So what is changing
with whole life insurance
when it comes to the 7702 update?
A lot of things.
Some for better
some for worse.
In this video
we are going to go through
2 topics when it comes to
whole life insurance
and questions we received
around these 2 topics.
The question that we received is
what will change?
The first topic or subject
I'd like to touch on is policy design
one of my favorite things.
So when it comes to policy design
specifically with the
major mutual carriers
there's been no change.
Meaning if I want a policy
where I'd like to pay
in any amount of money
often the lowest
I can drive that base premium
is about 10%
of the total payment
or total desired payment.
So what I mean when I say that
is this has been the case for a long time
and still is the case
if you wanted the ability
to pay in up to $100,000 per year
but you did not want to get a bill
for $100,000 per year
you could literally
commit to the premium piece only
the $10,000 per year
that could even be paid monthly
and then 100% at your discretion
you can pour excess funds
into PUAs [Paid-up additions]
hyper growing the cash value.
The most aggressive we could go
with those top companies
is that 10/90 split
there's been no change there
nothing that we've seen
I've talked to companies
about this a number of times
and that has remained the same
which is nice.
Because I can still design a policy
for minimum expenses
minimum compensation
maximum consumer value
which if someone's interested in that
that's how a policy
should be designed in my opinion.
What I will state
is in respect to the 7702 change
as often we receive questions
around hey should I go
with a 10/90 split
or should I go with a 30/70
or a 60/40
whatever it might be
and a 10/90
always delivers the strongest
guaranteed values
and based on actual history
real performance
it has always delivered
the strongest net cash values.
What we've seen
in respect to how companies have
repriced their products
to comply with this new change
because some companies
have made a number of adjustments
not just their guaranteed rates
we've seen that a 10/90 design
is even more favorable
with this 7702 change
than what it was before.
And what I mean
when I say more favorable
is comparing it to policies
that also comply
with the new 7702 update
but with a higher base premium
so a lower base premium
if your goal is maximum cash value
that'll do the trick.
But of course
we can always look at different options
because
it's always good to see options.
The one thing that did change
one of the things that changed
quite a bit
guaranteed rates.
So since the 1980s
guaranteed rates
with whole life insurance policies
have been at 4%
with most companies out there.
That's gone
as of 2022
it'll be gone with all new contracts.
If you have purchased a product
with a 4% guarantee
or you make a purchase
up until 2022
so during 2021
you can still lock in
the guaranteed rate of 4%
if that makes sense for you
if that's the best option
it's always good to compare
and contrast
because there are advantages to this
but that's been in force
since the 1980s.
Now what I want to touch on next
is something a bit technical
but it is important.
The guaranteed rate
on a whole life insurance product
does impact the
MEC [Modified Endowment Contract] limit.
So we have here
guaranteed rate of 3%
MEC limits increase by about 40%
Let's start with the 4% guarantee
that has been around for a long time.
If I take an age 40 male
and that 40-year old says hey
I want the ability to pay in
up to $100,000 per year
we would need a MEC limit of what?
$100,000.
What has a direct relationship
to the MEC limit
on a life insurance policy?
Because you can set the MEC limit
wherever you'd like
the MEC limit
has a direct relationship
to an individual's age
that's why I specified 40 years old
their age
and also death benefit.
So based on a 4% guarantee
the needed death benefit
is that guy right there
$2,800,000
and because most companies
have had a 4% guarantee
that's where we have seen
all companies need to require
about the same death benefit
for the same MEC limit.
Meaning
a 40-year-old male
with MassMutual,
Guardian, New York Life
any company out there
if they have a 4% guarantee
I'm going to need about
$2,800,000 in death benefit
in order to obtain
that $100,000 MEC limit.
Now
guaranteed rates are adjusting
companies have the choice
to set their guaranteed rate
anywhere between 2%
to 3.75%.
Some companies
have filed guaranteed rates
of 3% across the board
so for example
New York Life and Guardian
has filed a 3% guaranteed rate
for all of their products.
MassMutual
has filed guaranteed rates
between 2% and 3.75%
depending on what
whole life insurance product you select
so that's where having awareness
(1) around the actual guaranteed rate
but (2) around the MEC limit
with a particular product and company
is important
and it will not be an
apples-to-apples comparison
in all cases
like it has been
for a very long time
since I was born in the 80s.
So if we
isolate the guaranteed rate though
what I want to touch on here
is how it impacts policy performance
lower guaranteed rates
will result
in lower guaranteed values
so when I compare
a whole life insurance policy
on an individual
not a bank-owned life insurance policy
like we've looked at in past videos
but an individual policy
the policy with the guaranteed rate of 4%
did produce
stronger guaranteed cash values
and internal rates of return
than what the 3% guarantee does
which makes sense.
But
here's really what I want to touch on
is if I have a company
that has a 5.65% dividend
like Guardian for instance
that's their total dividend rate
for 2021
if you were to Google search that
that's what would pop up.
Now
it used to be a 4% guarantee
which means the surplus was 1.65%.
Here's where I'm going with this
3% guarantee
means the declared surplus rate
is now 2.65%
and why that's important
is when you look at the
dividend column
on a life insurance illustration
with any company
that annual dividend column
does not
let me emphasize this point
does not include
the guaranteed rates.
Meaning that dividend column
only reflects the surplus piece
even though it says annual dividend
and I would think hey
it's the company's dividend rate
I wish it was like that
but it's not
for a number of reasons.
So let's take a look at
an illustration here
side by side
so we can actually see the comparison
before we do that
what you will find
is the MEC limits
because the guaranteed rates
have dropped
if I have a 3% guarantee
I get about a 40% increase.
So for example
with the 3% guarantee
for the same age 40 male
so same scenario here
same $100,000 MEC limit
we're going to assume
that's exactly the same
the death benefit I need
is not $2,800,000
with a 3% guarantee.
If I go with a $2,800,000 death benefit
I'd actually have
a $140,000 MEC limit
so the death benefit needed
for the individual that says hey
the death benefit
right now I don't care about
I want maximum cash value
we would need a death benefit
just north of $2,000,000
that gives a 40-year-old male
a $100,000 MEC limit
based on a 3% guarantee.
If that doesn't make sense
please comment
in the comment section below.
So overall
weaker guarantees
but you will see
greater long-term potential
companies have been able to
kick down their insurance expenses
their reserve requirements
because of this change
it has helped them
and they are trying to
give that back to the consumer as well.
So let's take a look here
what I want to look at
is the actual illustrations
let's begin with the old product.
So this is a product
with a guaranteed rate of 4%
and everything is apples-to-apples
4% guarantee
40-year-old male
net death benefit $2.800,000
that gave him
the $100,000 MEC limit.
Let's look at the
new product
with a 3% guarantee
here's how you can tell
that's the needed death benefit
$2,050,000.
But let's go back to the old one here
because here's what I want to touch on
old one
this will be really interesting
if you're looking to open a policy
or if you're in the business
where is your money going?
The question I always ask
is hey if I'm you
Mr. Consumer
and I'm looking to pay in
potentially $100,000 per year
or if it's $10,000 per year
whatever
your money
going back to policy design
can be directed
toward the premium piece
there we go
or the PUA piece.
So this is a company
that actually allows us
to go 11X the base premium
technically
wherever you set that minimum premium
they will allow you to 10X that figure
the premium figure in PUAs
for a net of $100,000.
So I optimized that one as low
as we legally could
based on the
insurance company limitations
just juice the thing.
But my point here
minimum premium
maximum cash value
old product.
As we look at this guy
what do we notice?
The dividend column
here's what I want to isolate
end of year dividend
if this is the old product
with a 4% guarantee
this column reflects what?
This is fun stuff, isn't it?
The surplus.
And if I have a 4% guarantee
what's the surplus?
1.65%.
So let's do this
all I want to do
is take note of the dividend here
year 2
when the first dividend is paid?
In year 20
that's too low.
Let's go year 15
so what do you see there?
The dividend column year 1
reads $3,886
in fact I'm gonna do this
you'll see why.
Did I say year 1?
I meant year 2
and then year 15 it reads what?
$5,947.
So let's compare that to the new one
cash values by the way
old product
breaks even
between years 3 and 4
and year 15
$772,000 almost $773,000.
New product
first let's validate the design
are all things equal?
So not in terms of the death benefit
but in terms of a
minimum premium
maximum cash value allocation
minimum death benefit
for the $100,000 MEC limit
and the answer is yes.
Here's how you can tell
there's your premium
there we go
there's your PUA
identical figures
I might be off by a penny
but that doesn't matter.
Same $100,000 per year going in
I need less life insurance
so I need a lesser term Rider
so the term insurance costs
are a little bit less
the PUA Rider fee however
is higher with this particular company.
Some companies have raised it
some have not
it's good to have awareness on that
we're going to touch on that
in future videos.
But as we look at this guy here
design is identical.
Let's scroll down
dividends
here's what I want to look at
so what do we notice here?
Dividend year 2 $5,806
and what was it
in the first example?
$3,886 now it's $5,086
$5,086 so it's higher.
How about year 15?
When the other one is?
$16,872
What was it in the last one?
All things are equal here
same illustration
same dividend crediting rate
significantly higher
why is that?
Well the guaranteed rate is what?
And I'm going through this slowly
but I want to be thorough here
guaranteed rate is 3%
total dividend interest rate is 5.65%
and this dividend column
reflects what?
The total surplus.
So what would the surplus
crediting rate here be?
1.65% like the last one in green?
No, 2.65% so it's higher
and you have a lower
insurance expense
which helps that dividend move
at a faster pace.
So the potential
with this new update
is really based on dividends
and the non-guarantees
but it does exist
I mean it's not just
all dividend sensitive
they did reduce their insurance expenses
which should really keep
the integrity of the policy intact
and the guaranteed cash values
that rate
still exceeds the insurance expenses
so I walk away with more money
at the end of the day no matter what.
But look at this
about 84% upfront
instead of 88% to 89%
breaking even
between year 4 and 5
really year 5 in this example.
Now year 15
what did you have in the last one?
About $772,000
whereas this guy here is at $794,000.
If we look at the guarantees though
it'll be a different story
where you'll see the old product
have stronger guarantees.
So like anything
pros and cons whenever an update occurs
but what I have noticed
specifically with the major mutuals
because that's who we
work with more than anyone else
is where they are making adjustments
to protect themselves as a company
at the same time
they are giving that back
to the policyholders
really to maintain
the fact that they're
one of the major mutuals
and can stay at the top
which you have to do that
in this industry.
But I know that was a lot of information
if you enjoyed it
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and as always
I hope this helps.
Thanks so much.
Hey guys Steve Parisi here.
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