years old, and you get diagnosed needing help with eating bathing, dressing toileting. If you become in a position where you need long-term care, we’ve seen that used. We’ve actually have seen people implement using the face amount of the policy.
So, imagine if you have a life insurance policy that has half a million dollars in it. Somebody can pull out five, $10,000 a month of that death benefit before they die. And now they’re taking that money, and the beauty of it is this, what I’ve seen, and I know policies, every policy is going to be a little different, but that money gets paid directly to the policy holder.
They can use that with a lot more flexibility of who they want in their home, where they want their care. And again, doing it correctly could mean having little to no tax repercussions because it’s being used for that type of medical expense. These are things where I think people just in the world that we live in today, people shut down so quickly.
If the term is not necessarily understood, and I think life insurance is one of those terms. For people that have known my practice and know our industry that we serve, people come in to see us because we are fiduciaries. We’re always going to do what’s in the best interest of the client. We’re going to cover pros and cons. We’re going to cover compensation and fees, But the end game is this, you better have at least some considerations around these types of policies, especially as you get older because of what we just covered.
Jim Bowman: You know, it reminds me of a situation we had Isaac. We had a widow, I believe she was 71 and her retirement was all set. She had plenty of money for retirement. She had purchased an annuity that she thought she might need for income, but she didn’t need that premium. So, we said, “Okay, you don’t need it for income. So it’s just sitting there. So it’s really other people’s money now because it’s not yours. So, we have six there. Okay. Whose money is it?” She goes, “It’s for my two daughters.” I said, “Fantastic. So, you’re going leave your two daughters this annuity.” And it was qualified, meaning it hadn’t paid income taxes yet, kind of like what we’re talking about. So, we said, “Listen, if we reposition this and we just moved 5% a year, had to pay taxes on it and we bought a death benefit policy to double what was left for your daughters. Would that be better?” Oh my God. She was like, “Oh, that would be awesome. Can we really do this?” And so we did this. We ended up buying $900,000 of income tax free death benefit for her.
And all we did is siphon out 5%. It was gaining 3%. So, it only really had a negative 2% on there. But the key to the story though is that the daughters were going to get 450 each instead of 200, plus the remaining balance of the annuity. So she was thrilled. But with that, to your point, she got about, let’s say 50% of that $900,000 that could be used for long-term care.
Well, four years later, she could no longer do two of the six ADLs. She ended up hiring her daughter to take care of her and used the money out of that 450,000 to pay her daughter to take care of her. To your point, the flexibility of getting care, how she wanted, because her daughter wanted to take care of her, but then she would have to give up her job.
Well, this way, she was able to pay her and she had a pool of money. Now that did reduce the legacy, but everybody was okay because it didn’t impact any of her other assets.
Isaac Wright: It provided a solution.
Jim Bowman: It’s a huge, huge asset class that gives you flexibility down the road.
Isaac Wright: Well, Jim, listen, I just want to say, I mean, we could talk about this for so much longer, but you know the fact of the matter is knowing in the position that you’re in that nationwide, you’re working with hundreds of advisors in many different aspects towards whether a life insurance policy makes sense. How to not just position it, but effectively manage a policy to provide benefits to family members, spouses, loved ones for income replacement, for death or disability benefits and all the above.
I just wanted to take the time to say thank you for what you do. And number two is to have the opportunity to talk to you here for at least a short amount of time. We’ll probably have you back on the program, because again, all of the things that we covered today is absolutely a legitimate way to consider life insurance for all of you watching today.
If any of you have any concerns, questions related to the policies that you own in life insurance. Do they still meet your needs? And a lot of people sometimes own policies that never get a review on those for years. Reach out to our firm, we are happy to assist you. Jim, I just, again, want to say thank you for joining us today.
We’ll definitely have you back here soon. And for all of you, I look forward to having you back as well on the next episode of Wright Money Tips.
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