all about the policy design if I'm going to take a whole life insurance policy and I'm going to make
any type of commitment or any type of payments to this policy my money can again go where towards
premium or towards that PUA Rider premium buys me life insurance first and eventually builds cash
cash and PU $1 will refer to it as a cash dumping because I'm dumping money in the cash and it does
get me some death benefit as well so what many are not aware of is we can actually choose where
our money goes within a policy and it can be set 3 flexible as well but when I look at the
life insurance policy what we have up here on the screen is a basic whole life insurance policy you
see an individual paying in $20,000 per year 100% of this payment is going towards the base premium
the insurance expense component that's why I have zero in cash in the beginning takes a long time
to accumulate any real cash value ten years plus then we see a over funded whole life insurance
policy here's a policy with an individual paying in 50 thousand for five years and the thing about
this policy is I have five thousand dollars ten percent of the fifty thousand going towards the
premium small term writer attached and we're pumping everything else into that PU a writer
that's how I have rich cash values up front I break even very early between years three and
four I accelerate the immediate the initial cash values and also the long term growth when I look
at an example like this and I'm not committed to the 50,000 either here in this example either the
thing is when we design a policy upfront if you the consumer designing the policy and you say
hey I want to understand how I can maximize my cash value this is a great example to be aware
of I want to know how I can minimize the premium piece and maximize that PUA writer that allows me
to get more money into cash value which is immediately accessible begins to yield the
guaranteed rate and dividend sooner accelerates everything from the cash value perspective and
long-term you usually see more death benefit here as well when it comes to policy design
understanding the limits are critical here so when I say limits what do I mean well when I'm
gonna pay money into the insurance premium or that PUA Rider I have to be aware of the
particular insurance company or companies I am considering and what their limitations are for
example wherever I set that minimum base premium some companies will allow me to 10x that into PU
as per year each year so for example if I have a one thousand dollar per year minimum premium
that's what I'm committing to I can have the ability to contribute $10,000 per year not
committed to it but I have the ability that is the insurance company's limitation many are 10x
some are only 3x some don't have a limit depending on the riders you set and such but it is important
to be aware of that a lot of the top companies will often have a standard of a 10x limit you'll
see that to be very common in the industry so one limitation is the insurance companies limit the
other is the IRS limitations that's referred to as our MEC limit M e C stands for modified endowment
contract so any life insurance policy can become a MEC if it does I have to deal with taxes what
many are not aware of is we can actually set our MEC limit wherever we want so if one states
I want to be able to pay in 50,000 per year we're going to set the MEC limit at $50,000 the minimum
premium at 10% 5000 because I can 10x that now I am committing to five and I have the ability to
go up to 50 per year we've created a very flexible savings asset so I have to set that MEC limit up
properly that has a direct relationship to my age and death benefit so the MEC modified endowment
contract what is it well any life insurance policy can become classified as a MEC if it
does many of the tax benefits on the cash value that is carried within a life insurance policy
or at the window if I have a MEC policy the death benefit is still paid out income tax free however
when it comes to the cash value as it grows it still grows tax-deferred when I pull money out
whether I withdraw or loan from it I have to pay ordinary income tax on the games first when I make
a distribution from the policy also if I pull it out prior to age 59 and a half guess what I'm hit
with a 10% penalty tax in short I don't want this MEC to occur it ruins everything so when
it comes to a MEC on a life insurance policy how we prevent it is every policy has what is called
a MEC limit that's exactly what it sounds like it's a limit that determines how much money we
can pain to a policy per year before we trigger a taxable event what many are not aware of is we can
set that limit wherever we want you'll find that it has a direct relationship to our age and death
benefit and you'll see this on a illustration with any life insurance company as well or with
most life insurance companies we've got one up on illustration up here for example you see in the
bottom right hand corner we see exactly what the MEC limit is so as we adjust the individuals age
gender and total death benefit total death benefit doesn't mean we have to increase the base premium
we can do this through term riders however we maneuver that death benefit that's what is going
to adjust the total MEC limit in the policy so for example if you say hey I want to be able to pay in
fifty thousand dollars on any given year say it's a hundred thousand dollars in any given year we
want to make sure we set the MEC limit up at at least one hundred thousand dollars and then again
when it comes to the insurance-company limit we want to set that at what at least $10,000
because the company will allow us to 10x that minimum contribution MEC rollover dollars when
it comes to the MEC limits or make a limit on a life insurance policy we do have rollover dollars
I like to think of it as the old cellphone plans with the rollover minutes if you remember those so
when it comes to the MEC laws and how it works let's say we have a policy with a $100,000 MEC
limit that means we can pay up to $100,000 per year if we want to let's assume year 1 we pay in
$50,000 that means I could have paid in another 50k up to a hundred but I did not I only paid in
fifty year two rolls around my MEC limit resets at a hundred thousand plus any unused space from
the prior year which would be the fifty thousand so my total my key motive MEC limit for year two
is $150,000 let's say year two I again only pay in $50,000 what this means I could have paid in
150 but again I only paid in 50 so year three rolls around MEC limit resets at $100,000 plus
any unused MEC space from all prior years so year one and two that rolls over the extra fifty so
year three I could pay in a total of two hundred thousand dollars and it will continue to compound
on itself now if I want to make a big catch-up contribution I can do that as well so for example
year three let's say I inherit some money I sell a piece of property coming to a windfall get a big
bonus at work whatever it might be and I've got 200k I can make a large catch-up contribution into
the policy and this going back to the insurance company limits with the ten times rule the 10x
limitation often they will permit you to make a big catch-up contribution if the proper riders
are attached the company will have issues with it if I don't have the right writer attached because
it may push my death benefit up the view as a liability that's good for another topic however I
can make large catch-up contributions and make up for lost time so it's not as if I don't use my MEK
space I lose it no I can always make big catch-up contributions down the road flexible payments so
when it comes to the policy design and creating a flexible policy this is one of my favorite parts
and it's important to setup properly is when we hear the word life-insurance policy I'm just gonna
say insurance policy what comes to mind premium bill I pay the same and every month every year
if it's a life insurance policy it pays it when I die oh and cash value eventually builds up that's
it it works but there are way better ways to do it so we can design a policy how do we take
that traditional life insurance policy and turn it into a flexible savings asset that's where I
begin to get intrigued okay how do I use this so it all goes back to the limits wherever I have my
minimum premium I can contribute 10x that into PU ace whatever my MEC limit is I can pay up to that
number per year so when we design a policy we'll always ask the question how much do you want the
ability to pay into the policy on any given year if one states I might want the ability to pay in
$100,000 per year what we're going to do is set up a policy where the MEC limit is at least $100,000
and the base premium is $10,000 this allows me to commit to ten thousand it might be 11 or 12
K with the term rider attached but I can commit to a minimal amount and add more funds at leisure I'm
not committed to the hundred K number this way it doesn't feel like a bill now it is important
to be aware of the insurance company that I'm looking at at different companies because they
all have different rules around flexibility but it is possible to set policies up like this again the
main goal is how do I set up the policy where I have the ability to contribute X but I only
commit to Y now I can really use it as a flexible savings asset and not a burden this way I don't
get a bill for a hundred K a year and now I'm stressing to try and make that payment now we
can make it very flexible and then all of a sudden I've got an attractive savings asset