The Top Frequently Asked Questions Part 1

About this Episode

In this episode, Patrick Donohoe and Nick Welch discuss the intricacies of whole life insurance policies, focusing on the duration and flexibility of premium payments. They begin by explaining the commitment involved in permanent life insurance and the common questions they receive regarding the longevity of payment obligations. Donohoe clarifies that while premiums are typically required for a long duration, often up to 121 years, there is considerable flexibility in how these premiums are paid.

Key Takeaway Timeline

  • 01:07 Who is Nick Welch?
  • 01:56 How long do you have to pay life insurance premiums for?
  • 04:47 Are premiums required forever, and what flexibility do you have?
  • 08:13 What additional benefits does paying life insurance premiums provide?
  • 12:29 How long can I be paying premiums for?

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Transcript

01:07 Who is Nick Welch?

Patrick Donohoe: Welcome back, everyone. In this episode, we’re going to discuss the top ten questions and inquiries that we consistently receive from you all. I’m joined by my good friend and colleague, Nick Welch. Nick has been a part of our organization for about ten years, working closely with many of our existing clients. Since 2007, we have worked with approximately 8,500 people, and this experience has exposed us to a wide variety of scenarios and situations. However, we often find that we receive the same questions. So, in this episode, we’re addressing those questions for you. Thanks for joining us, Nick.

Nick Welch: Thanks for having me.

 

01:56 How long do you have to pay life insurance premiums for?

Patrick Donohoe: The first question we often encounter is about the commitment to a permanent life insurance policy. This isn’t a short-term trial but a forever contract, which seems intriguing to many. Most people understand that mortality is an eventual certainty, yet committing to something for the rest of their life raises questions. People naturally wonder about the implications of such a long-term commitment. They ask how they might back out if necessary and what uses the policy could serve, especially if circumstances change. These are legitimate and important concerns. How do you typically address the question of the policy’s duration and the ongoing payment commitments, especially since these questions often evolve over time, say after five, six, seven, or ten years?

Nick Welch: Absolutely, and the industry hasn’t made it easy to understand these products. They can be quite complex, reflecting the influence of actuaries and meticulous planning, often requiring payments until a very advanced age. Clients’ questions about this are completely valid. Depending on the product’s design, there may come a time when premium outlays aren’t required anymore.

Patrick Donohoe: Out of pocket?

Nick Welch: Yes, out-of-pocket payments might not be necessary eventually. People often want to know when that’s possible. We illustrate the possibility of ceasing contributions. Many of us, including myself, were attracted to this product for its liquidity, growth potential, and the ability to create a banking system concept. However, life changes. When people transition from accumulating assets to living off them, they often look for ways to reduce expenses. Life insurance could be considered in this context. Therefore, knowing the point at which out-of-pocket contributions can end is an important aspect of the discussion with your advisor.

 

04:47 Are premiums required forever and what flexibility do you have?

Patrick Donohoe: Our typical approach with setting up whole life insurance involves a significant contribution to the rider, which creates immediate cash value. This is done over a period, allowing the cash value, interest, and dividends to grow to a point where premiums don’t have to come out of pocket. It’s important to clarify that premiums are required for an extended period, often until the policyholder is 90 or 100 years old, and in today’s policies, even until 121 years old. So essentially, they are required almost forever. However, there is flexibility for policy owners in how these premiums are paid.

The first aspect of this flexibility is through riders, which are usually adjustable with a minimum and maximum rate. The minimum could be about $100 to $120 a year to keep the rider active, and payments can vary within this range. To reduce premiums, one could simply pay the minimum into the pay rider. For the base premium, which is required until 121 years old, there are a few payment sources. The first is out-of-pocket payments.

Another source is a policy loan to pay the premium. I experienced this personally during 2008 and 2009. I had just started with Paradigm in 2007 and had policies for myself, my wife, and the kids. When the financial crisis hit, I couldn’t pay for a couple of years, so I used loans to make premium payments and cover expenses. This flexibility can adapt to various situations, as cash flow problems are often temporary, lasting a few months to a year. In the initial years of a policy, not paying premiums for a short period is usually feasible, but indefinitely avoiding payments requires funding the policy at a maximum level for around seven to ten years, depending on the situation.

Nick Welch: Absolutely, it’s possible to have this flexibility, whether the situation is temporary or permanent. Experiencing this personally is valuable, as life doesn’t always go as planned. The ability to reduce contributions, and even make up for missed ones later, is extremely important. It complements the unpredictable nature of life.

 

08:13 What additional benefits does paying life insurance premiums provide?

Patrick Donohoe: Discussing disruptions in cash flow, if there is a temporary disruption, there’s no reason to cease or postpone contributions or premium payments. This leads to another variation of the question, considering the typical financial conditioning in the United States, where a premium is often viewed as a cost. In my experience with business insurance, like cybersecurity and officers and directors premiums, I pay a significant amount into pure risk mitigation. This type of premium, along with term policies, is essentially paying for pure risk. However, premiums going into your base or pay premium in life insurance are not a pure risk. This is an important distinction, as clients often view their premiums as an expense.

Nick Welch: That’s right. We’ve been conditioned to see insurance as a cost, an important one that indemnifies against potential risks in our lives. Overfunded whole life insurance not only covers risk but also offers additional benefits.

Patrick Donohoe: These are wealth benefits. It’s about accumulating cash value, not just covering a potential risk like cybersecurity insurance for a business. If a cyber compromise never occurs, it’s a cost. But if it does, it covers significant expenses. However, mortality is inevitable; we haven’t found a way to escape it yet. Therefore, it’s not a pure risk. You’re not paying for something that may not happen; you’re paying for something that will happen. You’re essentially financing your legacy, planting seeds early on for a guaranteed harvest at life’s end, whether that’s in a few years or many decades.

Nick Welch: Exactly, because it’s a certainty.

Patrick Donohoe: There’s also the cash value aspect, the equity of the inevitable death benefit, which you can access throughout your life.

Nick Welch: Right. There are similarities between how the asset class of life insurance functions and a mortgage. To clients, I often explain it as financing the value of your life over time. As time passes, equity grows. A typical whole life insurance policy slowly builds this equity, and eventually, there’s enough cash value to equal the death benefit. We use this as the foundation of the policies, adding extra overpayments to accelerate the growth and liquidity of the cash value and increase the death benefit.

 

12:29 How long can I be paying premiums for?

Patrick Donohoe: When approaching the topic of how long one needs to pay into a policy, there isn’t a one-size-fits-all answer. It depends on the individual’s situation. For those asking, “How long do I have to pay into this?”, it’s crucial to have a conversation to evaluate their specific circumstances. This could involve addressing cash flow challenges with temporary solutions like policy loans or reducing PWA. We also encounter people who see this financial vehicle as a temporary part of their financial life. It’s important to discuss how this product fits into an individual’s overall financial plan. Therefore, reaching out to a wealth strategist or our client servicing team is advisable to make the best decision based on your situation.

Nick Welch: Exactly. When I illustrate policies for my clients, I initially show a payment period of about 10 to 15 years, as it’s easier to conceptualize a decade or so. Life changes over such periods, so this timeframe is typically what I use for illustrations. However, the duration and amount of payments can be adjusted longer or shorter, increased or decreased. Another common question I get is, “How long can I pay?”

Patrick Donohoe: That’s a very different variation of the question.

Nick Welch: Most people, once they grasp the value of this asset class, start to wonder how much they can contribute and for how long. The answers vary, as we’re bound by insurance companies and IRS regulatory limitations. It’s essential to consult with a wealth strategist to understand these limitations on how much and how long you can contribute, as there may be restrictions from either the insurance company or the IRS.

Patrick Donohoe: Typically, it’s per policy.

Nick Welch: Exactly.

Patrick Donohoe: Alright, let’s wrap up. Thank you for tuning in to this short episode about a question we frequently receive. It’s clear that understanding your unique context and situation is key to making the best decision. Thanks for watching.

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 Nick Welch

Nicholas has been working in the financial services industry for over a decade. His passion for finance, investing, and wealth strategy began at an early age and inspired his formal education.

After studying economics and finance at Utah State University, he took his skillset and love of numbers and analytics to the business world. Nicholas worked with a fledgling business consulting firm and was instrumental in growing that start-up business to a $30 Million per year business services enterprise that services thousands of clients across the country.

From there, Nicholas joined the team at Paradigm Life, and has been working as a Wealth Strategist ever since. Among his achievements, Nicholas played an essential role in helping Patrick Donohoe fine-tune his bestselling personal finance book, “Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream,” and has worked alongside him since.

Outside of the office, Nicholas enjoys all-things sports – namely the Utah Jazz, RSL, and playing rec soccer. Nicholas lives in Salt Lake City where he carries out his most important callings in life as husband and father. He and his wife, Cierra, have two wonderful children, Ezra and Aila.

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