Alright we are going to look at
the lump sum study
but we're going to examine
the internal rates of return
on 2 of the best options
both the 3-Pay and the 4-Pay scenario
that we looked at in the last video
then also the guaranteed values
which is always beneficial
to at least look at in my opinion
and we're going to examine
the internal rates of return
on the guaranteed values as well
so let's get on into it and have some fun
shall we?
Alright so let's start off
with exactly where we left off
regarding the best options
we looked at anywhere between a 1-Pay
to 5-Pay scenario
that $1,000,000 lump sum
getting into a policy
and not paying a penny thereafter
all non-MEC scenarios.
So here's our 3-Pay
and then here's our 4-Pay
and the cash value difference
you see that the 4-Pay had slightly more
as we look at time
what do we notice here?
Not a huge difference
let's look at age 85
the difference in cash value is what?
Just under $8,000
so before we jump
to the internal rates of return
let's look at the guaranteed values
so this assumes a guaranteed interest rate
no dividends
I was going to say dividend interest rate
a guaranteed interest rate of 3%
if you saw the first video
we talked about the difference
between a dividend rate
and the net internal rate of return
granted the guaranteed rate here is 3%
that is never what I will actually earn
when I look at the internal rates of return
you can kind of see that
just with respect to how long it takes
to get my $1,000,000 back
there's my 3-Pay I pay $1,000,000 in
it takes 10 years.
How about over here
I pay $1,000,000 in
I get it just about year 9 I'm positive there
so it takes much longer
based on the guaranteed rate.
So let's take a look at the different values here
and I want to scroll down to age 85
what was your difference
on the non-guaranteed values?
In fact let's go back
to the 3-Pay verse 4-Pay
difference by age 85 was what?
Just about $8,000
going to the guaranteed rate
or guaranteed values
I see $1,662,000 compared to $1,695,000
so let's do the same thing
and put the cash value
difference column in here
there we go
so initially we see the 1st 3 years
the guaranteed values are stronger
with a 3-Pay
this is how much less money
I have in cash value with the 4-Pay.
Why I have less in the 1st 3 years
is because I still have to pay
another $250,000 in
I got the $1,000,000 in faster over here
then there's my premium
same thing over here
this is good to look at
with lump sum scenarios
if you intend on looking at a premium offset
to know if your value will always go up
when I look at the guaranteed rate only
no dividends
do things continue to climb up?
Does my cash value continue to appreciate
only looking at the guarantees?
In this particular case yes
so with no dividends
just the 3% gross guaranteed rate
can support the base premium
and I have enough left over
where my cash value continues to appreciate.
How about over here with the 4-Pay
same thing is true
very good
and then once I go reduce paid up
it gets much better
but what's the cash value difference here?
By age 85
it's not $8,000 it's about $33,000
and again depending on my age
funding amount
gender
these values can vary here
but you will see a difference
when looking at the guaranteed values
compared to the dividend values.
So let's take a look at
some internal rates of return, shall we?
So let's first look at...
why don't we start with the guarantees actually
then we'll go back to where we left off with
or what we left off with
so guaranteed values here
let's make that a little bit better
beautiful
annual IRR and average IRR
annual internal rate of return
I often like to refer to that
as that's what I'm earning year over year
a nice question to illustrate is
what did you earn last year
in the S&P 500?
The market hit a home run I did 30%.
Great
What did you average out
over the past 30 years?
I earned an average of 7% or 8%.
Same thing here
annual IRR
isolates what I'm earning year over year
average IRR takes into account all of the years
so I can look at my 10-year average
20-year average so on and so on.
So as I look at the internal rates of return
keep in mind that the guaranteed rate
on this product is 3%
does it ever hit 3%?
The 4-Pay is a bit stronger
so let's focus on that
the annual IRR will be the strongest
and you will notice a jump
once we execute a reduced paid-up option
there the IRR takes a nice jump
about 100 basis points
quite nice
same thing over here
it's actually a little bit more
but what do you notice
regarding the annual internal rates of return
beginning year 8?
Let me get those columns captured
beginning year 8 annual IRR
2.49%
if we were to look at the 1-Pay
2-Pay, 3-Pay, 4-Pay and 5-Pay
they're all the same
and it does depend on the company
and product I select
this is Guardian
same product apples to apples
when we execute a reduced paid-up option
a nice way to illustrate it is
the playing field is leveled
whatever cash value I have based on my age
that's going to purchase me
a certain amount of death benefit
based on a guaranteed rate
no dividends accumulating
the death benefit will not increase
if I'm only looking at the guarantees
but when I go reduce paid up
there's no premium due
I'll see that my annual internal rate of return
it's only based on what I have in cash value
that's exactly what this formula is based on
and the growth rate
what is it growing by year over year
and it is identical.
The average IRR is not
because that's based on
my overall cash value growth
factoring in the early years and such
and because I've got more money
in the 4-Pay
you will see the average internal rate of return
is higher with the 4-Pay example
so let's go down to where we have been going
age 85 1.54% on the average
internal rate of return
compared to over here 1.46%
so that's what you averaged out
safe, liquid, tax-free area to position money
this is absolute worst-case scenario
we've always seen the products
do better than this
but it is good to look at this.
So absolute worst-case scenario
based on your age, health, rating
there are factors that could impact this
and make it look better or worse
term Rider expenses are one of them.
Let's look at the IRR
based on the present dividend rate
here we go
so this is based on the
2022 dividend interest rate 5.65%
3-Pay versus 4-Pay
now everyone wants to look at all of this
some people do
because the first objective
is maximizing the policy value
cash value and death benefit
then the next objective
is putting the money in use
we're going to look at that in the next video
leveraging the policy and such
and really what to look at here too.
There's the annual and average
what do you notice as time passes?
Same thing
in year 8 the annual IRRs level out
there we go 4.67%, 4.67%
but the average will be a policy
that has a higher overall cash value
age 85 value
there we go
3.88% compared to over here 3.94%
minor difference
but the small details
we found a lot of people appreciate this
and then if we don't want to go as
in depth here we can always scale back
and look at the simplified version
or the detailed illustrations
but looking at the best options
now we've got the
internal rate of return analysis
we've got the guaranteed values
again the purpose of this video
really the past 3 videos
is demonstrating what options exist
if I want to maximize the cash value
I've got my 1-time lump sum
what was his original question
remember that?
Can I make a 1-time payment
can I move this $1,000,000 into a policy
and I don't want ongoing payments
so show the 1-time payment
this way we can see it
and how it applies to our individual scenario
and then oh by the way
it might make sense
to spread the payments out
there are prepaid accounts available
if you just want to send a one-time check
to the insurance company
a prepaid account
it's kind of like a high-yield money market
we don't have access to it
but it feeds the policy for us
for a number of years
you can be creative in that respect
but he did not want to pay anything else in
on top of the $1,000,000
that's where he's at right now
so show him that
and then if he wants to continue
to add funds he can.
So there are the different options
what we will look at next is this guy
using the money
specifically we're going to focus on
cash value collateral loans
we're going to hit on a point that is raised
quite a bit
regarding what's the actual growth rate
the internal rate of return of the policy
and then what's the net cost to borrow
this way I can look at them side by side
and see if it's costing me more
than what I'm earning in the policy.
Does the loan interest
outweigh the earnings rate in the policy
or vice versa?
At what point in time am I positive?
We're just going to go through it
one step at a time
this way it's very very transparent to us
as the policyholder that is when I say us.
So I hope you enjoyed this one
if you did please hit the like button
subscribe for more
and as always I hope this helps.
Thanks again.
Hey guys Steve Parisi here
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