Feb. 17, 2023

Showdown: Short Pay vs. Long Pay Whole Life Policies

Showdown: Short Pay vs. Long Pay Whole Life Policies

Payment duration is a hotly debated topic amongst life insurance agents and there is a lot of confusing, contradictory advice out there. Today, we are going to weigh in on the matter and help explain these policy design approaches and how they pertain to the Infinite Banking Concept®.

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Main Episode Description:

One of the most valuable traits an IBC practitioner can have is patience - you need to be able to “think long range”, as Nelson put it.

Which brings us to today’s topic: short pay and long pay policies.

This is a hotly debated topic amongst life insurance agents and there is a lot of confusing, contradictory advice out there. Today, we are going to weigh in on the matter and help explain these policy design approaches and how they pertain to the Infinite Banking Concept®.

Remember, everything in the insurance business is a tradeoff between cost and risk. There is no free lunch. So what are the tradeoffs when it comes to short-pay and long-pay policies for the purposes of deigning a whole life insurance policy for IBC?

This is super-important information so please give this one a listen!


Episode Outline:

0:00 - Introduction

0:12 - Episode beginning

2:55 - Some more context on “short pay”

7:27 - Why do people write short pay policies?

12:04 - Two other reasons that short pay policies have gotten more popular

16:07 - Another trade-off and long-term payments

18:06 - A policy becoming “paid up” and some more trade-offs

23:07 - Another trade-off, lower death benefit

24:24 - “Using your flexibility” and how it affects performance

27:29 - “The ability to go down”

29:45 - Measuring the performance of both

35:35 - The rule of thumb and where you would do a short pay

40:51 - The IBC mindset

43:19 - Episode wrap-up

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[00:00:00] John Montoya: Hello everyone, this is John Montoya.

[00:00:04] John Perrings: And this is John Parings.

[00:00:06] John Montoya: We are infinite banking authorized practitioners and hosts of the Fifth Edition,

[00:00:12] John Perrings: episode number 60 Long versus Short Pay Policies. And in this episode, we're going to dig into the number of years premium payments are made on a life insurance policy.

[00:00:24] We'll talk about why are, why there are even different. Premium durations in a life insurance policy, why that even exists. And since everything with life insurance is about trade-offs, we'll talk a little bit about, some general rules of thumb regarding long versus short pays and the importance of mindset around the trade-offs between policies that are paid for longer versus short.

[00:00:50] So let's kick this off, John. Yeah,

[00:00:51] John Montoya: let's do it. Let's first understand what is the difference between a short pay policy versus a long pay policy? What we're [00:01:00] referencing here is how long you're going to be contributing premium into a policy. How long are you gonna pay premium into a whole life policy?

[00:01:13] There are policies that can be designed where you can fund it every year for the rest of your life, and that would simply be what we refer to as a long pay policy. And then you have the other end of the spectrum, which is a policy where your funding premium for let's say 5, 7, 10 years would still be a short pay policy.

[00:01:40] So yeah, people get into this internal debate with themselves, really, one is better than the other and we wanna discuss this because in truth, there there's a couple things you gotta be looking at in order to make a decision that's best for [00:02:00] you. And it's. Black and white. So this is an important episode.

[00:02:05] If you're, teetering between what you think is, the best policy and there's. A lot of information out there that you might see on YouTube and whatnot that suggests, they're suggesting that one is better than the other. But it all comes back to what is right for your situation.

[00:02:25] And John, I know you have some data that you've put together regarding, know, how long pays will work compared to a short pay policy that I think we wanna get into as well. This is a great episode to really dig into and learn more about IBC. So let's get it started. Yeah.

[00:02:42] John Perrings: Yeah. and just for, to help the listeners understand a little bit better, we can define terms a little bit more.

[00:02:49] And so some terms out there are, that we're going to use, you'll hear us say things like short pay and so John mentioned some timeframes there. Short pay, you used to be able to do single pay premiums and [00:03:00] you still can. But the, in most cases, the shortest duration is around five years.

[00:03:07] We would call that like a five pay, or generically refer to it as a short pay. And then, I'd say the shortest short pay is probably around 10 years. And by the way, all the, all this stuff we're talking about regarding payment duration a lot of it is a result of the i r s rules around how life insurance is treated.

[00:03:25] And there's a there's the seven, what's called the seven pay test that determines the ratio that of cash value that you can have to death benefit over a period of time, seven years before the policy becomes taxable. And if you exceed. Cash value number the policy will be taxed similar to how like an I R A is taxed.

[00:03:44] So that's why we're even dealing with all of these payment duration questions. You used to be able to just do a single pay premium. No problem. But now we're working around, some of the different rules. But, I think another important thing to point out as we get into this because [00:04:00] short pay policy design has become I would say a lot more popular over the, probably last 10 years.

[00:04:06] I don't know, it may be more popular even before then, but it's definitely popular now. And I think it's super important to point out like a typical whole life, like a straight whole life insurance policy. For context is designed to have premiums paid all the way to age 100. Okay, so if you're 30 years old you could pay premiums for 70 years

[00:04:29] Right? And so that's the starting point. And so when people see these short pay policies they're assuming that's like the best way to do it, but it's actually a a deviation from just the standard policy, right? Standard policy. And again, I think it's super important to point that out because I think by default there are a lot of agents and advisors out there who default to short pay policies, in my opinion, because they're easier to sell.

[00:04:56] John Montoya: A hundred percent. Something Nelson would say a lot is that you, you have to think [00:05:00] long term, and here you have these. Essentially, what we're referring to as short pay policies, advisors, designing policies to be funded for 10 years. Let's say that's the average. Yeah. On these short pay policies.

[00:05:14] 10 years. It goes by in a blink. It just, it does, and then you're stuck in this situation where if you want to continue to put in premium, and I would argue, why wouldn't you? If you have the resources you're stuck because that policy that you took out 10 years ago no longer has the room to continue to put more premium.

[00:05:38] Destroying the tax setup of the policy becomes the modified endowment contractor, what we refer to as a mec, and that's because these policies are being sold in a way that satisfies a person's initial desire for cash value a. But only [00:06:00] does in the near term without ever thinking about the long-term consequences of, what the ramifications and trade offs are gonna be.

[00:06:08] And people definitely run into this because you get there year 11, what happens? You want our premium in? And oops, you can't.

[00:06:20] John Perrings: That's right. So maybe we could just get into, short pays and, why do people write short pay policies, you and why are they easier to sell?

[00:06:28] We like to come from the standpoint that everything's a trade off. And there could be valid reasons and I think there are valid reasons for short pays. In general, my feeling is the longer you can pay, the better. But, and we'll get into some reasons why you might wanna do a short pay, but let's just talk about why it's easier to sell.

[00:06:44] So from a. From a design standpoint, what's happening is you're reducing the base premium and cranking up the pua, which is in, all if all things were equal, of course that's what we would want and we'd want as much cash value in that first year as possible. But again, [00:07:00] we're always designing to stay within the MEC limits, the IRS modified endowment contract limits.

[00:07:06] And we also want to. Create a policy that has a lot of options. But what we're doing with these short pays, we're driving down the base premium significantly and cranking up the pua to the point where we're really maxing that pua out for five years straight. And then we have to pay it up. Because if we don't, the policy will most likely become a mech.

[00:07:28] And Why I think this is easier to sell. I think there are a few reasons, and I think the biggest one is that the typical mindset around life insurance views premium as a cost, right? And when viewed as a cost it's easier to sell life insurance when, a policy owner can see that there's an end to all this.

[00:07:47] They're looking at they're seeing these premium. Go out every year. And if they're looking at that as a cost, then they want, they would probably like that to stop, as soon as they could. And I think short pays are [00:08:00] popular because when a client sees the kind of tangible end, in five years to their premiums, it's easy for them to get their, easier to get their head around it and feel comfortable with it than it is to look at a, policy illustration that has them paying, premiums for 70 years.

[00:08:16] And the, in that case that I gave for the 30 year old. And so I think that's one of. One of the biggest reasons in that, I think people that rely and only sell these short pay policies, they really just don't. I think it's a kind of a basic type of understanding of what we can do with life insurance when we know how to, properly use it.

[00:08:35] John Montoya: Yeah, and I would argue that the advisors selling them really aren't hitting home the true value of that death benefit because they're treating it the death benefit as an expense as well, and completely missing the bigger picture. The death benefit is what makes everything possible in a whole life policy and e exactly.

[00:08:57] Having the least amount possible. [00:09:00] You, in the long run you're gonna end up with fewer options with the, with the least possible death benefit. And it just I'll let you get into it, John, cuz you've run the numbers and have prepared it for this episode, but, We always talk about having more options, right?

[00:09:21] That's what whole life Yeah. Provides. And if you're gonna limit yourself, you're shooting yourself in the foot without even knowing it by, seeing or not seeing the bigger picture. Yeah.

[00:09:32] John Perrings: Yeah. And I think it also should be mentioned that you. When people start researching infinite banking, we do talk about minimizing the death benefit because a person's need for capital is oftentimes greater than their need for death benefit.

[00:09:46] But I think there's a general misunderstanding of What is meant by that, that we're not saying the death benefit isn't worth anything, right? The protecting your human life value, which is your greatest [00:10:00] asset, is absolutely important. And so there are ways to get that human life value while still creating a very powerful infinite banking type of policy.

[00:10:10] And so let me just let me touch on two other reasons why I think short pays are easier to sell and have become more popular. The short pay policies, they also typically have a significantly higher early cash value especially year one, the cash value number as a ratio to premium.

[00:10:29] Is gonna be higher than a longer pay policy. And so people look, there's, for whatever reason, people really focus on that first year of premium. Meanwhile, it's one of the thing also in the book is you've gotta capitalize, right? And so we can't. We can't start a business and expect to be, a hundred percent liquid, have our investment back.

[00:10:50] In year one if we're starting a new business, which is what we're doing, we're getting in the business of banking. But anyway, those, that early cash value does look better. And lastly there is a higher [00:11:00] degree of flexibility in a short pay policy, from the premium outlay perspective because of the way it's designed.

[00:11:07] And by the way, everything we're saying right now, there's, there are subtleties depending on what insurance company you're working with, but In general, the premium part of a pre excuse me, the pua portion of a premium payment has a lot more flexibility in how much of that needs to be paid in any given year.

[00:11:25] And so you have the ability to go down and reduce your overall premium if you need to. If you just run into a hard month or a hard year, you can reduce that premium amount and it's pretty significant when, most of your premium is pua. And you. Increase some flexibility to go down, but we'll get into the trade off.

[00:11:43] You're actually limiting your ability to go up if you need to. And so this, the PUA portion is one of the ways we can build in some flexibility without making any changes to the policy. We have some flexibility in how much premium we need to pay in any given month or year, but there, [00:12:00] there are trade offs.

[00:12:02] Yeah. And the

[00:12:03] John Montoya: number one trade off is gonna be the premium cost. In order to fund a policy for a longer duration you need to have more death benefit in the policy. So as a result, and what I should back up and say, you need to have more permanent death benefit in the policy, right? In order to fund a policy for a longer duration.

[00:12:25] So what does that mean? It means that, , you're gonna have a higher base or a higher minimum as part of your total premium, but that's also going to give you the flexibility to continue funding a policy for a much longer period of time. And the longer you're able to fund a policy, the more cash value, more capital you're going to accumulate in

[00:12:53] your

[00:12:53] John Perrings: life.

[00:12:56] That's exactly it. So that gets into, some of our longer, [00:13:00] if we were to talk a little bit about, what's the difference between a short pay and a longer duration pay? The longer you pay premium, you're typically going to have a higher initial death benefit.

[00:13:09] That's number one, right? And something to think about when you pay for a longer period of time. What's interesting is that you're paying level premium payments, right? Meanwhile you're getting older every single year. And the co if you were to start a new policy in every single year, Just by way of example, your premium dollar the price of the premium would start going up every single year.

[00:13:36] However, for that same amount of death benefit, you're sta you're paying the same premium every single year to get that death benefit. And so it's a, it's an interesting way to start looking at, the earlier you start, the more efficient it can. Another, trade off of longer pay policies.

[00:13:53] It's gonna be, it's gonna have a little less flexibility. So going back to what we were saying before with the PUA rider, you have a [00:14:00] little less flexibility to reduce premiums if you need to because more of the premiums premium is buying base whole life. And probably some, term insurance via term insurance rider.

[00:14:10] And so more of that premium's going to be required to be paid. And so you do lose a little bit of that kind of downside flexibility to reduce your premium payment. But again thinking of long-term payments the, that steady payment is also sta it also stays steady during, in, when inflation is happening.

[00:14:32] So it's almost, it's kinda like the opposite of it's actually similar to a mortgage where every time you make a mortgage payment that stays. For 30 years. And so meanwhile, it's buying you the same, it's buying you that house that is increasing in value, presumably. Whereas a life insurance policy is similar where every time you make a premium payment, it's that same level premium payment, even though all the other, even though the dollars are being devalued out there.

[00:14:57] So in a, in inflation and [00:15:00] adjusted terms, Your premium is actually going down every single year to buy you that, to buy you that death benefit. So some interesting things to think about from a long term perspective are paying longer premiums. So why don't we get into some trade-offs here.

[00:15:15] Before we do that, I want to make one more definition, which is the idea of a policy becoming paid up. So we'll probably, if we haven't already, we'll probably use that term and really what that means is when a policy becomes paid up, It's a fully paid policy, okay? No more premiums are due on it, but you still have your cash value growing.

[00:15:36] You're still getting dividends that you can use any way you want, and you can still use policy loans. So it's a fully functioning, enforced life insurance policy, but you can just no longer pay any more premiums on it. So these short pay policies are, would be considered, paid up at the end of the five years or 10 years, whatever the number is.

[00:15:55] And again, the tra you know, traditional or, or I guess baseline whole life [00:16:00] insurance policy goes out to age 100 and then is considered paid up at age 100. So those are the goalposts. So let's talk a little bit about some of the trade offs. I just wanna go back to this idea of cost, right?

[00:16:12] And so regarding premium cost, while it's true for term insurance in most cases anyway, so here's a stat, like basically 1% of term insurance policies actually pay out. And 99% of the time term insurance premiums are a true cost. And so that's a legitimate way to evaluate life insurance premiums term life insurance premiums, I should say.

[00:16:37] However, whole life, we really have to look at the premiums in a totally different way because whole life insurance is an asset. Every time you make a premium payment, you're building that asset, it becomes more valuable. And most people are. And so when we look at The length of time we're paying premiums.

[00:16:53] Most people are totally fine paying a mortgage for 15, 30 years, right? But [00:17:00] they sometimes have a problem imagining themselves paying a life insurance premium for 15, 30, 40, 60, 50 years, whatever the number is. Meanwhile, what's happening is really very similar. You're, every time you make a mortgage payment, you b build equity in.

[00:17:15] Asset of which is a house. Every time you make a premium payment to a whole life insurance policy, you also build equity in that life insurance policy. And that's the val, the asset there is the death benefit and the equity in there is the cash value. So it's a very similar thing. And so I'm just bringing that up to hopefully help people look at premiums in a different way and why they might want to pay a little bit longer.

[00:17:41] John Montoya: I think it's important there to just really crystallize for people in both instances. You have to view your property as an asset, the same as a whole life policy, as an asset. But most people, they have this mindset the life insurance policy [00:18:00] is a, an expense, right? But what you just explain.

[00:18:04] With a term policy being the actual expense because you pay into it and 99% of the time your family ends up with nothing. That makes a, in truth, a liability compared to a whole life policy. Something that's permanent, something that's guaranteed to pay out a death benefit. It's guaranteed to accumulate cash value.

[00:18:26] That is truly an asset. And in fact, in the mortgage industry, I know most mortgage brokers never ask this, but on the application, when you're applying for a loan from a traditional bank, they'll ask you about your 401K assets. You know how much money you have in the bank, and. I'll say 99% of mortgage brokers, they might ask you how much life insurance you have.

[00:18:53] I'll take it back. Only 1% will probably ask you. 99% won't ask you how much life insurance you have [00:19:00] because they don't realize it's an asset. And that goes the same with, 99% of the public. They don't realize life insurance is an asset and when you don't value things, the proper. It's hiding in plain sight.

[00:19:15] that's why we have this incredible financial product, which is whole life hiding in plain sight because it's not valued properly.

[00:19:23] John Perrings: Exactly. I Look at the balance sheet on any big bank. They're holding billions and billions of dollars of whole life insurance as part of their tier one capital, the most valuable capital that they have on hand.

[00:19:35] And the cool thing is like we can actually we can have that, we can have the same, tier one capital that the banks have. If we just understood how to, as you said, value it in a correct manner. Another trade off is short pay policies, which typically give you that higher early cash value often results in a lower death benefit, which we did touch on before.

[00:19:56] But if we. Some, I, I think [00:20:00] a lot of advisors out there get so focused on the cash value. They really forget that the death benefit is super important as well, right? There is no question that if something happens to you and your income your family will have to make some changes. And if they don't, that means they're going to consume other assets that.

[00:20:22] Essentially earmarked for the future. And so your family will either end up with less now or they'll end up with less in the future. And I think if people understood that that side of it they might be a little more willing to under a little more willing to appreciate the death benefit side of it.

[00:20:39] And, I talk to people all the time. They don't care about the death benefit and that's fine. If you don't have anybody that you know, you'd like to indemnify against a loss, it's fine. , there are still plenty of reasons to consider paying for a longer period of time, which I'll touch on after we get through the tradeoff section.

[00:20:56] All right. Next on tradeoffs is we're, [00:21:00] I want to dig into why it matters that the more pua you have in your premium payment, how it gives you, it does give you more flexibility to reduce your premium payment if you need to. But I want to get into the trade off of actually doing that. You have the flexibility But we have to understand that if you use the flexibility, it will have a significant effect on the performance of your policy.

[00:21:23] Okay, so when we design these short pays, and most of the premium is p u a, That it's that PUA component that builds all that early cash value. So if anything happens and you actually do decide to not pay the PUA component of your premium your, the cash value in those early years is going to be significantly affected.

[00:21:46] Meaning it will be, you'll. You'll have no new cash value. Almost. If you did it the first year, you'd probably end up with zero cash value. And if you did it the second year might end up with zero cash value again. So it's like, what people have to [00:22:00] understand is that they. Not paying.

[00:22:03] Having that flexibility and using, having the flexibility is good, but using it creates some pretty big problems that your policy's not gonna be anywhere near what you thought it was going to be. And so we've talked about in a, in another episode, which we'll post in the show notes, I just thought of it, so I can't remember the number off the top of my head.

[00:22:22] But how much premium should you pay? And, we talk about rather than, Dumping is, paying a big premium. In the, because you know you can go smaller, your total premium should be something that you feel comfortable committing to for a long period of time. Because other, if you don't do it that way, the policy is gonna drastic, be drastically different than what you originally planned on.

[00:22:44] And another thing about this is there are some companies out there that have what are called blended term pua riders. And depending on how those are set up, if you are not paying the PUA portion of that blended term, PUA rider, what could end up [00:23:00] happening is the cost of the term insurance could outweigh what's happening in the policy.

[00:23:04] And you could actually lose cash value or worse, have a policy lapse, right? You could lose cash value, you could lose death benefit, or the policy could lapse. And so sometimes the flexibility, it really depends on the carrier you're working with, the insurance company you're working with, because these these blended pua riders could cause a big problem if you do.

[00:23:24] Take advantage of that flexibility. So again, coming up with a policy that has a longer payment period with a premium that you know you can afford is in my opinion, rule of thumb wise a much better decision. Lastly The, we talked about the ability to go down and ha and pay much less premium if you need to, but I touched on it a little bit earlier on.

[00:23:49] When you have a policy set up that way, you're basically maxing the p u a component out, and you can't put. Anymore into the policy if you wanted to. So when we focus [00:24:00] on infinite banking, one of the ideas that we wanna do is we want to go out and buy income generating assets, right? If you're gen, if you just bought something that generates an income and also pays your policy loan back where's that income gonna go?

[00:24:12] And if you don't have any room in the policy, It'll just go right back into a bank, right? Which was what we're, what we, this is why we did the whole thing in the first place cuz we want a better place to put cash. And so what happens is if you take advantage of the flexibility or you've got a policy that's maxed out, what ends up happening is you end, actually end up with a way smaller policy than you would have if you just had built in the flexibility and the options to.

[00:24:41] More rather than focus on that first year to maybe five years of cash value. And so now 20 years down the road, You've got a much smaller policy, you have much less cash value because you weren't able to pay a premium. Most important thing is pay a premium. That's what's gonna build this thing for you.

[00:24:59] [00:25:00] And John Montoya, I don't know if you have anything to add to that before I get into the, I've done a lot of research on this and I wanted to just share the results of if you don't care about the death benefit, you don't care about the flexibility, you might care about what the results are on the growth and the cash value.

[00:25:14] And so I wanna talk a little bit about that, but I don't know if you have anything

[00:25:17] John Montoya: else, John. No, I want you to keep going because it's that I think people are inherently wanting to, they come into IBC. With the idea of having this cash asset that can perform better than cash sitting in a bank, they're starting to see the bigger picture and they want more economic bang for their buck.

[00:25:40] So yeah. Go into the performance.

[00:25:44] John Perrings: Yeah. I've, it's a common thing. Again, when you look at, when you compare the cash value of a short pay versus the cash value of a long pay, and you actually, if you do an internal rate of return calculation, the short [00:26:00] pay does perform better from an I R standpoint.

[00:26:03] And so a lot of people look at that, and that's the, that's where they stop analyzing everything. However, it's actually not that much better. So what I did is I analyzed, A 30 year period. And what I did was I took a single 30 pay and just designed the policy for 30 years to pay for 30 years, and then I did six, five pays and compared the outcome of both of those.

[00:26:27] Because what often happens is people will, Agents will suggest doing a short pay, like a five pay, and then and obviously after five years, the policy's paid up and you can't pay any more premium on that policy. So people are like where do I put my money now? And the argument would be that's when you start your next policy.

[00:26:48] And that could be true, but it may not be true because we don't know if you can even qualify for life insurance in five years. We don't know what your health is gonna be. And John Montoya and I both have had people that, [00:27:00] waited to get life insurance and they're no longer insurable, right?

[00:27:02] And so that can happen just as easily if you have one life insurance policy or zero life insurance policies. So first thing, we don't know if you can get another policy in five years. But let's pretend you. Let's pretend you're definitely insurable at the same the same health rating. Your health never gets worse.

[00:27:20] It's always the same. The one thing we can't control for sure is your age. So you're going to be five years older. And so those, the cost of insurance is gonna be higher then , and guess what? You're also starting a new policy in five years. And so you have all of those new upfront costs in the new policy to overcome.

[00:27:38] Again, you have you're you've just created a new policy that has that capitalization period now, and so I think a lot of people miss that because they just see the i r on their five pay compared to a 30 pay, and they say this is better, but it's not better if you add everything up.

[00:27:54] It's not an apples to apples comparison if you. Six five pays over [00:28:00] 30 years and compared that to a single 30 pay. The truth is, if you combine all of the numbers, if you look at it from a totality standpoint of each scenario the i r on the 30 pay is actually slightly better. And you have a bigger policy, you have more cash value.

[00:28:16] Cuz think of it this way, imagine in year six you just made your last payment on a five. And you're gonna go start your next five pay. That first payment that you make, you're losing money, you make a premium payment, and your cash value does not equal the premium that you just paid. On the other hand, with a 30 pay in the sixth year, mo, more than likely, this is all depending on health, of course.

[00:28:39] But when you make that n that payment, that sixth year payment in your 30 year, let's say you made a $20,000 premium payment. You might have $25,000 of new cash value because that policy was, has been capitalized and has been able to mature to the point where it's becoming more and more efficient.

[00:28:57] Whereas you're chopping all those five [00:29:00] pays off at the knees and starting all over with that capitalization period. And so it's very easy to show the numbers where having that long. That long range mindset I is really going to make a difference in terms of what the actual outcome is going to be.

[00:29:19] And by the way, just going back to the insur, the insurability perspective With that 30 pay, you had the ability to pay premiums for the entire 30 years, right? You didn't have to go back through underwriting, you didn't have to do any of that stuff and qualify for another life insurance policy. It was all right there.

[00:29:36] And you had the ability to go down if you needed to, and you had the ability to pay more in premium if you experienced a windfall. And if that happens, you're gonna just, it's the policy's gonna blow. The six, five pays out of the water. No questions.

[00:29:51] John Montoya: Awesome. Sounds like the old tortoise versus

[00:29:54] John Perrings: the hair.

[00:29:55] Yeah, that's right, . That's a good, that is good. Yeah.

[00:29:59] John Montoya: And the [00:30:00] irony is that, people unwittingly, choose these five or seven, 10 pay options only to get to that endpoint and realize, oh, they want more of it. They didn't realize how much of a good thing this was initial. But they get to the end of that roadmap on that short pay policy, and they're like, yeah, I want another one.

[00:30:20] And the irony is that you sacrificed what you could have accomplished for, a lower overall premium. because you didn't see the bigger picture. And that's what we're trying to really emphasize people that you gotta take a look at things like Nelson said, from a long range point of view.

[00:30:42] John Perrings: Yeah. And his minimum long range, by the way, coincidentally was 70 years. So I, earlier we were talking about paying a premium for 70 years. His minimum outlook was 70 years in the book. So we just we just talked about a rule of thumb. Depending on the [00:31:00] scenario I think long pays are better in most cases because of the the flexibility, because of the death benefit and because of the overall performance of the policy compared to trying to do a bunch of short.

[00:31:14] That being said, , are there any reasons we would wanna do a short pay?

[00:31:20] John Montoya: And I can think of one. So a rule of thumb that I go by is source of premium. And there's a second one. Yeah. But just starting with the first. Rule of thumb, source of premium. The best, or I should say easiest example to understand is take an example of a person who, let's say, used that same 30 year old person they are in the workforce and planning to work, let's say for 30 years before heading off into retirement.

[00:31:54] They're going to plan on funding their infinite banking whole life policy. [00:32:00] or policies using their income as their source of premium? It makes sense to have at a minimum, and we would argue maybe even longer, but at a minimum 30 years worth of runway, meaning 30 years worth of premium that you could put into a policy versus.

[00:32:24] What you're talking about in your examples where, you compare it to six five pays, right? You wanna match your source of premium to the duration of the policy. So that is one example. The second would be the age of the insured, because let's say you're in your fifties. and your source of income, is going to be your job and you're anticipating working for the, let's say, the next 15 years or even 10 years, depending on your situation.

[00:32:54] If we're matching the source of premium we also have to take into consideration your age [00:33:00] because if you're gonna retire in 10 to 15 years, does it necessarily. Make sense to design a policy for 30 years worth of premium. There is an argument to be made. Yes. And maybe John, you might wanna get into that, but there's two examples where, rule of thumbs, it makes sense to, look at these variables to figure out what is best for your situ.

[00:33:25] John Perrings: Yeah, and I think those two things actually tie in together too, because, it, you were talking about the source of premiums. If you have a lump sum, does that make sense? To stretch out a lump sum over 30 years, maybe the premiums wouldn't be that big. And you're also Earmarking a large lump sum of money that's not able to do anything for a long period of time other than pay those premiums.

[00:33:45] So it might not be the best use of a large lump sum. And if you're let's push that age out to retirement. Let's say there already are retirement or there. Retired, or they're five to 10 years into retirement. A lot of those people, they might have a lump [00:34:00] sum, sitting in the form of, one of their retirement plans that it might, it may make sense for them to move that over into their life insurance policy.

[00:34:08] So those are, I think those are great examples of, when it could make sense to do a short pay However, I would also say both of those people, they could presumably have assets that pay them in income, and so they still need a place to put cash. It, so I guess what we're saying is, it, there could be a place for a short pay, there's nothing, written in stone that you can never do a short pay or anything like that.

[00:34:33] But we really just wanna examine the, the situation and. I do have a hard time, for a young person, I have a hard time thinking of a good reason other than what you said. If they have a lump sum source of premium and they wanna, fund a policy with that, I might even, say that, Hey, maybe it makes sense to.

[00:34:53] Create a policy that you can pay a premium on for the next, in our 30 year old example, pay a premium for the next [00:35:00] 70 years or 30 years, or 50, 50 years, whatever the number is as long as possible. And then we could fold in that lump sum into that. Into that policy so they can still pay a premium on it.

[00:35:11] But again, it's all just relative and it makes it, it matters what the bigger picture is, like you've been saying, John Montoya matters what the bigger picture is in terms of what's the best way to accomplish that.

[00:35:23] John Montoya: Yeah, and I think. It all comes back to principles and the IBC mindset and that's where we're gonna finish off.

[00:35:30] Ultimately what we're talking about is warehousing your wealth, and if you are blessed to live a very long time, you need to. Create places where you can redirect that wealth and that, that's what these IBC policies do. It allows you to create a cash asset that is gonna earn 40 times what you would get at a typical bank.

[00:35:58] It's going to give [00:36:00] you an intangible of sovereign financial. Individuality in that you're not indebting yourself to a traditional bank, right? When you wanna finance all the major things in your life, you're not beholding to a traditional bank. You have this family banking system, so to speak, that you've set up, or you can go to it anytime you want.

[00:36:22] We've hit on in previous episodes the tax benefits. We always touch on, the accessibility of these funds. That, that can be really a life raft. Especially in times, when times get tough. There, there's that saying, we find out who's who's been swimming naked when the tide goes out.

[00:36:42] When you've got these IBC policies and you've been redirecting your wealth to these policies over time, you're never gonna be swimming. So there, there's absolutely, yeah. Yeah. Anything you want to add to that, John?

[00:36:57] John Perrings: I would just add, if you haven't yet, go back and [00:37:00] listen to episode 55, IBC and the power to heal and, you can listen to John's wife Kelly's story of having a liquid source of capital at the time she needed it the most.

[00:37:11] And that's really that's really one of the things that this is all about. I would just, the only things I might add are, the potential creditor protection as well, depending on what state you're in, all the things you were talking about with growth, everything grows tax deferred and you can get to it tax free.

[00:37:26] You mentioned the tax benefits. Those are a couple of them. And then I guess we could probably wrap it up by. It's a quote from Ed Slot who's an accountant. I'm not a fan of everything he does. He's an I u L guy a lot of times, which I'm not as big of a fan on i u l, but he makes a great point about using life insurance.

[00:37:45] If you had a place to put money that had all those qualities we just talked about, earned 40 times what it would earn in a bank, grew tax deferred gave you the liquidity you needed when, if you need. The worst possible time, gave you that liquidity and then gave [00:38:00] you all the tax advantages, right?

[00:38:02] If you had a place to put money, would you wanna only be able to put it there for a little bit of time or would you wanna be able to put it there for as long as possible? And I think that's a great Just thought exercise around, why, what are we doing here? We're strategically accumulating capital and I can't think of any reason why you wanna shortchange yourself and in terms of how long you could do that.

[00:38:23] Amen. Awesome. We went a little bit long on this one cuz I think it was worth, really digging into if you have any questions, you can always go to the fifth and right there you can schedule an appointment with us. No cost, no obligation. And you can find out, how these principles could work in your life.

[00:38:41] And if you're one of those people that, just likes to really learn on their own before they talk to anybody, we have a course up there that you can get a 50% discount on it. And Go through that and do all the self-education to your heart's desire. So thanks everybody. Looking forward to talking to you next time.

[00:38:56] Thanks, John. Take.