Alright
today and tomorrow
and the next several videos
we are going to touch on
one of my favorite questions
and favorite topics
which is how do I maximize
the cash value
on a life insurance policy?
And I'm not talking about policy design
specifically we've got this IRR up here
which is the internal rate of return
just the net growth rate.
Meaning
I'm interested
you're interested in a cash value
life insurance policy
you've got a lump sum of money
and as you paid in
you simply want to know
when I pay that money in
how do I beef the cash value up
short term
long term
as much as possible
based on the limitations offered
by the insurance company
and the IRS [Internal Revenue Service]?
It's really understanding those limits
short term
long term
and then just
maxing out the policy.
So in this video
we're going to look at a case study
of funding a policy for 7 years
and 10 years
and in some of the following videos
we are going to look at
actual policies
that have lived the test of time
these are enforced policies
that I put together
or put in force 7- 8 years ago
so you can see
exactly how we do that
or how we're doing it
for existing clients.
So what we've got here
a case study
of a 40-year-old individual
a lot of people we work with that are
involved in real estate investing
engineers
CFOs and data scientists
love this kind of stuff
and they look at the numbers
and they elect a 7-Pay
and you'll see why
as we look at the numbers.
So if you have $100,000
and that's the amount
you're planning to pay
into a policy per year
I should rephrase
you want the ability to pay in
up to $100,000 per year
because if we talk about policy design
of that $100,000
what would your actual premium be?
Just to clarify this
if you haven't seen it before
$10,000 per year
and then you'd have
a PUA [Paid-up additions] Rider
at what?
$90,000 per year
for a total of
$100,000 per year
and the PUA component
is optional
so now you give yourself
maximum cash value performance
by getting more money into PUAs
you also give yourself
maximum flexibility
as you are only committed to this
and you can dump in PUAs
at your discretion
really nice with that flexibility.
So the design of this policy
what the $100,000 for 10 years
is just that.
The thing is though
often we'll get a question
hey should I
fund it for 7 years
up to that MEC limit
and then stop?
Or I might want to keep going
maybe I'm planning to fund for 10 years
maybe I want to continue to pay
as long as possible
everyone's different.
But in this specific case study
what does it look like
if I plan to pay into it for 10 years
but then I stop at 7 years?
Or if I plan to pay in for 7 years
and then stop at 7 years?
Why I mention that
is the design here
will be slightly different
and this is going to be consistent
with the premium and PUA design
but when it comes to the
MEC test on a policy
I promise I won't get
too technical on this
if you're an agent
and you want the technical details
we do have
a lot of MEC material
on how to stress test the policy
short term or mainly long term
in our ILS agent academy.
But with that MEC test
if you're funding for 7 years
and I have a policy
where I'm paying in $100,000
so if I want to do $100,000
for 7 years
I would set that MEC limit
at guess what?
$100,000.
If you said well
I want to pay in $100,000 per year
for 10 years
what I'm going to do with the policy
is overinflate that MEC a little bit
be difficult to set it
at a clean $100,000
I could do it
but I'd have to carry a turn Rider
for an additional 4 to 5 years
there's some things I have to do
with the premium offset
again I don't want to get too technical
but my point is
if I want to pay in
$100,000 for 10 years
I now may need a MEC limit
I'll call it $110,000 to $115,000
it's right around the range
of where the one is that I set
on this example you're going to see it
to prevent the MEC
from ever occurring
based on the guarantees
non-guarantees
all that good stuff.
My point
is if I raise that MEC limit
how do I do that?
There is a technical video.
What does the death benefit
have a direct relationship to?
I'm sorry I gave it away.
What does the MEC limit
have a direct relationship to?
An individual's age
and total amount of death benefit
life insurance
that is the measuring stick
that the IRS is going to use
to determine
if a life insurance policy
is life insurance
or a MEC
a modified endowment contract
that MEC limit
is determined by an individual's age
and death benefits.
So as we look at the numbers
that I'm about to pull up
the 7-Pay plan
when I plan to pay for 7 years
and I stop at 7 years
that is going to have
a clean MEC limit of $100,000
and you'll see that
through a lower death benefit
compared to an identical product
but a larger term Rider
with a 10-year fund example.
So let's take a look here
this will be fun.
So the 2 on the left
are the exact same policy
where I plan to pay for 10 years
life happens
or I just change my mind
and I want to stop after 7 years
so what do we see here?
Option on the left
funding up until age 50 for 10 years
breaking even
almost there year 4
year 5 I've got $512,000
where I've paid in $500,000.
By year 10
I've paid in $1,000,000
and I've got $1,173,000
there's my death benefits
cut the term Rider
after year 10.
Death benefit initially
$1,800,000
middle example
identical policy
look at the 1st year $89,100
$89,100 and $1,800,000
Look at years 4 to 5
identical
look at year 7
when the last payment goes in
identical.
Now the difference here
look at your death benefit drop
here we hit that kill switch
reduced paid up
and what happened?
Cash value starts to jump
from a performance standpoint
death benefit comes down though.
Also what I want to touch on
is now
I've given myself the opportunity
with the example on the left
to keep making payments
here
I forfeited that
but I built this plan
to fund for 10
life happened
I can stop the funding
which is nice.
Now if I could rewind the clock
and say alright
well if I would have started this policy
and plan to pay into it for 7 years
would there be a difference?
Do I want to have awareness
on that kind of stuff upfront?
And the answer is yes
it does not make a huge
drastic difference
but there is a difference
and everyone's scenario is different
this is based off $100,000
if it was $10,000
you could just move the decimal back
if it was $1,000,000 per year
we'd move the decimal forward.
So here we go
optimize 7-year fund
so look at this
death benefit $1,460,000
this was $1,800,000
this guy
gives you a MEC limit
of almost a clean $100,000
I minimized that thing
minimize expenses
as much as possible
juice the cash value.
In the 1st year what's the difference?
You're at $89,500
you can compare the 2
so the middle one
and the one on the right
or you could just look here.
CV difference represents
the actual cash value difference
between the 2
so not much right off the bat
$430
Break-even
oh so close
year 4
I couldn't quite get there
if he was younger we would
just about year 4
$1,800 difference.
Year 7
so we planned this guy
to stop payments after year 7
someone that wanted maximum IRR
the next couple of videos
we're gonna look at the actual
internal rates of return
with different examples
but a little bit more cash value
you might be looking at it
and saying hey
that's not that much
how I would look at this is
well I've got about a $3,500 difference
so that's what it costs me
to go with this option
where I can keep on paying in
$100,000 per year
because what I'll add with this guy
is once year 8 comes
even if we kept the term Rider on
we could not continue to pay
$100,000 per year
it would MEC.
So what we would have to do
if we wanted to continue to pay
you can
just not at the same level
we would have to kick
the funding down a bit
and if I accidentally did go over
that MEC limit
and paid in $100,000
the company notifies you
me, my office,
and it's very easy to reverse
they'll just refund
the excess we went over
but at the same time
we're forced to pay in
a lesser amount
this is the kind of stuff
we always talk about
with those we work with
because it's important
depending on how long
I want to pay into it
but it's also important to be aware of
when it comes to maximizing
the internal rates of return
juicing that cash value.
In this particular example
it does not make a huge difference
focus on the middle column
and the one on your right
if I look at the year 30 difference
what do we see here?
$2,237,000
compared to what?
$2,247,000
$10,000 difference.
If you knew
with all certainty
you're going to stop after 7 years
or earlier
because you don't have to pay that long
that option is better
if you had your plan set.
However
if you said you know what
I might stop after 7 years
I think I will
but there's a chance
if things go well
I might want to keep
adding money to this product
at the same original MEC limit
10/90 split
$100,000 per year
then I would go with the option on the left
or the middle
because they're the same.
If it was 7 years or 5 years
I'm gonna max fund it
then I'm gonna cool off
from the funding a bit
then I go with the option on the right
and the good news is
you can talk to us about that
if you're working with us
or if you're an agent
a lot of agents know about this as well
it is technical
so if you're being shown 1 option
and you want to keep asking questions
it's your money going into the policy
so you do have the right to do that
never feel like you're
burdening anyone
an agent that is
because this is how we get paid.
My point is
they can do it
it just might take time
to produce several numbers
but anyway that's another topic.
I hope you enjoyed this
I have a ton of fun
going through this kind of stuff
a small difference
but it's just knowing how to
pull the different levers.
If you did enjoy it
please hit the like button
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and we'll talk to you soon.
Hey guys Steve Parisi here.
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