Video Posted: May 14, 2025
Hey, it’s John Smallwood, and I am back on Money Isn’t. I am continuing the conversation on life insurance. Hopefully, you have found these to be of value. I am seeing some interesting comments which I truly appreciate.
The question I get a lot is: “okay, I kind of get what you’re talking about on life insurance, but I don’t want my family to profit from my death. But you want them to profit from your being here, because that’s what’s happening. Now, I’m joking about that, but the reality is this: if I properly orchestrate life insurance into your plan, and you end up paying less taxes, you have less risk, you have more savings, you have more benefits and more protection around that wealth, you get to have more retirement income, and you pass more to your family. Why wouldn’t you want that, right? Why do you want to pay more taxes and have more risk and have less retirement income and pass less to your family? That’s really the option here, right?
And my belief is this: that there’s a multitude of financial products that are out there. Many of them are really good, many are mediocre, and a lot of them suck. You want to spend the majority of your time defining the strategy, not based on the product. And what I find in this industry is that people say, shove all your money in this product. They say “buy an annuity, buy life insurance, put all your money in there because you’re going to have a tax-free retirement. Put all your money in our registered investment advisory product because we know how to invest money.” That’s the marketing, right? All of that is absolute nonsense.
It’s the coordination of multiple products coming together, designed in a unique manner for what you are and who you are, that’s going to make sense. And when you do that, you optimize your cash flows, you minimize the taxes, you minimize risk, you maximize retirement income, and you live a life that is the way you want it to be. And I believe there’s this concept that says, if I put money into life insurance, I’m going to give up return. And in the last thing we showed 100% of your money in the S&P 500, no cash, no bonds, no nothing. That is just pure danger and stupidity. Like, you could get very wealthy, but you can also get very unwealthy because the liquidity of the pressures that present themselves along our time frame such as colleges, family needing money, long-term care, or lawsuit hits. There’s so many pressures that are coming at us, and all those require liquidity events. Right? They require money available to take advantage of opportunities.
All I want for everybody listening to this is to have the best possible plan that they can have, that has the most amount of protection with the least amount of cost. They accumulate the max amount of money that they can. They enjoy it during retirement to their fullest while they can. And I want you to pass the maximum to your family. If that’s what you want, then we’re a really good fit.
Now, the proper structure of a plan is going to use your money at all times—meaning your money’s in motion. In economics, there’s a concept called the velocity of money and the money multiplier effect. When we hoard money and we keep it stagnant and it’s not in the economy, the economy is not good. So when banks don’t lend money, the economy goes into restriction and we go into recession. You need to think that your money in motion, sitting in one financial product and doing one thing by itself, is not good for you. Your money in motion, you utilizing the dividends to go from the portfolio into life insurance, back out of life insurance into something else, into an investment, into something else, or you staying there, your plan is going to dictate what you’re going to do based upon who you are and what you’re trying to achieve. But you want to have access to your money.
And having access to your money at times when things are difficult, meaning stock market’s down, taxes are high, and I got a big tax liability. I’m gonna borrow money against my money. I don’t want to pay those taxes, which creates more risk. Right? Or the market’s down 50%, and now I need $100,000 for this—this goal that I was going to do. Am I going to be comfortable doing that? No. I’ve got to have money in different silos.
I’m using a simulation that I believe is unrealistic, because nobody ever has 100% of their money in their equities unless they’re building a business. People always diversify to generate different streams of income, have more assets, and have more enjoyment. Right?
So what I’m doing today in this simulation is we’re showing death benefit to death benefit, meaning a million dollar 10 pay, a million dollar 20 pay, and a million dollar whole life 100 in my 35-year-old scenario who makes $250,000 and has saved up $400,000. We basically did a simulation where we showed if the person did not have any life insurance and they just simply invested the money they’d have in the S&P 500. We basically said a third is getting taxed as ordinary income, a third is getting taxed as capital gain, and a third of the portfolio is unrealized. We’re using the S&P, just to kind of reiterate this—from 1988 through 2023, the average rate of return on it during that time frame is 12.42%. When we factor in taxes, market volatility, adjusted in, those adjustments is down to 9.25%. It generates $14.98 million with an unrealized tax liability of $1.4 million.
I’ve overridden the taxes, and I’m assuming 20% on marginal ordinary income and 20% on capital gain. If you’re making over $500,000, you’re in a higher tax bracket, so I may be underestimating taxes. You have no idea what future tax laws will look like. We don’t know what the future interest rates are going to be. Past performance is no guarantee of future success. I don’t know what the dividend rate on a life insurance policy is going to be. I don’t know a lot of things. And anybody tells you that they do—you should run away. Because there’s so many variables that are going to affect your financial plan. So many.
So I’m putting this in context right now and saying the unprotected portfolio with no life insurance got to $1.9 million, which is great, with a $1.4 million tax liability. We go to a life insurance guy, and he says to buy some term, but you’re going to need the term for 40 years. So we buy the 40-year term. Now, you could buy 30-year, 20-year, 10-year term which are all cheaper. But the idea is that now drains your portfolio down. I still have this million-dollar 40-year term that’s still around at 68. We’re going 35 to 68 using the S&P 500, netting the taxes from the portfolio, showing volatility-adjusted returns, showing all of these things, right? And when we look at it, we see as the money grows, the fees in the portfolio compound. They go from first-year fees on this portfolio—about $4,000, because you got $400,000 invested—and the taxes on the portfolio are $10,984. At 68, my fees have compounded to $122,000. My broker took me from $400,000 to $14 million—I’m a very happy person. My portfolio tax has gone up to $576,000. Compound taxation has dropped my wealth. With the term insurance, I’m now down to $14.724 million. So $250,000+ off the bottom of my account for the $1,500 a year premium.
Then what we did in the last one is we said: let’s do a Whole Life 100, where it’s a $1 million death benefit. Premium’s $13,000 with waiver of premium, so if I become disabled, the plan is self-completing. So the cash values continue to happen, $13,250 is getting paid into the policy. At 68, the waiver of premium is off, and the premium is down to $12,890, but I got a million dollars of cash value and a $1.8 million death benefit at this time, so I’ve got a heck of a lot more death benefit.
Now we’re looking at historical performance in the S&P, which is after-tax volatility adjusted at 9.25%, and we’re moving money into a 5—a current dividend scale at 6.1. Internal rates of return on a whole life? About 5, 5.5 over that time frame. So you’re taking money from 9, and you’re putting it at 5. There’s no tax on the life insurance, which is why you’re doing it. You want the life insurance to be permanent. You want to have access to that cash. You might want to use it as an emergency fund, for college, or something else. But you’re getting to the same spot with less risk.
Now we’re going to talk about what people are like. When you look at these Whole Life 100s, you’re looking at this and saying, “For the $13,000, the first-year cash value is zero. I put in $13,000 and it’s zero.” But I get the $1 million death benefit, and over time all my cash comes back and I make a return on that capital. But my death benefit is increasing all the way through. So by the time I’m 70 here, the dividend on the contract is $27,000 under the current scale, cash value $947,000, and the death benefit’s $1.8 million, so I’m making a return on my money. The guaranteed cash value is $460,000, which assumes a dividend was never paid. Now, once a dividend is paid, it becomes part of the guarantees.
Now interest rates will rise, this will go up, but that doesn’t matter. What I want to talk about is concern about the liquidity in the contract in the first year. I’ve got $400,000 in my portfolio. I really shouldn’t be concerned about short-term liquidity. I’m looking at the life insurance for a long-term vehicle. I want to have money working in other places. Assuming these are my two investments—the money in the life insurance and the money in the portfolio—for a second. Let’s say instead of using a Whole Life 100, we can use what’s called a 20-Pay Whole Life. The premium is going to be higher, but it’s going to have more liquidity in the first couple of years.
And the reason why I’m digging into this is because I want you to psychologically understand that the liquidity early on is not what I want. It’s the liquidity later that I want. But when I do this, I’m now repositioning. Instead of $13,250, I’m repositioning $24,910 for the same $1 million death benefit. And what’s happening is that premium is paid for 20 years. By the time I’m 56 years old, there’s no more premium. By contract, there’s no way I can put any more money in.
Now, I was looking at the 25-year-old policy—that the internal rate of return is about 5.5%. If I pay the premium on my own policy, I get about a 5.5%. If I don’t pay the premium, I get about 5. Well—where can I get 5.5% tax-free right now? I want to pay that premium, but contractually I can’t pay it. When I look at this at the same 68 mark, because I took more money out of the market even though I had more liquidity in the 20-Pay Whole Life, instead of having $13.795 million, I’ve got $13.285 million.
Now we are using historical performance for the S&P, and we are using current dividend scale and extrapolating it into the future as if it never changes—we’re not using historical performance here. But it’s about a $500,000 ding in my future value. When I look at this on the 20-Pay concept, my cash value at the end of the first year is $7,500. Well, I put out $10,000 more to get $7,400 more in liquidity in the policy.
Yes, I get more cash value, I get, you know, cash value quicker, policy is paid for quicker. The dividend at 69, because it has more cash value, is $42,000. And the death benefit is $2.2 million. I got a tradeoff. I don’t know which one in the moment is going to be more valuable. This may make more sense for somebody that’s older. But when I do this, I have a tradeoff.
So now I go to a 10-Pay policy, which is a very popular thing. Looking at this on a mathematical basis—the 10-Pay, instead of being $13,000, is now $59,420 for the same million of coverage. I get out to 69 because I put a lot of money—68—in this policy.
It’s like a $2 million drag on the account by stuffing the money into the life insurance and leaving it there. So when I look at the 10-Pay, you can see I put out almost $60,000 versus the $13,000, and I have $21,000 of liquidity. And I pay it for 10 years, and I can’t put in after 10 years. And when I get out to 65, because the policy’s had a lot longer time to accumulate cash, it has significantly more cash. But that dividend at 69 is $84,000 on the current projection, versus $43,000 on the 20, versus $29,000 on the Whole Life 100.
But optimally, I’ve actually created less wealth, unless I take the money and I use it from a velocity-of-money standpoint, where I take money out and I move it to other investments, or even back into my investments. But I still lose the ability to continue to put money into that contract for the longer run.
If I step back into the real world for a second and I look at: What’s my family’s needs? Does it make sense for me to tie up a lot of money right now into a 10-Pay Whole Life at the age of 35? Maybe at 60 it does, right? But is it more important for me to have more death benefit? For the same premium, I could have $3 or $4 million of death benefit and get to a wonderful place. It’s the net death benefit that I really want in my retirement, which in all three scenarios seems to be very similar, but I’ve given up $2 million of capital to get there. So in a rising tax rate, which one works better? Potentially the life insurance, because it’s not getting hit with taxation.
There’s an optimal blend that I’m trying to get everybody to, and what I wanted to do today on this conversation was to look at this and say: let’s focus on the right things. Let’s focus on protecting, let’s focus on the long run, let’s focus on the short run—and blend those two decisions together. This does not take into account the myriad of ways to pay for a policy. There are multiple different ways: there’s financed premiums, there’s all kinds of things that could be happening—but many of those are not appropriate for most people. I’m talking about a very structured process. Optimally, I do want to have more cash value in my plan. I do want to have that greater cash value in the future—but what’s the rush to get it all in there? If the market’s down, I want to take advantage of a down market. Cash values are going to help me do that.
If I’m retired and my portfolio drops 50%, I’m going to be a lot better off because I have access to the cash values. If I look at a traditional plan and ask: is it appropriate for me to have 100% of my money in the S&P 500? Or should I do some combination of cash and bonds? That return is going to drop, and now the life insurance policy is going to perform relatively better because it’s similar to bond-like cash values. So I probably want to reduce bonds as I develop cash value to reduce risk. I don’t need to have a ton of bonds when I have a ton of cash value.
What I want is maximum income in retirement. I want maximum flexibility along the way. I want access to my capital for emergencies and opportunities. But I also want to maximize the death benefit.
If I could get to 65 and have relatively the same $13 million of capital but have $6 million of death benefit, that’s a much better plan because then my cash value would be 15–20%, maybe 25% of my overall value, which is going to increase my retirement income. If I have 4x the dividends that I have in the whole life 100 because I did 4x the whole life 100 for the same premium as the 10-pay, I’ve got well over $100,000 of dividends that I could take out tax-free.
I’ve got the permission slip of the death benefit. How do I use the death benefit creatively in retirement to be an inflation hedge, to be a market volatility buffer, to be my long-term care solution, to be my inheritance tool. Now, if I’m really successful, anything over $26 million is subject to significant inheritance tax. So you see very, very wealthy people buying life insurance to cover the inheritance tax. They don’t need life insurance, but if I have a $100 million estate tied up in real estate and stocks, I have to liquefy about $30-40 million of that very quickly to pay an inheritance tax. If I have $34–40 million of life insurance, the family can make a decision to liquidate something or not—keep the cash, or use the cash to pay the inheritance tax and keep the assets.
Rumor on the street: a big sports team, many years ago, was worth about $1.5 billion and supposedly had about $750 million of insurance. And when the owner died, there was the one year in which there was no inheritance tax—but you didn’t get a step-up in basis. So the family got to keep the $750 million and not give it up, and keep the team. That is magical.
Now let’s talk about access to cash value as an emergency vehicle. You look back in time in history—available money is Aladdin’s lamp. If I have available money, I can take advantage of down markets, I can take advantage of opportunities. If I have no money, I don’t have any liquidity to take advantage of that 50% drop in the market. I want to have money in different buckets that have different tax treatments.
The beautiful thing about life insurance is it’s a safe, secure asset. It pays a very competitive rate of return relative to other products. It grows without taxation. It can generate tax-free income. The cash values are creditor-proof in most states, meaning they can’t be taken away in a lawsuit. The death benefit is rising. And I can get access to my money at very low cost. If I borrow the money from the life insurance, the life insurance is still making money—because it’s a collateralized loan. It’s not pulling your money out.
So I really want you to get this right. I’ve been doing this for 35 years, and everything has changed. Tax rates have changed, products have come and gone, they’ve gotten better, they’ve gotten worse. But this whole life concept has been here forever and it kind of gets knocked down in a whole bunch of ways that don’t make any sense to me. When you zoom out and look at the big picture, it looks completely different when you look at all the variables. If you look at what this means for husband and wife work for companies, got money in a 401(k), pensions—how valuable it is to have life insurance in the plan.
Think about this for a second: husband and wife, Social Security combined—let’s say $75,000 each, paid in at the maximum dollars. Wife’s got a pension for $50,000 with a 50% survivor benefit and they’re taking a distribution from their portfolios. If one dies, we lose a Social Security of $35,000. Depending on who dies, the pension gets cut in half and we lose a significant amount of money. If I had the proper amount of life insurance in play and somebody dies—yes, I lose the Social Security, yes I lose the pension—but now I get a big lump sum of death benefit. If I get $2 million of death benefit that was paid for as part of the plan, giving us income—now I’ve got the $2 million. Now I get $100,000 a year at 5% off the portfolio.
But how do I maximize those benefits in retirement? Retirement is the place where you want insurance. If you’re 30, if you’re 20, best time to start a policy is now, because your cost of insurance is the cheapest it’ll ever be. You want to pay that sucker not for 10 years but for a long time.
In theory, this is not a discussion about “my investment’s better than your investment.” This is a discussion about how the two investments together are better together, because they come together in a unique, harmonious way. And if you orchestrate it properly, you get to the same point—but you have more benefits and more protection, more income, and you pass more to your family. That’s what we’re talking about here.
Thank you for listening. This was a lot of fun, and hopefully you got some value out of it. And if you did, I want to hear from you. Thank you.
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