So what I want to talk about today
is a topic that has caused
a ton of frustration
for people that have opened up
whole life insurance policies
or considered whole life.
So why a lot of people
take out whole life insurance
is often for the cash value
they hear about these great things
that big banks,
corporations,
wealthy individuals,
take out whole life insurance policies
specifically for the cash value
because it's a safe area
they can position money
liquid, tax-free
all of that good stuff
but expectations are not set properly.
You're told that hey
you're gonna see these great returns
dividend rates of 6% on your money
where you can borrow at 5%
you've got a positive 1% spread
that often hooks people in
they end up taking out
a whole life insurance policy
and then look at the numbers
expectations are not set properly
they're not earning
what that dividend rate is
and I'm going to touch on briefly
as to why that is.
But to set expectations properly
I'll let you know exactly what to expect
if you are interested in a
whole life insurance policy
for maximum cash value.
If you set everything up properly
with 1 of the major mutual companies
today from 2021 onward
you can expect an IRR
somewhere between 3% to 5%
that is after the company's
insurance expenses
that is also tax-free
if it's a non-MEC
if we don't cash the policy out
any of that good stuff.
Now we've got some history here
so this history
is based on data we actually have
full disclosure reports
a lot of policies
that people have been kind enough
to share with us over the years
of well-designed policies
with the major mutual companies
and the actual performance.
1975 the oldest policy
I have on record
our company has on record
this policy that was issued in 1975
we did not write that policy
I wasn't even born at the time
but it produced
an internal rate of return
actually north of 7%
it was 7.1%
very attractive
with 1 of the big 4.
1980s we've got a handful of policies
producing between that range
4.5% to 6.5%
1990s 4% to 6% in that range
that's a big range 2%
and you'll see that
somewhat consistent across the board.
Where that range comes into play
(1) is company selection
but the big thing is policy design.
And we've got
a million videos on policy design
which has to do with
minimizing expenses
maximizing cash value
that is critical
1-2 punch
company selection
properly designed policy
that's a great way
to set expectations properly
as far as seeing the best possible results
based on real data
that'll help set you up properly.
Let's continue on here.
So why people take out these policies?
The why?
Like why would a bank do this?
These internal rates of return are great
but here's what comes with them
safety
no risk
your money is not invested in
tied to the stock market at all.
Liquid
you can access it anytime you want
and a unique feature
to a cash value life insurance policy
is if your policy is earning
let's call it a 4% IRR
that's the actual growth rate
if you access some
or even all of your money
you'll continue to receive that
4% internal rate of return
on your entire cash value
as if you never touched it
in the first place
no lost opportunity cost
very very similar to borrowing
against real estate
assuming that the real estate
always appreciates over time.
And then we've got the tax free piece
if done right
so if it's done wrong
that would be a MEC
a modified endowment contract
if I have a gain on the policy
and I cash it out
or I pull the money out improperly
there are ways
that I can trigger a taxable event.
And then legacy planning
people use this very heavily
this has to do with the death benefit
leaving a legacy
in terms of their family
or business.
And then how companies do this
we touched on this already
so how individuals
and corporations do this
I say companies
because we work with
a lot of corporations
that set these products up.
Company selection
major mutuals
4 of them
MassMutual,
Guardian,
New York Life,
and Northwestern Mutual
it's been consistent.
And then policy design
to properly design a policy
for maximum cash value
to clarify that point
if that's why
you're interested in a product
what we've seen consistent
based on actual results
not illustrations and projections
is properly designed
minimum insurance expense
that's often that 10/90 splits
we will refer to as.
Meaning if I'm paying in
$100,000 per year
10% or $10,000
is my underlying base premium
everything else is plowed toward the
PUA [Paid-up additions] Rider
maximizing that
cash value growth over time.
So to set expectations properly
some things that I would look at
if I'm you
if I'm a consumer
just with the knowledge I have
is (1) look at the guarantees
worst-case scenarios
are always good to look at
how I view everything
is if I'm comfortable
with a worst-case scenario
which probably won't happen
but if I'm comfortable with it
everything is better
so if I set my expectations
for it to produce the guarantees
I'm going to be satisfied with it.
Now it'll probably do better than that
so if I look at a conservative dividend
that's a nice way to say, okay
if I go to the 3rd option
a current dividend rate say 6%
and I have a guaranteed rate of 3%
a conservative dividend
would be in the middle of the road
a 4.5% dividend.
So just to set expectations properly
I can look at different ranges there
and as an agent
if you're working with someone
what agents can run
typically the software
or what they're provided by
an insurance company
is always the current dividend rate
the best-looking numbers.
The guarantees sometimes are disclosed
but often you'll have to ask for them
or a conservative
or midpoint dividend as well.
And then the last thing
what to look for
so if a lot of this seems overwhelming
and you're thinking okay
like I just want to make sure
it's set up right
what do I look for
when I actually see the numbers
if you're working with us or anyone?
Year 1 cash value
between 80% and 90% on average
there are some products
that credit more
high early cash value products
but really the average
what I should look for
is between that 80%
and 90% in the 1st year.
Actual performance
this is huge
a track record
proof of performance
that is big in my opinion
because what I touched on earlier
the biggest source of buyer's remorse
is where people buy a policy
expecting to have this big pile of cash
but everything just goes south
the product under-delivers.
Why?
No one can explain it.
If we have proof of performance
satisfied policyholders
major mutuals
well-designed policies
that's where I've seen
people be successful
and happy with these products.
And last thing I want to mention
this ties into the last point
not dividend history.
So there's a big difference
between dividend history
and actual performance.
I'll give you an example here
so if we look at any of these
if we pick the 1990s
let's do that
1990s
what do we see here?
1990 dividend rate
with this company 11%
so does that mean
if you have a cash value
life insurance policy
you're going to earn 11%?
Remember when I was early in my career
I worked at all at an office
and there was a former
investment professional
that got into this side of the business
cash value life insurance
and he is looking at the policies
and he had an internal problem
with how things
were being marketed and sold
he said you know
I look at the cash value growth
it's not growing
by what the stated dividend is.
And the manager at the office
was adamant about saying no
like the dividend is what we tell people
they're actually earning
they're receiving that dividend
and they're going back and forth
and the problem
as I did not see back then
because I was very very young
the problem was
if I go to 1990
where this could be huge back then
if I told you hey
you're earning an 11% dividend
that would make me think
as a consumer
if I have $100,000 in cash value
that I would earn $11,000 that year
that is not the truth at all.
A dividend rate
with any insurance company
is a gross rate
that is credited after the company's
insurance expenses.
So the net internal rate of return
what we started out with
that you saw on the right
with that historical data
that's what I'm interested in
to set expectations properly
that'll prevent so much problems
for so many problems for agents
people that purchase policies
everything.
So we've got dividend history
but let's just say I don't care about this
but I want the actual
internal rate of return.
So going back to the whiteboard there
that 3rd bullet point
was when we asked for
actual performance
not dividend history
we need to see real data
because there are other pieces that
drive cash value performance
the dividend is typically 1/3.
So let's wrap up
just by looking at some examples
of properly setting expectations
I'm going to look at one example here
an individual
40 years old
$100,000 per year for 7 years
a 7-Pay is a great way to maximize
the internal rate of return
he could fund shorter
he could fund longer
completely up to him
but what do we see?
Guaranteed rate
annual internal rate of return
and average internal rate of return.
If you have questions on those
we do have other videos
you can always
leave a comment below too
and I will get back to you
or someone on our team will.
But guaranteed rate 3%
just like what we mentioned
with the dividends
that's a gross rate
the IRR is the net over time.
Guarantees
between 8% and 9%.
If you have an old product
with a guaranteed rate of 4%
you'll often see a break-even
usually around year 5 at best
sometimes between years 5 and 8
guaranteed rate of 3%
delayed a little bit
that change occurred
with the new 7702 update
that fully goes into effect
beginning 2022
right now or the end of 2021
people can make the choice.
But here's the guarantees
based on that gross rate of 3%
there's your IRR over time
internal rate of return
net growth
dividend assumption 5.65%
breakeven point
much more attractive on the IRRs
that's what I'm talking about
between that 3% to 5% range.
As we scroll down here
what do you notice?
Tops out a little under 4.8% annually
this column's annual IRR
which isolates
what the cash value is growing by
each year
whereas the average IRR
factors in hey what's my average?
What was the average
my money produced or earned
in the past 30 years
in the S&P 500?
8%, okay.
With a life insurance policy
past 30 years
if the dividend stays the same
4.2%.
The dividend won't stay the same
especially over a 30-year span
we'll go down for a bit
then we'll come back up most likely
so that's why state
to set expectations properly
that 3% to 5% range
for a safe area to position money
this is exactly why banks
and wealthy individuals do this
in addition to positioning their money
in other asset classes.
Then you've got an indexed assumption
on the far right
which some whole life insurance products
offer this
is 1 company of the major mutuals
it's a nice feature.
The nice thing about this
is these are all the exact same product
so we're not showing
one product versus another
this is a whole life insurance product
this dividend and indexed assumption
you can actually switch back and forth
over the years
you go partial index
partial dividend
we've got other content
that goes into the indexed feature
but it does offer greater earning potential
because we're tying it to the S&P 500
but there we go
solid place to position money.
So I hope you enjoyed this one
this is a topic I always like to talk about
because it's a point of interest
to so many people
that's often just
swept under the rug
or not talked about enough
because of a million reasons
that has to do with
(A) not wanting to be transparent
that the internal rates of returns
are less than the dividend rates
which make the product less attractive
for people that are interested
in cash value
and then (2) is compliance
you do have to be very careful
in your language
in the finance or services industry
that's why you'll notice
I don't ever call life insurance
an investment
or an average rate of return
because it cannot be classified like that
or stated in that manner
so that's why we use the terminology
internal rate of return
it's compliance approved.
In any event
I hope you enjoy this one
if you did please hit the like button
subscribe for more
and we'll talk to you soon.
Thanks so much.
Hey guys Steve Parisi here.
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