"The worst thing to do is take that money and spend it in cash, and it's all gone, and we have nothing. We don't have uninterrupted compound interest. We don't have dividends. We don't have death benefit. We have absolutely nothing. Life insurance is one of the best places to put it. In the meantime, maybe some investment, maybe an annuity, something like that, where at least we're earning something, but we can use it to slowly move over to a life insurance policy."
Hello, hello, and welcome back to the podcast. Thank you very much for being here. We're gonna talk about something today that I don't normally talk about, but it happened in a meeting this week, and the guy had the same questions everybody else has. What happens when you come into a big lump sum of money, and what can we do with it? How do we structure a policy? What does that look like? All the things.
And so first we have to start with what is a lump sum of money? That is a relative term, 'cause some people deal with more money than other people. And so for some people, a lump sum of money and a big amount of money is $3,000 to $5,000. Other people, it's $2 to $6 million. Maybe it's $100 million. I don't know, whatever the situation stands for.
So let's talk about kind of the thought process that I go through, and can you put money into a policy, and what does that look like?
So on the lower end of, "Hey, I came into some money. What do I do with that money?" And we've got $3,000 to $5,000. Okay, $3,000 to $5,000 — are you 20? Are you 60? It's very different because of what the insurance is going to cost for death benefit. I have to have a certain amount of money to even write a policy because the insurance company says, "Hey, I'm not going to issue a policy under $50,000 of death benefit," or, "I'm not going — I need $100,000," depending on what type of policy we're using.
And so if you have something that is $3,000 to $5,000 and you're young, great, maybe we can do something with it. If you're older, that's not enough money to do anything with. You may as well use it as cash, buy a CD, whatever that looks like for you.
But we have to remember we need at least 10 years of premium. Now, there are times that we can maybe say, "Okay, we're gonna pay premium for seven years." If you look at Nelson's book, and this throws a lot of people for a loop, if you look at Nelson's book, he has an example in there of where he paid premium for four years, and then he was done paying premium. He was not done paying premium. He was using dividends, or he was using cash value loans to pay premium. If you actually read the chapter that that is in, he did not stop paying premium. He stopped illustrating it.
So I cannot take money and only pay premium for four years. I can take money and do a single premium. If I do that, where we're paying premium one time and one time only, we can do that, but guess what? You're going to pay tax on any of the growth. Now, that might not matter if you are 80 or 85 years old and we have to pay tax on the growth. I've done those policies before, and the owner of the policy does not care that they're paying tax. So we have that option, but it's not an option that we normally want.
Yesterday I came into a situation where a client has oil money, and we have a new well being drilled. We all know that in that sit— well, not all of us, but those of us that deal with oil know that the majority of that money comes from when they drill the well and the first year. After that, you could literally go from millions to zero in a year's time. Oil is very finicky.
So when we have a situation where we're coming into a lot of money, but we don't know if there's going to be money that's continuing to come, now we have to figure out, how are we going to design that policy so that we can get the money in there, but we… Are we gonna do it over a short period of time? Are we gonna do it over a long period of time?
And so in this example, we have a client that's coming into a very large sum of money. I cannot put in that year's time that much money into a policy without it growing taxable. So therefore, we have to say, "Okay, we know we're not gonna have money going forward like this, or we may not." We kind of know from example that that's not gonna happen, or from history that that's not gonna happen. So number one, we have to think about what the premium going forward is. We can get a bunch in year one, but what is it going forward that's going to be comfortable? And how much I can get in year one is relative to what it is going forward.
So in this scenario, this particular client was calling and saying, "Hey, okay, I'm coming into this large sum of money. What is the difference between an IRA and the life insurance policies?" Because this is exactly what happens in every single one of these cases, is now I've got a bunch of money, I can't get it all in the policy right away. Where else do I put it?
Well, if we put it into an IRA, now all of a sudden we have created a taxable event — a traditional IRA. We've created a taxable event to the heirs. We've put it at risk. If we're not over 59 and a half, we don't have the liquidity, we have a 10% penalty if we want to use it.
The other question becomes, what are we doing in our life? Are we a business owner? Are we farming and ranching, which is still a business owner? Are we just an employee working? Are we retired? What is going on? What are we looking at doing? Are we an investor and we're buying rental properties? And so we have to think about all of those things. It's not a cut-and-dry, "Oh, I'm gonna put it here."
So in this case, do we put it into an IRA? Okay, what are the implications of that? Just went over those. Are we gonna put it into an annuity? If we put it into an annuity, that's fantastic. If we have a fixed annuity and there's money coming from that annuity every single year, great, fantastic. When we die, that is also going to be taxable to our children. And I could be wrong on some of these, 'cause I am not a financial advisor, but check with your financial advisor.
So if you have an annuity, you have taxable, you don't have as much liquidity. Okay? If I put it in a CD, I can do that, but I don't have the flexibility. Sometimes CDs, they say, "Hey, if you take money out of the CD, you're gonna have a penalty. You can only access so much per year." A CD is probably gonna be more liquid than most things if you're under 59 and a half, but still.
You could put it in a brokerage account. You have risk of the market, but you do have the liquidity of it. Okay? What we put it in outside of life insurance — like in this case, we can't put a bunch in a Roth. They make too much money. There's limitations on a Roth. So where they could pass it off to kids income tax-free, not gonna be the case.
If we put it in an IRA, there's now a rule that says you have 10 years that you have to take that money. So now the kids, if we die, that goes to the kids, and there's 10 years that they have to take that money. When the insured is 73, they have to take that money or there's a penalty if they don't take anything. And so now it's leading to more tax trouble on both sides of the equation.
If the insured is alive, or if the owner of that IRA is alive and they're over 73 and they don't need the money because they have a bunch more money coming in, then we have tax trouble. If we leave it to the kids and they inherit, in this situation, they will inherit the minerals. Now they have a bunch of money coming in for minerals, and they have to take this IRA money at, over a 10-year period of time. We created a tax problem.
So if we want to get around some of that tax problem, life insurance is the answer. But there's a limitation to how much we can put in, how fast we can put it in, those sort of things. So this is not a case of, "Oh, hey, Mary Jo absolutely hates IRAs and other investments." I don't love them, let's be honest. It's not something I love. But if we can find the right one to put some of this money in the meantime, and slowly move it over into a life insurance policy, that's great.
Maybe we wanna put it into an IRA. Maybe we wanna put it into a brokerage account. Maybe we — this gentleman said he has an investment that he knows, and he trusts somebody told him he can make 5% on. Great. 5% of the money he would have invested every single year — if he just took the interest only out of that investment, the 5% that he makes, and puts it into a life insurance policy, we know we have the money. But he still has all of this other money that is somewhat at risk. If it's gonna be in an IRA, it's gonna cause him tax problems at 73.
So we have to think about when we come into a large sum of money, we have to think about how we can utilize that money. I sold a business. Okay. Are we gonna be retired? Are we gonna work after that? How much can we get into a policy? What is our cash flow gonna look like? If we're not gonna have any cash flow, do we wanna move that money over into an insurance policy over a 10-year period of time? If we do that, where are we gonna house it for the next nine years? Are you gonna spend it in the next nine years?
This is not any different situation than if somebody passes away and I deliver a death benefit, and now we have a large sum of money. What are we gonna do with that money? Ironically, in most situations, I will say, "Hey, let's move it over to a policy over a 10-year period of time," because we don't think we're gonna have cash flow coming in longer than that.
Great. We get to year three or four, and they say, "Mary Jo, I can't pay that premium." Why? Why can you not pay that premium? Because the money is burning a hole in their pocket. If you are not managing that lump sum of money that you got, and we've planned for it over here, what are we gonna do? What are we gonna do? You have to be smart about it.
This is why people that win lotteries end up broke. This is why people that come into a large sum of money end up broke. Because if you can't manage a dollar, you can't manage a million. It does not matter. You will not convince me otherwise. If you have a large sum of money and that is burning a hole in your pocket, and you've gone on vacations and you've bought campers and boats and you've done all of these things that do not produce cash flow, how are you going to continue to pay that premium for that 10-year period of time? You're not.
So when I am meeting with people that have large sums of money, I am very picky about how we structure it, what they're doing. I wanna know what these other things are. If you're gonna have an investment that's gonna be 5% — this particular client, I did not have to ask him. He is not irresponsible with money.
But if somebody was coming to me and they had pie in the sky, and they were being told they're gonna get a 20% rate of return year over year, no questions asked, it doesn't matter if it's real estate or some oil investment or what it is, I am not going to trust that. No. Okay, so they've done that for three years maybe? Ooh, good for them. What are they go— how… Let me see 20, 30, 50 years of history on that, and then I might look at it and go, "Oh, that's interesting. Okay." We are looking at two or three years and saying, "Oh yeah, somebody got this great rate of return." Okay, good for them. Good for them for two or three years.
Remember, I'm working with insurance companies that are 140, 150, 160, 200 years old. They've paid dividends for that long. They're still around. That's the history I'm looking at. I'm not going to say, "Oh, this is some great investment." When he said 5%, I'm like, "That's reasonable. That's very reasonable."
The problem that we have is that when we accumulate sums of money and we turn 73 years old and they are not in a life insurance policy, or they are not in a Roth — if they're in something like an IRA, that is required to be taken out at 73. That's going to cause some tax problems.
There is a lot that goes into just… instead of… People will email me and say, "Hey, I came into a bunch of money. How do I, you know, what do I do for a policy?" Well, I don't know. Like, that has to be a conversation. If you're emailing somebody and they have an answer for you, you should probably run the other direction, because if they're not questioning all these other things, then how do you know that they're doing what's right by you?
'Cause even in this situation, I know he has to go to a different, other investment avenue. I know that. I know him as a client. I know that he's in agriculture. He's not going to go vest in — invest in a bunch of real estate. He is going to go do s— more conservative type things because they've dealt with this oil thing forever. They know that it's up and down.
And you will have people that will come in and not understand lump sums of money. I have quite a few oil clients, and I've learned — I did not realize this right away because I did not grow up where they actually hit oil, okay? We can't even find water, much less oil. So I didn't understand the fluctuations in oil.
And so once you understand that — people, other agents have told me over the years, "Oh, Mary Jo, that must be awesome. You're working with all these oil clients because there's a boom in North Dakota." No, I'm not. Like, I'm not going out and being a vulture and seeking those people out. Absolutely not.
But what I have learned from the ones I do have is that we can literally go from a million dollars a year to almost nothing, $20,000, $30,000 a year, very, very quickly. And so when somebody comes in and sees a lot of money, they are going to be drooling because they're like, "Oh my gosh, I'm gonna make a ton of commission. I can charge a bunch of fees," whatever that is. They get super excited about it.
I am rational about it. Is it exciting for the client? Yes, it's super exciting for the client. It's fun. It's awesome. But you have to be extremely rational about it. You have to be conservative about it because that money, a lump sum of money, only comes once.
Having and hitting an oil well is no different than hitting the jackpot. What are we going to do with that money, and how smart are we gonna be with that money once we have it? If you've sold a house, if mom and dad passed away and you have some inheritance, it's no different than hitting that well. It's a one-time sum. We have to understand how to use money in order to make smart decisions going forward. If we don't understand how to use money to make those smart decisions, we end up where we started, which is probably broke.
The piece of this that I've kind of forgotten till now is we could take his money that he's getting, and if I remember correctly, one of the numbers that we looked at, we were leaving his kids with $17 million of death benefit. When the wife turned — 'cause we looked at a policy on her — so when she turned 85 or 86, I believe it was like $17 million of death benefit. Compared to the money we put in as premium, which I think was like $7 to $9 million, that we doubled his money that went to his kids income tax free. Now, if they do correct estate planning, there will not be estate tax on that. Doubled his money income tax free.
We can put that money in an investment, and are we even going to get double that because we don't have uninterrupted compound interest? If he puts it in an investment, the market's gonna go up and down. He's gonna have to start taking money — they're gonna have to start taking money at 73. They're gonna have to pay more taxes.
This is going to grow income tax free, they're going to get to use it income tax free, and they're going to pass it on income tax free. Doubled. No income taxes. A check delivered to the kids. That is not how the IRA or any other account is gonna go. So we have to really look at what is that big picture.
If you are working with an agent that is not asking those questions, or you are not working with a financial advisor that is looking at all of those questions and all they see is a large sum of money and a payday for themselves, that is scary.
I even asked this particular client, "Have you considered long-term care? I understand that you've got a bunch of money, and we're gonna have money to pay for long-term care. I get that. But the question becomes at that point, do you wanna pay for long-term care, or do you want somebody else to pay for your long-term care so we have more money to pass to the kids?"
'Cause with long-term care — and if you guys haven't seen my episode with Michelle Prather, it's on the Farming Without the Bank side of my podcast. So if you haven't gone to Farming Without the Bank and listened to that one yet, listen to it because it's so good.
If we have long-term care, and we can let the insurance company pay for that, and we can pass more off to our kids, that's phenomenal. If you don't care about passing more off to your kids, keep your comments to yourself. I don't really care. Doesn't matter to me. So many people out there are like, "Oh, I don't wanna make my kids rich." Well, good for you. The rest of us do want to leave an inheritance to our children.
So that is something that also — can he just pay a single premium for long-term care and be done with it because he came into an influx of money? I mentioned it because I have another client that did the exact same thing with a pipeline that went through their property, and a large sum of money came in. They wanted to pay the premium one time and never worry about it again, but know that they have the ability to have the long-term care. So lots of different options when we have a sum of money.
His concern was, what is the difference between the IRA and the life insurance policy? Liquidity, control, guarantees, uninterrupted compound interest, and income tax-free transfer. Those are really the big things. It's taken me 20 minutes to say all that, but those are the things that we have to look at, and then what's gonna happen in the future, how is the premium gonna get paid, where is it gonna be invested, all those things.
So this may not apply to you today because you don't have the lump sum coming in. But Nelson always said the majority of us will have some sort of money coming into us that we were not expecting, and that has happened even for myself already. There were certain things I did not expect. I did not expect to sell a house, and then you have excess money because you're gonna sell it for more than what asking price was. And so there are times where we may all get into that situation, and we need to know what to do. So file this in the back of your head if nothing else.
But if you have questions, if something happens like that where you do have a large sum of money and you need options, ideas, whatever, let me know. Just schedule your appointment, and we can go over it.
The worst thing to do is take that money and spend it in cash, and it's all gone, and we have nothing. We don't have uninterrupted compound interest. We don't have dividends. We don't have death benefit. We have absolutely nothing. In my opinion, life insurance is one of the best places to put it. In the meantime, maybe some investment, maybe an annuity, something like that, where at least we're earning something, but we can use it to slowly move over to a life insurance policy. Or at least use the interest only to put into a life insurance policy.
So lots of options. If you guys have questions, comments, concerns, let me know, maryjo@withoutthebank.com. Read the book. Happy to help. Otherwise, you guys have a fantastic rest of your day.
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