Alright today we are going to answer
some commonly asked questions
around whole life insurance
with a specific focus
on the cash value.
The questions we receive today
go hand in hand with each other.
The first question is
what is the difference
between the guaranteed
and non-guaranteed side
of a life insurance illustration?
We're going to walkthrough
a couple examples
with different policies
on a 45-year-old individual
and also a 50-year-old individual
to provide some additional context
or more information.
But then the 2nd question
what is the difference
between the tabular values
and then the supplemental values
on the life insurance illustration?
Have you ever looked
at a life insurance illustration
and just felt overwhelmed
or confused?
Because there's so many columns
there's so many different variations
that look like the same
the same amount of money
going into a policy
but then the actual
cash values are different
and you're looking at it and thinking okay
I just want to know
what my money will look like
if I pay X amount of dollars in
for X number of years?
We're going to go through
exactly that
so let's first look at the tabular
and supplemental values actually
so the difference between these 2
we're going to go through first
just a verbal overview
and then look at some actual visuals.
So the tabular values
on a life insurance illustration
will always assume
that the base premium
is paid forever.
For example
if you have a policy
that is payable till age 100
this might be called
a life paid-up at 100
legacy 100
whatever the name of the contract is
if premiums are payable
up until the age of 100
the tabular values
will always assume
at least the minimum base premium
is paid up until age 100.
Now on that point
if I have base premium paid forever
it's not always forever.
If you have a 10-Pay policy
and at the name of the contract
it's a 10-Pay
meaning premiums are payable
for a maximum of 10 years
that base premium will display
on the tabular values
a 10-year funding period.
So going back
to the legacy 100 example
you may state okay
here is a legacy 100 policy
where I can pay into it
up until age 100
but I'm going to pay into it
for 5 or 10 years and then stop
that's your actual plan
that might be what you actually do.
However the tabular values
will assume after
call it your 10 years of funding
the minimum premium
is still paid into the policy
and we're going to look
at an example on that.
So any customizations we make
on the policy
are typically not included
on the tabular values
I often refer to it as a junk column
on a life insurance illustration
and you'll see why
mainly because we can't customize it.
If we execute
a reduced paid-up option
that is not reflected on the tabular details
or tabular values.
If we cut the term Rider off on a policy
that is not reflected
on the tabular values.
The guaranteed values
often look horrible
on the tabular value side of the illustration
and the reason why is
if I have a policy and I plan to
cut the term Rider after year 7
in order to continue to have my cash value
grow at the fastest rate possible
this will assume that the term Rider
stays on the policy forever
and the costs continue to increase
and then if I'm looking at
the guaranteed values
what will happen in this situation
is that the term Rider costs
will exceed the guaranteed rate
and my values will go south.
You'll see an example on that
but I don't like that
when looking at the guaranteed values
because it's not accurate
however
it can definitely cause concern
for an interested buyer
if you're interested in a policy
because
you want to see what's guaranteed
and that is an inaccurate reflection
in my opinion.
The supplemental values
are much better
the supplemental values
assume any custom funds scenarios
any tweaks we make to the policy
for example
if I take that L-100 policy
you can pay up to the age of 100
but you don't have to pay that long
say after 10 years you stop altogether
you don't pay another penny into it
we cut the term Rider
we go reduced paid-up
the supplemental values
will show us exactly that.
So if you plan
to pay into a policy for 5 years
and then stop
20 years
and then stop
the supplemental values
we'll assume just that
when we're preparing illustrations
and you're looking at the numbers
that's what I want
that's often what it shows.
So that is a quick overview
of the tabular and supplemental values
let's progress on
to the differences between
the guaranteed
and non-guaranteed side of illustrations
and here we go.
The guaranteed side
reflects the guaranteed rate only
no dividends are paid.
One other thing to be aware of
is often on the guaranteed side
of life insurance illustrations
those guaranteed rates will be applied
but it is also the insurance company
is also going to assume
that they are going to charge
the maximum allowable rate
for any Riders attached
for any fees associated with Riders.
For example
if you have a term insurance Rider
attached to a policy
all insurance companies
have their current term insurance charges
and also their maximum allowable charge
meaning if they want to
raise the cost of that term Rider
they can.
Now do all companies do that?
Usually no
it hasn't happened in over 150 years
but they can
and the guaranteed values
will reflect that.
If you have a company
that perhaps has
a PUA [Paid-up additions] Rider fee
of call it 8%
but they have a maximum of 10%
maybe it's much higher than that
some smaller companies have PUA fees
with a maximum allowable charge
north of 20%
that is heavy when you look at it.
But the guaranteed side
of an illustration
is going to reflect
the maximum charges
for any Riders and fees as well
so not only does it present
just the guaranteed rate
which is a worst-case scenario
also the most expensive
or making the policy
as expensive as possible
so it really paints a great picture
as far as a worst-case scenario.
One thing I like to look at
when I'm looking at numbers
is if I'm comfortable with this
the guaranteed values
on that guaranteed ledger
of a life insurance illustration
then I'll be happy with the policy
especially
if it's with one of the major mutuals
because we've always seen it
doing better than the guaranteed values.
Progressing on
to the non-guaranteed side
so this will always reflect
the company's current dividend rate
and then also what their current charge is
for any Riders
and current fees on PUA Riders.
What I'll add before
we look at the numbers
is you can run different assumptions
so for example
if I have a guaranteed rate of 4%
and a dividend of 6%
I can run a midpoint assumption at 5%
and I can even be creative
and run different dividend assumptions
so we can always go
up to whatever the current dividend rate is
and then anywhere in between
the guaranteed floor
and the present dividend rate
so we can run conservative projections
if someone would like to see that
I like looking at that stuff myself.
So let's begin
with the tabular values here
what we'll look at
is a 45-year-old male
now this individual's plan
is to pay to the policy
$100,000 per year
for 5 years
$500,000 going into the policy
and nothing thereafter.
So his plan
here we go
$100,000 total
for 5 years
and then 0 thereafter.
Now as we look at this guy
so this
represents the tabular details
this product is a whole life 95
meaning that premiums
are payable up until the age of 95.
So if we take a look here
what do we notice?
We see guaranteed and current
so this also
provides a partial answer
to the individual's question
as far as what's the difference
between the guaranteed
and non-guaranteed side.
Current
means the current dividend rate
but what do you see here?
Funding for 5 years
there's the $100,000
but his actual plan
is to pay 0 in beginning year 6.
Do we see 0 there?
No
we see $10,000 per year.
The guaranteed cash value
what happens with it?
It's climbing up
but here's what I want to point out
what happens
before we actually get to the next page?
He's getting close to age 80
he's paying in in this example
$10,000 per year
what's happening to his cash value?
Slowing down
and look at this
years 34 and 35
it actually goes down.
So why does it start to go down?
When we scroll down further
it really comes down
and then the death benefit blows up
it functions almost like a universal life policy
when those go south.
The reason why
is again this represents
the tabular values
which does not represent
any customizations
we attach to a policy
or we make after the fact
of starting a policy.
For example
if an individual's plan
is to pay in for 5 years
and then nothing thereafter
what we would do is (1)
stop the payments
so it's out of pocket is 0
but also after year 7
we'd execute a term reduction
and reduced paid-up option
which would eliminate
the premium altogether
cut the term Rider
and now all of the guaranteed rate
or if I look at the current values
dividends are kicked back into cash value
the term Rider is gone
there's no drag on the policy
and things look like
what they should look like.
Let's take a look at that
so here are the tabular values
let's take a look
at a ledger statement
which reflects just the
non-guaranteed values.
So what do we see here?
We see the customization
included on this policy
net out of pocket
$100,000 per year for 5 years
nothing thereafter.
Base premium over here
$10,000 years 1 through 7
during the 1st 5 years
I'm paying that
I'm paying in $100,000 total
of which $10,000 of that
is directed toward my base premium.
With this product the base premium
begins coming back to cash value
year 2.
What about years 6 and 7 though?
It's still due
but you're not paying it in this example
what's happening here
is the insurance terminology
is a premium offset
and what this means
is we elected to have the
dividends and the guaranteed rate
cover that base premium for us
so the insurance expenses are covered
the premium
and the cost of the term Rider
and then anything left over
is kicked back into cash value.
Up until year 8
at that point in time
what do you notice about the premium?
It's gone.
What do you notice about the term Rider?
It's gone.
Death benefit also drops a bit
but then again no payments
cash value grows
that is based on the
non-guaranteed values.
Shall we look at the
custom guaranteed values?
It's very beneficial to look at here
very important to be transparent with this.
Do you have to look at every sheet
that we're going through here?
No
but it definitely helps to understand
what you're looking at
especially when you have a full illustration
because this is going to provide
the information that you want.
So we've got the custom example
$100,000 for 5 years
this is what the individual wants to do
and what do you notice here?
On the left
guaranteed values
this is actually
assuming a guaranteed rate of 3%.
Then we see current values
this is based on the company's
present dividend rate of 5.65%
and then you see intermediate
which assumes a rate in between the 2
so that'll be about 1.325
on top of 3%
so call it a dividend of 4.325%.
Okay, so that gives you a nice
conservative assumption as well
in the event dividends come down.
But here's what I like
is now we get the
actual guaranteed values
worst-case scenario
$100,000 for 5 years
assuming the guaranteed rate of 3% only
and the maximum allowable charge
for that term cost
where it will hurt the individual the most
is years 6 and 7.
Now if you see your values
continue to go up
when a premium here
is technically still due year 6 and 7
because it is
but its values are still going up
based on the guaranteed
which is the guaranteed values
the worst-case scenario assumption
that is a fantastic sign
the policy is designed properly.
If you have a hybrid based premium
that won't work
or you'll see it come down
but after the reduced paid-up option
is executed
cash value continues to appreciate
death benefit does not
the reason why
is if you're not paying anything
into the policy
no premium or PUA payments
and there's no dividends
being applied to the policy
the guaranteed
that you have a guaranteed death benefit
it'll stay at that forever.
If you're not making payments
and dividends are being paid
like the 2 examples on the right
then you'll see your death benefit
will appreciate.
Here we go
same thing
reduced paid-up option
and term reduction
that's your death benefit
and then here's your cash value.
So we looked at the tabular values
which did not look good
especially when looking at
the guaranteed values
then we looked at the ledger statement
which was a reflection
of the non-guaranteed values
but the ledger statement
I'm sorry is the supplemental value
so that was step 2
that showed the customization
where we cut the term Rider
after year 7
eliminated the base premium
and then we looked at
a custom guaranteed value report.
And this company
puts it all side by side here like this
which is great
as we look at another example
some companies do not do that
or we have to actually break it up.
So here we go
this is on a 50-year-old male
a legacy 100 policy
so he can pay into it
up until the age of 100
however his plan
at the age of 50
is to pay in $100,000 per year
for 10 years
and then stop
not a penny in thereafter.
So here we go
there's your base premium
very close to 10%
but here's what I want to look at
tabular values.
If this is you
what are you going to think?
You know I wanted to see
$100,000 per year for 10 years
but I look at this contract premium
what happens in year 11?
Steve, it still shows me $10,776
like I told you
I don't want to have to continue
to make those payments.
If I just tell you
oh you don't have to actually
we can elect different options
you might follow
but if you could see it
it is much much better.
Before we progress on
here's what I want to look at here
(1) we see the cash value
breaking even just about year 5
which is good
but as I look at this guy
those are the non-guaranteed values
on the left are the guaranteed values
now there's a big issue here
as there always will be
when I look at the tabular values
what do you notice
about your death benefit?
Year 13 to 14 it implodes
so it's kind of hidden in the design here
because we've got
so many things going on
but the term costs
became too expensive
you see your death benefit
just dropped down to that $2,500,000 figure
this is not optimized
from a guaranteed
cash value standpoint at all.
So what we would actually have to run here
is an additional report
looking at the supplemental values
but now looking at the guaranteed
and non-guaranteed side.
Here we go
so same thing here
exact same product
what do you notice?
You've got $100,000 per year
for 10 years going in.
Beautiful.
There's your net cash value.
Fun stuff, right?
Breaking even year 11 in this example
okay not bad
for the guarantees.
Annual surrender
this represents
your base premium that is still due
but you're not paying it in this example
so I still have a premium that's due
but again this is
a premium offset option
allowing the policy to pay for itself
to the guaranteed rate and dividends
and then what we did
because again this is the
supplemental values
there we go
reduced paid-up
year 16.
The supplemental values
will reflect a reduced paid-up option
exercised
there's your cash value
continues to grow
no more term column
because we chopped it off
the term Rider
no more annual premium column
because a reduced paid-up option
gets rid of it altogether
and our cash value
just continues to grow.
So then what we would do
is look at the same thing
with the current values
and this looks much better
there's your break-even
just about year 5
doing what it should
and continuously
appreciating over time
everything's exactly the same
on this example.
A lot of information here
now what we do like to do is
put this all on a simplified spreadsheet
so you can see it side by side
supplemental guaranteed
supplemental non-guaranteed
makes it much more transparent
easy to follow.
If you're in the business
and would like to learn how to do that
in a time-efficient manner
because you may be looking at that
and thinking hey that takes a long time
to put together
it does
but we do have our ILS agent academy
that does provide information on
how we create that
and we've got our mastermind calls
that walk through it as well.
If you're interested in a policy
if you're going through this information
and you'd like to see some examples
or work with us
or just have a conversation
please feel free to reach out anytime
this is something we like to cover
with everyone we work with
especially if you have questions
or like to dig deep.
I hope you found this video valuable
if you did please hit the like button
subscribe for more
and I'll talk to you soon.
Thanks so much.
Hey guys Steve Parisi here
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