Wit, Wisdom, and What Matters Most Episode 13 Debunking social media myths Investment advisory services offered by Moneta Group Investment Advisors, LLC, an investment adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. The information discussed in this podcast is for informational and educational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Kyle: And welcome to this edition of Wit, Wisdom, and What Matters Most. It’s a podcast by Moneta’s Gast Freeman Troyer Racen Team. My name is Kyle Luetters, an advisor on the team, and I am joined by Danton Troyer, one of the partners. So ,Danton, no guest on this episode, but actually when we’ve been prepping for what is now season two, that’s hard to believe, we were talking about some of the shows that we wanted to do and some of the guests that we wanted to have. And this show really kind of came up as an idea from something we were talking about in passing, which is just financial myths or financial topics that come up on social media, and really wanting to dive into some of these things. Because, as you very well know, in this industry, it is very, very difficult to paint with a broad brush and to paint in absolutes. Danton: Yeah, I think that’s, you hit the nail on the head there. I mean, and social media is obviously not a great place for these types of conversations because they’re very nuanced and very individual. But nonetheless, I can’t tell you how many times a year I get financial advice forwarded from an Instagram clip or some sort of social media presence, and it’s a guru who can solve all your problems just through social media posts. So it’s definitely a topic that’s worth exploring. Kyle: I can debunk one without much talking, it’s somehow, someway, somebody pays taxes. It’s like watching the movie National Treasure, where the Harvey Keitel character comes in and he goes, Ben, somebody’s got to go to jail. So we can just debunk that one right off the word go. But you know, there are different things, different mitigation strategies, but really let’s do this. Let’s kind of have you set this up, and we’ve picked out a couple of them that we’re going to kind of talk through. And we’re going to go banter back and forth on these. But before we get started, do you have anything else that you wanted to add before we kind of jump into that first myth? Danton: No, let’s jump right in. Kyle: Okay, go ahead for it. Danton: All right. So the first one we’re going to talk about is a strategy called infinite banking. And just broad picture, we’ll dive into more of the details as we talk through this, but it’s using a life insurance policy with a cash value, typically. We see this with a whole life policy. And so the thought here is, why do I need a bank when I can use this as my savings account and just borrow money from the cash value or the insurance company, paying myself interest? Everything sounds great. I don’t have to pay the bank any interest, I’m paying myself, that sounds reasonable. I’m using the money that I put in and so everything, you know, kind of checks a box that is this easy solution to bank yourself and who needs the big bad banks? Kyle: I think, and I hear what you’re saying there, what’s the oldest profession in the world? Sales and persuasion. And I think that’s key in taking a look at a lot of these. So let’s take this one and go through it just a bit. So you’re going to have a permanent life insurance policy that is going to build cash value. So permanent life insurance policy, as long as the premiums are paid, stays in force over the course of your entire lifetime. And different from term insurance, whole life insurance builds cash value. Now that’s what you are, in a sense, borrowing against or paying yourself on is the cash value in that policy. First and foremost, whole life insurance is a whole lot more expensive. I think that’s where they get the name – whole is a whole lot more expensive than term insurance. And rightfully so, you are building a cash value. They are doing a calculation based on you keeping this coverage in place over the course of your entire lifetime. But you’re paying somewhere between 15 to 20 times the cost for that permanent life insurance policy. So I think if you’re going to make this case for having this bank of your own, you have to factor in the cost of insurance, because that’s a very big key in all of this. And that’s where some of the higher costs do come from. Now there are a ton, and I mean a ton of different types of policies out there, the way the policies are structured. And be very clear when I say this, I do believe there is a case for these types of products in certain scenarios. And again, each individual scenario is individualized. But by and large, these things are expensive policies. They kind of fit a narrow gap for folks. And the costs are just astronomically high between, the cost of insurance, the cost of riders that are honestly associated with them, and they have a slower growth rate than what you would at other normal investments. So you know, in a lot of cases I’ve seen in-force illustrations where permanent policies don’t really go cash flow positive until about year 14 or 15. Danton: I think that’s exactly a couple of the main points that are maybe intentionally left out of that sales pitch is a lot of people see this as kind of a silver bullet that can work right away. And as you said, this is very narrow on when it actually can work partially, I mean, that’s part of the issue. And then you do have the higher costs associated with just insurance in general, which it makes sense you’re paying for that death benefit. So for it to work, there’s got to be a lot of things that line up perfectly for you. But I think the other caveat is too, those things have to be lined up for a long period of time. This is not something that just you snap your fingers and you’re taking loans to pay for your kids’ college the next year. It’s not the way it works. Kyle: You have to have built up enough cash value in the policy in order to loan against it. And typically, in the first few years, cash value growth is very slow unless you structure it in a certain way. And again, these are very complex products, and I do say that word products, Danton, emphatically, they are complex products. And it may take a while before the cash values get to a point where they could really be a good source of lending. That’s why if you’re older and you’re listening to this and you do have a policy that’s been around for 20 or 30 years and has accumulated a lot of cash value, this might make sense. But think about that a second. It’s going to take 20 to 30 years for you to, quote unquote, build your bank. Why not go ahead and just borrow from a regular institution? Because there is another thing, because I know something I will get from other folks is, well, they’ll say, well, you know, you could front load a whole life policy. As Lee Corso, said, not so fast, my friend. There is something called the Modified Endowment Contract. And if you stuff too much money into the policy from the word go and then think you can borrow against it, you might actually turn this thing into a taxable time bomb that is going to strip away a lot of the tax-deferred or tax-free benefits of a life insurance policy. And again, you have to ask yourself in these deals, in any one of these types of social media financial topics, who benefits the most? Who benefits the most from doing this? And insurance products, like the whole life policies, have very high commission rates. Now, again, I’m not necessarily saying that that is the case for everybody, but it’s another question to ask as you’re taking a look at potentially employing the strategy. Danton: Yeah. And it’s going through, as you said, just the full picture of it. And then the other side is, what’s the opportunity cost out there? This isn’t the only strategy or way of running your personal finances. So I think that’s part of it too, is there’s definitely an opportunity cost by doing it in a specific way. And it’s just not flexible is the other part with this. I mean, once you’re in, you’re kind of in, so if your life changes, if the world changes, it’s pretty difficult to unravel as versus a bank. I mean, yeah, you may or may not need to pay off that loan right away, but that’s the same thing with this life insurance policy. Plus, you’re potentially going to get hit with a big tax bill too, if you don’t do it appropriately. So you could get hit maybe twice as hard on the backside if you’re not doing it the right way. Kyle: You know, one thing in working with a lot of families that I do see on these policies, and then that this was a personal story from someone that I knew very closely, is that when you’re young, cashflow is still a major concern you’re trying to build. You need life insurance coverage, but if someone comes along and says, hey, you know, do this permanent policy, it’s 15 to 20 times more expensive than a term policy, and you get into a tight spell where you’re trying to pay the mortgage, pay groceries, keep shoes on the kids, so to speak, you probably are sitting there going, you know what, this month it’s down between the life insurance premium and Hamburger Helper. And I can guarantee you which one falls by the wayside. Danton: Yeah, yeah, I mean, it’s tough because when you need the most life insurance, you’re probably younger and you’ll have less assets to make up that gap. And so something like this might sound appealing, especia
