The Tax-Free Money Secret (Ep. 353)

"It's a big deal. People need to understand the implications of the taxes. No, you can't write off the premium, but it grows income tax free. You use it income tax free when you use it correctly. You can't just take it all out — yeah, it's going to be taxed. But when you borrow against it, and you borrow against the growth of it, it's income tax free."

Hello, hello, hello, and welcome back to the podcast. Thank you very much for being here. All right, we got John today. John made the trip from South Dakota to North Dakota.

Yeah, it's great to be here. Come to the barren tundra of North Dakota, so.

Yeah. And it is about time. I've had all kinds of other podcast guests on and you are the closest. And we waited forever.

I feel like I'm on Joe Rogan or something. It's been so fancy. I'm, like, scared at how good the cameras look in here. This is gonna be bad for me.

Hey, maybe it'll be good for you.

Yeah, who knows?

You know. All right. So today we are going to talk about — I mean, we're gonna talk about a lot of stuff today, but let's start with taxes. A lot of people have — and I don't know if you get this a lot too — but a lot of people have questions about, "Oh, can I write my premium off as an expense?" Is the death benefit really income tax free? Is the cash value really income tax free? Do you get a lot of that?

Yeah, I do get asked about that quite a bit. My favorite is when they realize the death benefit's tax free, because that always blows their mind. Income tax free. Yes. But that always blows their mind and they're like, "Oh my gosh, that's…" They didn't know that, you know? So that blows their mind, but especially this time of year, obviously with taxes on people's minds, that gets asked quite a bit.

So let's just address one of the things right away, which is premium. Premium is not a tax deduction for anything. You can't deduct it as a business expense. You can't deduct it. Well, some people will say, "Yes, you can if it's in a trust and…" Yeah, okay.

Yeah, get into the weeds on it, maybe.

Yeah. You go down that road yourself. We're not going down that road. You probably don't know this, but there was an agent — well, she was an agent, her husband was not — and they were teaching people how to do all this tax trust stuff. And he just got sentenced to 12 and a half years in prison.

Oh. Got too creative on their taxes.

A little too creative. A little too much. Yeah. So, you know, I'm just gonna stay away from that, because I'm not gonna do well in prison.

No, me neither. I don't wanna try it.

I was not made for such environments. But the premiums are not expensed. You can pay them out of your business. Like, I pay them out of my business, which I've also learned is probably not the best option. You can pay them out of your business, but they get coded as a distribution to me or as income to me. You're going to have to take it as income.

Yeah. I actually always just look at it as, like, I want to pay tax on that, obviously, because it's a seed rather than the harvest situation. And I'll gladly pay the taxes on that small amount of money to be able to get the death benefit tax free and have access to all that cash value without consequence later on. It's no different than a Roth or something like that. You know, you're paying tax on that so that you can enjoy the benefits later on.

Right. I would agree. And a lot of your high income earners are wanting to use it as an expense, so they're saying, "Well, how do I get my money out of my business? If I take the money out of the business and have it as income, now I have to pay tax on it." You do, but you also have the cash value to use to buy a piece of equipment —

Yeah, to put right back into business.

Right, which then becomes the expense.

Yeah.

So you still have the expense on the other side. For farmers, it's not such a big deal, but for business owners, it's a bigger deal when we're talking to business owners.

That's true. I would say farmers don't ask about that quite as much as a regular businessman or something like that. But, yeah, those high income ones — when you have a huge premium, it is a little more of a question than if it's a smaller amount, you know?

But if I can turn around and borrow my cash value — and I liked your point, you're paying tax on the seed, not the harvest — so it's growing income tax free, so you're not paying taxes when you borrow against it.

And I think that's another misconception, because I've been eaten alive on TikTok apparently. Like, who knew? I did a TikTok on one of my clients that texted and said, "Mary Jo, 401ks are BS." Because he took money out of his 401k — he wanted to take money out of his 401k and pay off his house. If he did that, his Medicare went up for two years by $1,000 a month.

He said, "I'm actually gonna end up paying more money to Medicare than I would to the bank in interest by paying the house off." He's like, "I may as well keep the house and not take this extra money." Well, good job for him that he saved his 10 to 15% and was a very good saver.

And I didn't hashtag that video. I just put it out there as an FYI. This is what happens. I didn't know Medicare went up if you take too much money. Medicare goes up for two years. I had no idea.

Yeah, that's a pretty big consequence.

Well, apparently everybody on TikTok is so smart with their money, like, ridiculously —

They found the wrong people there.

Yeah. Or the audience for it. And my client is the dumbest person on the planet because he should have put money in a Roth. Even though we don't have the full picture, because I didn't tell them two hours worth of information. I told them three minutes worth of information.

Yes, he could have put money into a Roth, but when we're borrowing against our life insurance policies, it is not taxable income because it's borrowed money. So if he wanted to pay the house off, he could have borrowed from his policy, paid his house off, no effect on Medicare, no effect on taxes.

And you're just paying a little bit of interest, but that's a lot less of a hit than whatever the tax consequences of doing it differently would be.

Yeah. And the interest rate in his policy is cheaper than the interest rate on the house.

Yes. I always think it's really interesting meeting with older people that are closer to retirement. And I mean, they're the ones that are actually going through the process of using all these different types of investments and, like, "Oh, you know, I have this 401k forever, have this Roth, or whatever it may be." But they're like, "Why do people tell you to have all these? They aren't as great as they're made out to be." And they're the ones that are actually using them for their desired purpose. And they don't love it.

I see it, and you probably see it too, that they come to you and they're trying to figure out how to get into a lower tax bracket because of required minimum distributions, because they have all this money and they're like, "Okay, I was a really good saver, but now I wanna buy some real estate, or I wanna buy a business, or I wanna buy some farm ground. But if I take it all out to use it as a down payment for X, Y, and Z, now I've got the Medicare issue, I've got the tax issue."

It's like a whole system with so many rules that there's so much rigidity to it that they can't function within it.

Yep. And here's the thing, most people don't know the rules.

Yeah, until you're in that time frame.

Until you're 59 and a half. They're like, the magic number is 59 and a half, right? At 59 and a half, I get to take that money out of my 401k without penalty. You do, but if you're gonna take Social Security and you took too much out of your IRA, now Social Security is going to change and what you get for Social Security. Oh, now you're 73, so you have to take required minimum distribution, or you get a 20% tax on what you should have taken, right? So they don't know all that stuff. I mean, everybody on TikTok does.

Yep, because they're geniuses.

But yes, everybody on TikTok knows. But apparently there's just those few, you know, 100 people in the world that know and everybody else is a moron.

What's happening is financial advisors aren't telling people, "Well, these are all the rules." 'Cause if you think about it, and even when I wrote my book — until 59 and a half, the government tells you you're gonna have a 10% penalty. Then from 59 and a half on, no penalty. But whatever you take out is gonna affect Social Security. At 73, then you have to take it. If you die with an IRA, now the person who inherits it — the family member, not the wife, but the kids that inherit it — now there's a rule that they have to take it within a 10-year period. They can't just roll it over anymore. They have to take it within a 10-year period.

Which, depending on their situation, can cause some issues.

Well, what happens typically — and we talked about this, I think, in an agent training recently — is that what I see, and you can confirm: kids that inherit money are typically high income earners because mom and dad were high-income earners. So typically, if you come from a high-income earner, you will most likely be a high-income earner, because you were taught about money and business and all the things. And so you have a good job, and you're a high-income earner, and so now all of a sudden you're like, "Well, thanks, mom and dad, for that money, but I don't want it. Like, this is gonna put me in huge tax trouble. What am I supposed to do with that?"

Instead of getting a tax-free death benefit, they've just got a tax burden essentially that they have to use in a certain timeframe.

Yeah. If mom and dad would've left them death benefit, it would've been income tax free.

Yeah. So it's like, "Oh, sweet. I just got, you know, even a relatively low death benefit, say it's 250 grand." Okay, well, that's still a good chunk of money that I'm not having to claim on my income taxes — versus, even if you get a $250,000 amount from a parent through an IRA or something, how do you go about introducing that? You know, obviously the higher it gets, the more problem you're gonna have.

Yep.

Yeah. It's like, again, when you're involved with anything government-wise, they create, like, a whole web of rules around everything that just makes it hard to function within that. It doesn't matter if it's investments or anything else.

Yeah. And so when people say, "Oh, this is a terrible thing to have" — is it?

Not in my opinion.

I mean, it's funny too, because people will say in the comments of that post I made, people are like, "Yeah, she's selling life insurance." Uh, no shit, Sherlock. Like, aren't you brilliant? Of course I'm selling life insurance, but I'm teaching you how it works. The problem of why we think or have an assumption of why it's bad is because we don't truly know how it works.

Yeah. Which they don't truly know how the investments work either. They just think they're normal because they are so common and, like, pushed on you, whether it's from jobs or, you know, media.

Yep.

But there's pros and cons to everything, and people think there's only pros when it comes to investments, it seems like.

Yep. We forget about the ups and the downs.

Mm-hmm.

There'll just be ups and downs. Like, it's okay to have ups and downs in the market, but when we sell a life insurance policy, they're like — it's not gonna go down. That's a benefit. Why are you holding this to a different standard? If I told you that's just to be expected, then you would be okay with it.

Yeah. You'd accept it and move on.

Yep. You actually have an example of a kid that canceled his policy because professionals didn't understand.

Yeah, he got advice — I don't know that it was sage advice, I guess, or whatever. But he was a 25-year-old kid that I met with last fall, was farming some land of grandma's, you know, and she's getting older, so they're kind of working through a transition and how is it gonna pass to his mom and then to him eventually, you know?

But he had no debt. He did have a good income coming in. The side job he worked, he got housing, so he didn't have to pay for that. So he had, like, a heck of an opportunity in front of him, you know, to get a good chunk of cash into a policy and not have to have a line of credit moving forward. He would be able to expand the farm that way and not have to run to the bank.

So he's, like, all excited when I met with him and started his policy, you know, about this opportunity. Had all these ideas that he was gonna use it for. And I think it was the beginning of February, he goes in to do his taxes and calls and, "Oh, I wanna cancel my policy." I was like, "Okay, something changed here."

Which is not normal for us to have somebody cancel their policy in the first year. Like, super abnormal.

No, it was very, very —

And you lose a ton of money when you do that.

Correct. But he calls me and he's like, "Oh, my CPA and accountant told me that this was a terrible idea, that I bought this life insurance policy."

CPA and accountant?

Yes.

That had not read the book. CPA and advisor, or —

No, accountant.

CPA and accountant are the same people.

That's what he told me in the email.

Oh, okay.

So yeah, I guess —

Oh, I wonder if he has two —

He may have two different guys.

Two different people in the office or something. Okay.

Yeah, that's just what he told me. But anyways, he's like, "Yeah, they told me this is terrible." Like, all right, well, have they ever read the book? Did they look at the policy or do any checking on it? Well, no. Okay. Well, what type of investment did they try to get you into? Just curious, you know?

Well —

I couldn't even tell you. I don't remember. It's like, all right, well, to me, he got railroaded by these guys to some extent. Like, they just bashed it because he did have some investments with them, you know, when we met and went through his stuff. But what good are these investments gonna do for him in the near future here? Nothing. He's gonna go right back into debt at a bank as he tries to grow his farm now, because he's not gonna have any liquidity. He's gonna take all that cash and put it in an investment.

It's such a good example, though, of somebody not understanding the product. Because not only would he have been able to borrow that money and use it for whatever he was going to do when he took over the farm, or bought it, or increased it, or started businesses or whatever in his life — not only did he have liquidity of that money, income tax-free, right? It's growing income tax-free. He also had death benefit that was going to go income tax-free.

Correct.

And so instead, they tell him it's a terrible product, because people don't do a good job of teaching the benefits. Now, he obviously didn't have confidence in himself to say something to them, which is unfortunate for him. But it is a true indication that people will say, "Oh, we're bad people because we sell life insurance." Yeah, we're the worst people on the planet for selling life insurance. But you've also got those slime balls that are giving you Roth IRAs and IRAs and all these other things and not telling you the true implications of what's happening. They're not teaching you investments when we're trying to teach life insurance.

Well, yeah, essentially they just told him they were gonna take care of him. He doesn't even know what he was getting involved in, so obviously he has no idea of what implications that will lead to in the future. They just bashed on this life insurance idea so hard that — I mean, he was, like, extremely excited about it when I met with him. And it was almost like they killed his spirit on it. They punched him in the gut and kicked him out the door and told him he was stupid.

Yep. And that's another example, though, that our clients tend to be the experts over anybody else they're listening to, because our clients read the book. But nobody else they're talking to read the book. They're believing all these people that don't have a clue what they're talking about. Their mindset is not correct. They haven't done any of the research, and yet that's who you're talking to, right?

That's like saying, "I'm gonna go to Walmart and have the cashier tell me how to farm." Like, they're not even in the seed department. They're not even in the garden center.

Hey, maybe you'd have better luck if you just winged it.

Right. Or let's even make the assumption they are in the garden center. Oh, I'm gonna go to Lowe's and they're in the garden center. Or let's even do a better assumption and let's say I'm gonna go to a greenhouse and they're gonna tell me how to plant corn — because that's essentially what you're doing. You're going to a greenhouse, which is a financial advisor who knows about money, right? The greenhouse knows about seeds, they know about dirt, they know about fertilizer, on a small scale of how can I get this seed to grow.

Yeah.

But they don't know how to plant 2,000 acres of corn. Not the same thing. They're not running tractors all day, you know? So you've got somebody that is going to somebody that knows that there's a kernel of corn that can go in the ground and grow, but they don't know how to do that, because they've not engulfed themselves.

Yeah. I would have even been happy to have a phone call or a meeting with these people real quick, just to explain it or talk through it with them. I mean, they had him pretty down in the dumps about it by the time he called me. I genuinely felt bad for him, because it was a sad deal. I'd be interested to see how that goes for him, I guess.

Yeah. It is kind of a shitty situation when that happens. And it doesn't happen often that we have people cancel, but somebody has almost always talked them out of it, and they don't come to us for advice because they're so non-confrontational, or they do get their spirit broke to some extent. And you just gotta take yourself back to the book. You gotta take yourself back to the education piece and go back to Nelson's —

Yeah, why did I want this in the first place?

Right. Go back to Nelson's book and just be logical.

Now, in his scenario, it would be interesting if the bank said, "I'm not lending you money because you're paying too much for life insurance." And I've seen that happen before with clients. I had a client that came in that said, "We need to have a conversation, because my banker said that I'm overpaying for life insurance and I could buy term from him cheaper than I'm paying for this whole life."

And this is a case of the husband didn't read the book, the wife did. But they came in, and before they came in, I went on FDIC.gov and I looked up how much BOLI the bank owned. And it's a North Dakota bank. And not all banks own BOLI — bank-owned life insurance is what that is, if you're wondering. So not all banks have cash value life insurance. But this particular bank did, and it's a smaller bank, so I was kind of surprised by that.

So I have that all printed out, and when the client came in, we talked about what he had and whatever, and I slid the paper across the desk and said, "Why don't you take this to your banker and ask him, if cash value life insurance is so bad, why does the bank he works for have BOLI?"

Yeah, great question. I'm sure they're paying too much.

And the client immediately was like, "What?" End of conversation. Like, if it is good enough for the banks. And ironically, this kid doesn't know that. But the banker probably — or the accountant — has no idea either. But they're trying to save him. Save him from what? Save him from an IUL, a UL, a VUL? Well, that's great. You're trying to save him from a UL product, but that UL product is not whole life.

Getting back to the whole point of this conversation, of taxes — he's going to be in a position now where they've put money into IRAs for him, and now he's not gonna have the liquidity of it. He's gonna have all these government rules. It's not gonna grow income tax free. It's not gonna go to his heirs income tax free.

It's a big deal. People need to understand the implications of the taxes. No, you can't write off the premium, but it grows income tax free. You use it income tax free when you use it correctly. You can't just take it all out — yeah, it's going to be taxed. But when you borrow against it, and you borrow against the growth of it, it's income tax free.

Well, and that's why when you do go to use that in the future, you come and talk to us about it and we can tell you how to do that properly and work around whatever tax scenario you are in at the time. Because obviously that changes as you get older, whatever they do with taxes in the future.

And I don't know if you guys noticed or not, but John's a little younger than me.

A little bit.

I know I'm looking young nowadays. But that is a benefit, and our clients do wonder that a lot. Like, what happens if you die, Mary Jo? It's an actual email that goes out to everybody.

Yeah. So John should be around, Trisa should be around. It's nice that there is a big age gap between the two of us, so that if something happens to me, you know all this stuff. So it's not a matter of, oh, they're just gonna be stuck out with anybody.

But it's also why we do the podcasts. Because if you went to your policy at 70 and said, "I'm taking out all of this money," then it's going to be taxed. What you put in isn't taxed, but the growth is taxed. You don't wanna take it out. I've seen that happen before too. I've had people that have said, "My dad's accountant told him to cancel the policy when he was 80." I said, "Oh my God, you had massive tax implications."

He's like, "Yeah, he paid a ton of taxes that year." I said, "Yes, because you took out everything. He could've just borrowed it. Why is the accountant so adamant that he gets rid of death benefit?"

Yeah, that's some pretty bad advice.

Because it was expensive. But you're listening to an accountant.

About a life insurance product.

Yeah. I had a client email me this week, and he said, "My dad's going into the nursing home. They have told us that we need to cancel his life insurance policies for Medicaid." And I said, "No, no. If you take a full loan, that asset is now depleted, so Medicaid would kick in. If you buy down that asset, you do not need to get rid of the death benefit. Even if you take a full loan, there's a loan, there's no more cash value available for them. But when he passes away, at least there's still death benefit — enough to bury him," or whatever. I didn't see the policy. But there are ways that you utilize that.

Like, I have a local accountant that told a client of mine, "That's not good." So I lost about, I think I lost two or three clients because of this accountant, and I finally called him. 'Cause he was supposed to show up in my office and meet with our mutual client. And he decided not to show. He called and canceled five minutes before he was supposed to show up. So I gave him a courtesy call.

And I found out through my one client that continued to have a policy, he said, "Well, I tried this and it didn't work. My wife had cancer and I took the money out and I got taxed on it."

You did it in a way —

You took it out.

Loan.

Exactly. That's the keyword there.

But again, a CPA that had his life insurance license — and on top of that, he had a universal life. He didn't even have whole life.

Well, and had he even read anything about what you were actually doing to know that that's not what you were doing?

No. No. But this client has had her policy for — she was one of my very first clients, so I'm gonna say we're going on year 15, 16 for her. And he would ask her to see it all the time. Every year she would ask for an inforce illustration, he would look at it, and now he quit.

Yeah, he's probably like, "What the heck is this?"

Well, and he's retired now. But, oh, it is working how she said it's gonna work. Because if you borrow against it, it's income tax free. When she dies, it's income tax free.

Again, though, this kind of goes back to, you have to go to the expert about this stuff. If you have an investment, don't come ask me how you should use it. Go talk to the guy that gave you the advice on that. But life insurance, come talk to us. Don't listen to somebody else.

For investments, we can give you some talking points to go ask your advisor, but we're not going to give you advice.

Yeah.

And here's a mind-blowing idea — maybe put all of us in the room at the same time. This is the one thing that's bad for our clients, is their financial advisor doesn't wanna meet with us. Their accountant doesn't wanna meet with us, and we're like, "Hey, we're happy to meet with anybody — the banker, the accountant, whatever — so we can help educate them, right?" We can show them what it is. But our poor client is having to go do our job. What's in their brain is not coming out, and they can't think fast enough, because they don't know enough to be able to have that conversation and relay that information.

Yeah. They just feel like their idea is under attack, and they're in a defensive position, you know?

Yep.

So yeah, it's unfortunate.

Yeah. So anyway, that's taxes. I mean, we got the taxes in a roundabout way and then a few other things. But nonetheless, if you guys don't understand the tax implications of your investments, or you don't understand that you're not gonna get your premium as a write off — you have to think about the big picture. And I like what John said, the seed versus the harvest, because it truly is seed versus harvest.

Anyway, you know the routine. If you have comments, questions, concerns, email me, maryjo@withoutthebank.com, or you can even email John at john@withoutthebank.com. We're happy to answer any questions. Even if you have an inforce illustration from a current policy that you have, a universal life type policy, we're happy to take a look at those so that we can educate you. It's not about you canceling a policy and replacing it. It's truly about education of what do you have.

I just did a podcast on a UL policy that was expiring and the guy is 90. We don't want you to be put in a position in life where we're having to play Russian roulette with your life. So send that to us. We're happy to take a look at it, get your book, schedule your appointments, we'll go from there. All right, you guys have a fantastic rest of your day.