Alright in today's video
we are going to look at a case study
of an actual policy
that was started back in 2016.
We've got an individual
who was and still is very analytical
he is an engineer
he's actually a lead network engineer
at his company
he's very very technical
he wants to understand the details
of how the product works
think of it this way he wants to know
how the watch is built not just that it tells time
which is perfectly fine
and a lot of times it's beneficial
to ask questions
that someone very technical or analytical does
when it comes to a whole life insurance policy
because we can put the same dollar amount
into a policy
and have that policy (A) look very very strong
with respect to cash value
or (B) very very ugly
when we look at the actual cash value
and how it performs over time.
We'll touch on that
and we'll go through a question he had
or questions that he had
and a lot of people ask
when it comes to whole life insurance.
To provide some details first
let's get on into it
what we have is as follows
the goal was cash value
he wanted to maximize the overall performance
he started the policy just about 8 years ago
his past year 8 premium is coming up
and the original plan funding was as follows
$40,000 per year for 5 years
we are going to reference
the original illustration
you'll see after the 5th year
he did plan to pay
perhaps just the minimum premium
which is just about $5,000
we'll go through a breakdown
but what we'll look at
after we look at the illustration
is the actual funding
as his actual funding
meaning what he paid into the policy each year
was not this
he paid different dollar amounts in
you'll get to see exactly what he paid in
year over year
and then we will review the performance.
So when he started the policy
he was 53 years old
a little bit on his background
network engineer very analytical
and what we're going to look at
because of his analytical nature
and what we do for a lot of individuals
is display the performance
both in dollars and percentages
so what I mean when I say that
when I say dollars
is if I'm you what I want to know here
is how much
is my policy growing by year over year
where I can simply ask
how much money did I receive?
How many total dollars did I get
from the insurance company?
Did I get $5,000 or $10,000?
What was the growth for this particular year
and then what's the total growth
over any period of time?
So over 10 years if I paid in $200,000
and my cash value is $250,000
the total growth or total gain would be what?
It'd be $50,000
everything above what I paid in
and then we'll look at
the same thing with percentages
which we'll look at the
yearly internal rate of return
which isolates what his policy grew by
and is still growing by each year
and then the average internal rate of return
which like the total cash value gain
we'll take into account all years and say
how much did I average over the past 10
20 or 30 years?
So let's get on into it
we'll begin with the original illustration
so what we have here is as follows
it's very interesting
annual net outlay
and this illustration is actually back from 2016
but we've got the $40,000 per year
for the 1st 5 years
and then years 6 through 10
another $5,000 per year
which gets a total of $225,000 into the policy
so the original illustration displays a plan
of getting $225,000 into the policy
and what we see
from a performance standpoint
based on the company's dividend rate back then
cash value and then also the total death benefit
so what do you notice here the 1st year?
You paid in $40,000
how much does he have in cash value?
Just about $33,700
and he received the top health rating
ultra preferred
so just about $33,700
if you're analytical
or perhaps even if you're not analytical
what are you going to ask when you see that?
You paid in $40,000 and you have $33,700
even if we round up to $34,000
what's missing?
It's $6,000, what is that?
A simple answer could be the cost of insurance
some like to use the phrase
that's the cost of doing business
whatever it is I still want to know
where is it actually going
and can it be improved?i
In this particular case
here's the base policy insurance
what this represents
is the base premium on the policy
$4,700 and change
in this example we drove it as low as we could
we could tweak it a little bit
just with how we design policies today
maybe to get that down to $4,300 or $4,400
but it's very very close to the minimum
which the base premium
does not show up in cash value
with this product
in the 1st and 2nd policy year
this takes the biggest bite out of cash value.
So he makes his premium payment
or a total payment of $40,000
we've got if we round up $34,000
that shows up in cash value
there's the biggest chunk that doesn't show up
what also does not show up is term Rider fees
PUA fees
there are fees deducted from PUA payments
and we've got other videos
that provide a thorough breakdown on that
but my point is where that is not
or why we don't see our full $40,000 show up
it's because of the cost of the premium
then also other small charges
but in the 1st and 2nd year
we see those charges
and then when we look at year 2 to 3
look at this your cash value was $69,000
you added $40,000
and the next year the cash value was what?
It was $111,000 and change.
Did you get your full $40,000 back?
Yes, an easy way to tell
is if you just add $40,000 to $69,000
what do you get?
It's $109,000 and cash value is worth $111,000
that means the gains
are now exceeding the expenses on the policy
and we have a positive cash value growth
year over year.
So let's look at the actual performance
because this was valid for the 1st year
and then he changed his funding
so we've got a couple examples here
let's start with this just to make it simple
what's highlighted in yellow
represents what has already happened
the payments he's made
and the actual cash value
and death benefit figures
that he received on his annual statement
so what we did
is looked at what he paid in each year
and then what he actually received
in total cash value and total dividends
and what the death benefit
has appreciated to over time as well.
So looking at this what do we notice?
In year 1 he paid $40,000
remember what that illustration showed?
This exact figure of $33,699
so what we've got here is a couple things
we mentioned percentages earlier
annual IRR
which stands for internal rate of return
and then I've got annual here
that's meant to be average internal rate of return
I'll correct that in a little bit
but this displays the average overall IRR
so year 1 if this is you
you paid in $40,000
you've got about $33,700
which no matter how you spin it
it comes out to a loss of 15.75%
that's the yearly growth for that particular year
a negative 15.75%.
In year 2
what was his actual payment here in 2017?
It's $20,000
that brings his total funding up to $60,000
this is important to look at
when we're tracking the average
internal rate of return
your total funding that is
but I paid in $20,000 and I did have $33,699
I paid in my $20,000
if I got the full $20,000 back
it would have been worth what?
It's $53,699
but I did not I got less than that back
the 1st 2 years are the worst years
which is why I see that annual IRR
of negative 7.14%
the average IRR is still in the red.
In year 3 he increases payment to $30,000
the total funding is now at $90,000
the cash value
I get my $30,000 back that year
and a little bit more
the net growth rate
meaning dollars that I received
from the insurance company
come out to 1.08%
and as I look at it year over year
what do you notice here?
I paid payment $30,000 then 2 years of $40,000
and you'll notice the break-even point
is in year 6.
If we go back to that original illustration
it was Illustrated to break even when?
Year 5 $200,000 was paid in
and he had just over $200,000 in cash value
why it is year 6
partly because the dividend rate went down
but that doesn't have a huge impact
here's the main reason why
these 3 years especially year 2
underfunding the policy
when the original plan was to max fund it
at $40,000 year in and year out
that's typically what achieved
in an early break-even point
here he reduced it which is perfectly fine
what happened the break-even was delayed
1 year in this particular case
and then what he did in year 7
he wanted to make a catch-up payment
or make up for some lost time
and he made a total payment of $53,000
which $253,000 in the policy
and he's got $262,000 and change
so what we see here
each year the internal rate of return jumps
and by year 7 the average IRR is just over 1%
because he's made total payments of $253,000
he has $262,000 that's the IRR over 7 years
again the average and then he's got that
total death benefit as well
now what do you notice about year 8
in this example
with respect to the internal rate of return?
What's it at in year 7?
Annual internal rate of return is 3%.
What's it out in year 8?
It's 4.54% so why does it jump so much?
because you'll notice year 8
is the 1st year that is not highlighted in yellow
the reason why it jumps so much
because look at your funding here
it takes a big drop
$5,700 and change
which is the base premium
plus a small PUA Rider
that he would continue to pay
if he continues to pay
right now his plan is to pay just this
as he's comfortable with it
but if he continues to pay this
I don't need to say that
it's significantly reduced from prior years.
Here's the important piece
this is the base premium and a little bit in PUAs
anytime you add money to PUAs
there are fees associated with that
and your internal rate of return
your annual IRR will show your net growth rate
net of all fees
and everything that comes with the policy
but what you'll notice
is if you reduce your PUA payment
for example if I don't pay in $50,000 in year 8
so another $45,000
that's another $45,000
that I'm not going to see a fee assess to
which will drag down my overall
internal rate of return
that's what happened each year
so you've got the compounding
which is working in your favor
and then when you make a payment
for that particular year
it is going to pull down the IRR a little bit
because I've got those PUA fees
associated with the policy.
A quick side note
maximizing your PUA Rider
still will result in the greatest
overall cash value
when you measure policy performance
but the point to that long-winded explanation
is once I reduce that what happens?
I see a nice jump there on the IRR
which a lot of people are attracted to that
typically you'll see this
when someone heavily funds a policy
and then they take their foot off the gas
and usually it's in cases like this
so we started the policy when he was 53
at the end of the 1st year he was 54
and now he's 60 getting near retirement
I'd like to take my foot off the gas a little bit
or a lot of times we see that
but we see it in this case too.
So let's take a look at this guy
we ran 2 illustrations here which will be fun
with a slight slight difference
you may have noticed it already
zero compared to still paying the premium
and he did ask the question
can I pay the premium this year
or maybe a couple years and then stop?
Do I have to pick one or the other?
The answer is no
you don't have to pick one or the other
yes you can do what you mentioned
where you can pay the premium
for a couple years
and then stop if that's what you want to do
you can even set it up in a manner
or even follow a pattern
of paying the premium in some years
then stopping
then resuming the premium payment
you've got some flexibility there
which is really really nice.
In this case we are assuming
that you stop the premium payment altogether
with this reduced paid-up option
which eliminates the premium
even if you want to
you can't add anything else into the policy
but what it does do is give us a nice little jump
on the internal rate of return
which is not drastic when we look at it
compared to the example
where we keep paying premiums
but I do see a slight increase there which is nice
depending on how realistic it is
that I continue to fund the policy
but options and the nice thing about this
is it's an option that we can exercise
after a policy is in force.
The last thing we will look at
is the growth but in dollars
so the exact same thing but in dollars
it looks like this
and really depending on what your preference is
that's the report I would look at
if you're working with us
we can put both of them on a spreadsheet
along with your full illustration
if you just like one we can do that
everyone's different
but what we've got here
is the exact same thing
continue to pay the premium
compared to the reduced paid-up option
instead of the IRR
you've got cash value increase
which isolates the yearly cash value increase
what are you getting net
from the insurance company each year
for example look at year 3
at the end of year 2 your cash value is $49,864
you pay in $30,000
you got your $30,000 back
we do not include that
in the cash value increase
because that's your money
out of your pocket going into the policy
but we got that back plus another $866
meaning when you subtract $80,729
from $49,864 you're going to get $30,866
so subtract your payment
and that gives you
the actual cash value increase
the money you receive that is
from the insurance company.
The cash value gain in year 6
what do you notice?
The total payments are $200,000
the cash value is at $201,906
hence the gain of $1,906.
If we look at year 20
but these are nice reports
just to make it a bit easier
if you're trying to crunch
what does my policy
actually growing by each year
and what's the total growth of my policy
this does make it a bit easier.
So I hope you enjoyed this video
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let us know if you have any questions
feel free to leave them in the comments below
and as always I hope this helps.
Thank you so much for watching.
Hey guys Steve Parisi here
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