Building Wealth: Exploring Whole Life Insurance Strategies

About this Episode

Explore the core principles of the Wealth Maximization Account, a fundamental component of the Perpetual Wealth Strategy, as discussed by financial experts Patrick Donohoe and John Stewart.

Key Takeaway Timeline

  • 01:07 What is a Wealth Maximization Account?
  • 05:24 How does life insurance serve as a multidimensional financial product?
  • 07:30 What you can learn from the evolution of life insurance.
  • 12:45 Is whole life insurance or term life insurance the best fit for you?
  • 16:26 How to leave the legacy you want with life insurance.
  • 17:47 How cash value whole life insurance is similar to real estate investment.
  • 22:43 How to protect your assets with life insurance.

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Transcript

01:07 What is a Wealth Maximization Account?

Patrick Donohoe: In the next video, we will cover a core foundational product of the Perpetual Wealth Strategy called the Wealth Maximization Account. This holistic strategy focuses on cash flow optimization, adequate protection, and various investments and financial products that comprise your wealth strategy. It’s crucial to pay attention to all these components and how they work harmoniously together.

Today, we’ll discuss why the Wealth Maximization Account is our core financial product. Unlike typical investments or qualified plans with one intended purpose, this incredible financial vehicle serves multiple roles across different phases of your life, whether you’re starting out, at the peak of your career, approaching retirement, or planning for a legacy.

This financial product serves many roles not only upfront but also throughout your life. Let’s delve into how it works. First and foremost, it’s a life insurance product. The Wealth Maximization Account is a high cash-value life insurance policy, usually provided by a mutual insurance company.

Now, let’s focus on its design, which is crucial. Life insurance has evolved significantly over the years. Initially, it was more of a communal insurance, where communities, often churches, would contribute to a communal fund. If an individual passed away, the fund would provide for their loved ones. Over time, this evolved into formalized institutions, transitioning from communal to stock-based and eventually mutual insurance companies, shaping the types of policies available today.

Today, there are various life insurance products, including term life, universal life, and whole life. Our goal is to help you understand the role of whole life within a comprehensive, holistic financial strategy. The Wealth Maximization Account, based on whole life, is a reliable financial product that has stood the test of time.

Unlike traditional life insurance, where you pay a premium and receive a death benefit upon passing high cash value, life insurance introduces a savings component that you can access as a living benefit. This is a fundamental change in how life insurance typically operates.

The IRS became involved due to the original purpose of life insurance, which was to replace income. Initially, no taxes were associated with the growth of cash value or passing a death benefit to a beneficiary. However, the I.R.S. started regulating the tax benefits associated with life insurance. We’ll explore these tax implications later.

The Wealth Maximization Account stands out from other financial products due to its diverse roles and characteristics. I often liken it to a Swiss Army knife because of its versatility.

 

05:24 How does life insurance serve as a multidimensional financial product?

Patrick Donohoe: The Wealth Maximization Account is like one tool with multiple micro tools associated with it, depending on the circumstance you’re in. John, before we delve into how this type of insurance policy works and why it’s foundational to the Perpetual Wealth Strategy, maybe you can share what you’ve learned about life insurance over the years and why, from your perspective, we advocate it so highly.

John Stewart: Absolutely. When we talk about the changes in life insurance, particularly term and whole life, which were the core options, I like to draw an analogy. Term insurance is akin to renting a place; it serves a purpose but isn’t the most effective for wealth growth. It provides a roof over your head without many financial benefits.

On the other hand, Whole Life Insurance is like buying a property. It comes with a lot more advantages. As you mentioned, it’s similar to a Swiss army knife. You build cash value, gain asset protection, and enjoy tax benefits. Just like buying a property changes your financial dynamic.

Personally, I used to be a staunch advocate for term insurance, especially when I was a young father with two kids. However, my perspective shifted when a close friend passed away, and I witnessed the impact on their family. Then, my sister and her husband passed away, leaving her with five kids under ten years old. This profoundly affected me.

These experiences made me realize the importance of honoring my commitment to my family. I initially started with term insurance, but as I learned more and focused on building wealth, I understood the significance of cash flow and protection. This led to a significant change in the financial tools and products I used.

 

07:30 What you can learn from the evolution of life insurance.

Patrick Donohoe: Life insurance has been around for a long time, primarily because it addresses the one inevitability we can’t avoid – death. While there have been attempts to extend life through medical innovations, death remains a certainty. However, human nature drives us to make things better, and life insurance has evolved over time.

Initially, it was created to cover the loss of a loved one, but it evolved into an institutionalized system, with mutual insurance companies sharing profits with policy owners through dividends. In the early 1900s, life insurance was the primary savings vehicle, as alternatives like mutual funds and the stock market were limited to a small percentage of the population.

Farmers played a significant role in advocating for policy loans because they faced irregular income due to seasonal harvests. They needed a way to access cash during planting seasons, which led to the idea of borrowing against the cash value of life insurance policies.

Life insurance has since undergone changes in policy design, introducing various riders and increased flexibility. This complexity can be overwhelming, but our goal is to help clients understand how to use this tool as a foundational product within the Perpetual Wealth Strategy.

We began by providing context because understanding the different characteristics of whole life insurance is crucial. It applies to cash flow, protection, and wealth.

John Stewart: Additionally, farmers were pioneers in risk-sharing concepts. They would pool risks related to factors like droughts, floods, or pests, making sense of sharing the burden.

People often wonder if the tax benefits associated with life insurance are a loophole or might disappear. However, it’s in the government’s interest as well. When individuals ensure their loved ones are taken care of, it reduces the government’s responsibility to provide social safety nets for families left without a breadwinner.

In the unfortunate event of the breadwinner’s death, there’s a high probability that the surviving family members will require government assistance. So, on both an individual and societal level, having life insurance as a foundation makes sense.

Patrick Donohoe: Indeed, and it’s interesting to note that State Farm, a well-known insurance company, has its origins in serving farmers. The evolution of the U.S. economy has seen life insurance as a key financial product, and it remains one of the strongest institutions in the country. These insurance companies are not only highly regulated but also excel in risk pooling, actuarial science, and equitable pricing.

While risks have diminished over time and actuarial science has advanced, these mutual companies continue to improve their ability to pool and price risks effectively. This benefits policy owners through dividends, a topic we’ll explore further in our series.

 

12:45 Is whole life insurance or term life insurance the best fit for you?

Patrick Donohoe: Let’s delve into the characteristics of whole life insurance and understand how it works. Insurance, in general, tends to be misunderstood, often due to negative perceptions propagated by financial institutions. People may not fully grasp their insurance options. To simplify, let’s draw parallels to real estate and rental properties.

John Stewart: Term life insurance is like renting an apartment; it covers you for a specific term, typically 5, 10, 20, or 30 years. It hedges risk for that period. In contrast, whole life insurance resembles buying a property. Actuarial science is used to determine life expectancy and set premiums. If we buy a half-million-dollar life insurance policy, we’re financing a predetermined benefit, and there’s a unique clause: if we pass away before it’s paid for, they still provide the asset.

Patrick Donohoe: So, it’s essentially a contract. When you sign a contract with an insurance company, they consider various factors, including mortality tables that predict life expectancy. The contract is legally binding, and as long as you pay your premiums, the insurance company is obligated to pay out. There are other components to the contract, but the primary part is this.

John Stewart: Right. We pool our risk; we may live into our eighties on average, but some pass away in their 40s or 50s. By paying a relatively small premium, we shift the risk to an insurance company, particularly in the case of mutual insurance companies, where we collectively share this risk.

Patrick Donohoe: Focusing on the primary death benefit, you must grasp that you’re essentially paying a premium for your legacy. This financial benefit will go to your estate and is ideal because it pays out immediately after death. This payout is tax-efficient and can cover end-of-life expenses, replace lost income, or fund a legacy, which involves using legal directives and entities to ensure the money is distributed according to predetermined instructions.

 

16:26 How to leave the legacy you want with life insurance.

Patrick Donohoe: Indeed, time is limited for all of us, and the desire to leave a lasting impact is intrinsic to humanity. We naturally want to make the world better and create a legacy. Leaving behind financial burdens, such as end-of-life expenses or unresolved business matters, is where life insurance plays a crucial role, particularly in the case of an untimely passing.

John Stewart: Absolutely, and it’s important to recognize that people have diverse viewpoints on legacy planning. Some are passionate about leaving a legacy, while others may struggle to envision it, simply hoping to avoid becoming a financial burden in their later years. Some even fear that leaving a substantial inheritance might negatively impact their family. This ties back to the Perpetual Wealth Strategy, which is not just about a single product or event but a comprehensive strategy encompassing growth, income, and legacy phases. It’s essential to consider this holistic approach when making financial decisions.

 

17:47 How cash value whole life insurance is similar to real estate investment.

Patrick Donohoe: Another essential characteristic to consider beyond the permanent death benefit is the concept of cash value. Cash value marks an evolution in the history of insurance. Initially, policies had no cash value, meaning that if policyholders couldn’t sustain their payments for life, they would lose everything they had invested. To address this, cash value was introduced, providing a liquid or refundable value within the policy contract.

John Stewart: Drawing a parallel to real estate, cash value in a life insurance policy can be likened to the equity one builds in a property. Premium payments contribute to the initial cash value, similar to mortgage payments for building home equity. Over time, this cash value earns a guaranteed return comparable to the interest one might earn on a bank account.

Patrick Donohoe: Additionally, dividends in a life insurance policy are akin to property appreciation. These dividends are based on the profitability of a mutual insurance company and are distributed to participating policyholders, such as those with whole life insurance. Notably, the IRS treats these dividends as a return of premium rather than taxable income, given the insurer’s profitability reflects an overcharge to policyholders.

John Stewart: It’s intriguing how our premiums effectively make us shareholders in a mutual insurance company, entitling us to both the contract’s benefits and a share of the company’s profits. This unique contract structure also impacts how it’s taxed.

Patrick Donohoe: Continuing with cash value, there’s a legal requirement to pay an opportunity cost interest rate when someone holds money. Consequently, life insurance policies with cash value not only accumulate the guaranteed cash value but also include interest associated with it. Furthermore, dividends are paid on top of the cash value, increasing its growth potential. In this discussion, we’re focusing on traditional whole life insurance, and we’ll delve into high-cash-value policies in the next video.

John Stewart: It’s worth noting that the insurance company assumes the risk in this contract. They determine premiums based on their calculations of policyholders’ average life expectancies. If a policyholder dies prematurely, the insurance company bears the risk, ensuring the beneficiaries receive the full benefit. It’s a unique contract where the insurance company shoulders more risk than the policyholder.

Patrick Donohoe: Indeed, it’s a fascinating and distinctive arrangement in which the insurance company takes on the risk of both investment performance and mortality outcomes.

 

22:43 How to protect your assets with life insurance.

Patrick Donohoe: Whole life insurance, as we’ve discussed, encompasses a range of valuable characteristics that make it a foundational core financial product. It offers permanent protection through its death benefit, which can replace income in the event of a premature passing or fund various estate-related expenses. Simultaneously, it features a savings component with liquid cash value and a policy loan provision.

John Stewart: The policy loan provision allows policyholders to borrow against their cash value with guarantees from the insurance company, providing unique flexibility. Additionally, whole life insurance offers ideal asset protection because it is not solely for the individual policy owner but for the benefit of someone else who does not share the same liability.

Patrick Donohoe: This asset protection shields your assets from creditors who could make claims based on judgments against you if you are held liable for an event. While it doesn’t replace trust, it shares similarities and can be a first step in asset protection strategies.

John Stewart: The application of whole life insurance is versatile, with various uses in business and personal financial planning. It can indemnify or replace income for business owners, participate in buy-sell agreements, facilitate business succession, fund educational expenses, serve as a banking tool, start a business, provide asset protection, and fund legacies.

Patrick Donohoe: One key aspect that can make whole life insurance seem complex is its flexibility. Unlike many other financial products, it offers many options and tax advantages. The policy loan, in particular, is a powerful feature that allows policyholders to borrow against their cash value while maintaining asset protection and enjoying tax-free benefits.

John Stewart: As we move forward, it’s essential to remember that whole life insurance is not the only financial vehicle available. In upcoming videos, we will discuss what high cash value is, which involves a strategic design of whole life insurance to maximize living benefits. Stay tuned for the next video in our series.

Patrick Donohoe: So, as you can see, whole life insurance is a versatile and valuable financial tool with many applications. It’s important to understand its features and how they can be utilized to achieve your financial goals. In the next video, we’ll dive deeper into the concept of high cash value and its strategic benefits.

About Patrick Donohoe

Patrick H. Donohoe IAR, AIF®, RFC®

Over two decades of experience in the financial services industry, Patrick has seen the challenges people face in managing cash flow, risk, and investment performance – especially for business owners, real estate investors, and entrepreneurs. The struggles lead to continuous uncertainty and unease, – negatively impacting the areas of life where they have the most significant impact.

At Paradigm Life, where Patrick serves as CEO, he leads the company mission of helping Clients overcome these challenges through proven, economically sound, and time-tested strategies. Since 2007, Paradigm Life has guided over 8,000 clients nationwide to new levels of financial independence, helping them create and follow a path to thrive personally and professionally.

Patrick’s journey into the financial industry was unique. Growing up in a middle-class area in central Connecticut, the child of two teachers, he wasn’t taught much about money, investing, or business. His interest in finance was sparked by studying Economics & Statistics formally and reading Rich Dad Poor Dad in 2002, which opened his eyes to the financial potential of all human beings.

Patrick’s first real taste of personal finance came during college, where he worked in a call center that provided debt consolidation strategies as an alternative to bankruptcy and, later, in the mortgage industry.

He founded Paradigm Life in 2007 and, like many during the 2008-2009 financial crisis, learned firsthand about the unpredictability of the business environment and economy. That period tested him but also shaped him. Amidst the struggle, he worked tirelessly, providing consultations and webinars to help people navigate the financial storm. In 2011, those efforts started to bear fruit, allowing him to expand his team and build a strong company culture.

This journey compelled Patrick to write “Heads I Win Tails You Lose – A Financial Strategy to Reignite the American Dream” in 2018. The book encapsulates his financial philosophy and the wealth strategies Paradigm Life uses with Clients, rooted in his career experiences. To date, the book has sold over 60,000 copies.

Patrick also co-hosts several podcasts with over 1,000 episodes combined.

As a veteran of the industry, Patrick gets the challenges Clients face. His personal and professional experiences have equipped him to guide others through the complexities of personal finance. While he is passionate about numbers and objective analysis, he strives to prioritize making financial theories accessible and practical for Clients without getting lost in the complexity.

On a personal note, Patrick has been happily married since 2003 and has three children. He’s a Utah Jazz fan, plays Ice Hockey, and loves spending time in the mountains with his friends and family.

About Jonh Stewart

John started his first business at the age of 15. Since then he has been a business founder, co-founder or in high-level management the majority of his working life. Having more than 25 years in the financial, and management arena, John has consistently been drawn to the numbers and details of business and investing. John has built several multi-million dollar businesses from the ground up, including one of his corporations with over 170 employees and subcontractors doing business in 37 states.

Over the years, as John has attended “the school of hard knocks.” He has been in charge of a wide range of responsibilities involving business management, finance, investing, real estate, and legal/contractual duties – all the while continually educating himself professionally. He considers himself to be a perpetual student. From his years in businesses and real estate, John has picked up invaluable experience, wisdom and comprehension in creative and diverse financial dealings, as well as the nuts and bolts of business management and investing. This has been an ideal foundation for his ability to educate and assist his clients in reaching their financial goals. John has always loved sharing the knowledge he has learned with others. Over time, he realized a great need and passion for “true” financial education so that people could be financially free. John is currently active both professionally and personally in private lending, real estate, and business funding – all using the cash value of his Life Insurance through the principles he learned from the Infinite Banking Concept over a decade ago. John’s true passion is creating financial freedom for others, and educating people on how to build their wealth using the fundamental principles of liquidity, control, safety, and thereby writing their own financial outcome. John lives in Salt Lake City with the love of his life, Ruth, and their three beautiful children. Away from business, he enjoys scuba diving, mountain climbing, traveling, and spending time with his family and friends.

A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™