We are going to answer some questions
about cash value life insurance.
So we frequently receive questions
about whole life insurance products
typically centered around the cash value
individuals are interested
in maximizing the cash value
choosing the right company
setting up their product
so they can pay into it
for a very short period of time
or maybe they want to pay into it forever
then we talk about loans
taxes and everything else that comes
with the whole life insurance policy.
So in today's video
we are going to answer a question
it's actually a series of questions
for an individual that is interested
in a whole life insurance policy
cash value is his goal
but what he's primarily interested in
is maximizing his cash value
and he wants his policy liquid.
The main reason why
he wants his policy liquid
is so we can access the cash value
specifically for real estate
and business opportunities
he's in the medical field
right now he's in the planning stage
meaning he's ending residency
he knows his income is going to be very high
he has some real estate investments right now
he's done well for himself at a very young age
but he wants to get everything set up correctly
and he's asking a lot of questions
about how he can use
a whole life insurance policy.
So his questions are as follows here
he's got a couple of them
(1) can I access my cash value at any time?
So with a whole life insurance policy
the answer is yes
when you have a whole life policy
whatever you have in cash value
you have access to
and there are no penalties or anything like that
which he did ask about as well
we'll touch on that in a second
but whatever you have in cash value
you can access it any time
the only thing to be aware of is
if you make a payment
so let's say you make a PUA deposit
that's your PUA Rider
which will immediately do what?
That'll build cash value for you tomorrow
so if I throw in $10,000 today
tomorrow I would see call it $9,500
of that $10,000
available in cash value immediately
if I do that you will see some companies
have a 10 business day wait period
before I can turn around
and actually access that money
so that something
that's beneficial to be aware of
because companies sometimes
do want to make sure that the funds clear
from a bank account and such
but the answer to the question
can I access my cash value anytime?
Is generally yes
depending on the company
I might have to wait 10 business days
or something like that
but again generally speaking
I can access it at any time.
His follow-up question
if not, when can I take out
some of my cash value?
Well you can take out your cash value
through a policy loan anytime you'd like
now you can take withdrawals as well
so a follow-up question
some people ask about this
and this typically comes in the later stage
is when it comes to
actually accessing money in your policy
there are 2 ways or 2 transactional methods
in which you can actually
get to your cash value
the first one is what everyone's used to
which is policy loans.
Policy loans are a beautiful feature
of whole life insurance products
it functions very similar to a line of credit
in the sense that
I can borrow against my policy
and I continue to earn
dividends and interest on everything
so what I mean when I say that
is if you've got cash value
let's say of a $100,000
and you elect to take a loan
let's do it up here for $50,000
well you can borrow $50,000
because you had $100,000 in cash value
whatever you have in cash value
think of that as your available equity
the line of credit
that determines how much you can borrow
what will happen in this case
is if you take a $50,000 loan
there is interest and a cost to borrow
that goes to the insurance company
you'll also see your death benefit
collateralized by $50,000
so any time you take a policy loan
your death benefit will drop dollar for dollar
now going back to earning interest
on everything
is if you have a whole life insurance policy
you have dividends
dividends are not guaranteed
but you've got a guaranteed rate
plus a surplus that's going to come out
to the total dividend rate
if you don't borrow
dividends are being applied
to the full $100,000
if you borrow dividends are being applied
to the full $100,000
so why a lot of people
are attracted to policy loans
is because I can borrow against my cash value
while it continues to compound for me over time
meaning there's no lost opportunity cost
now with that said
it's still very important
to factor in the cost to borrow the loan interest
and we've got case studies that go through that
but that loan feature is attractive
because the money continues
to move forward for me.
Now the second way to access money
is through a withdrawal
which is exactly what it sounds like
so if you've got $100,000 just in cash
in your checking account
let's say it's earning 5%
that'd be a nice bank account
but if you've got $100,000 earning 5%
and you decide to withdraw $50,000
what happens to your checking account?
Well you pull $50,000 out
so now you're going to earn 5%
only on the remaining $50,000
because you've pulled the money out
so with a whole life insurance policy
it will function similarly
meaning if you take a withdrawal
you no longer earn dividends
and interest on that money
with a loan you do
with a policy withdrawal you do not.
Another item to be aware of
with withdrawals
is they typically do not make sense
during the 1st 7 years
and what I mean when I say that
is if you take a policy withdrawal
your death benefit's going to reduce
and it will impact the MEC limit
so what this means
is if you say hey I don't want to take a loan
can I just withdraw money from my policy?
The answer is yes you can take a withdrawal
sometimes you can't in the 1st year
but technically in the 2nd year
if you wanted to you could
however if I've max funded the policy
up to the MEC limit
then I want to withdraw money
I might get a message
right before I actually can take the money
first I might be told
yeah you can take a withdrawal
then it's like oh if you do that
you'll actually trigger a MEC
okay I don't want to do that
so why do we have to wait
beyond the 1st 7 years
that goes beyond our initial MEC test
another name for a MEC test
is our 7 paid premium test
which is the 1st 7 years
of a life insurance policy.
So a lot of extra info
which is the purpose of this video series
but here's where I'm going
or here's what I want to highlight
with the 2 methods
to actually access your cash value
loans and withdrawals
if you want to use your policy
like this individual
wanting to use it for real estate
and business financing down the road
policy loans will work beautifully
when withdrawals work very very nicely
is when I want to take income from the policy
particularly in retirement
when I'm no longer making payments
and I say I just want to supplement
my retirement income
and I'd like to use the cash value
in my whole life insurance policy to do so
in that particular case
an efficient strategy to get money out
is typically first withdraw up to my cost basis
your cost basis is the total dollar amount
you've paid into the policy since day 1
and then once you've taken withdrawals
up to your cost basis
if you continue to withdraw
beyond your cost basis
you're going to be taxed as ordinary income
so we don't want to do that
what you'll typically see as a strategy
is after we hit that cost basis
one will begin to take loans
without paying any loan interest
we're taking those loans as income
this way I can continue to take
withdrawals against the policy
and keep it tax-free.
Now we do have to as an agent
make sure we never trigger
a taxable event in that case
which is easy to do
but this is my long-winded explanation
to say there are two ways
in which you can actually access the money
which are policy loans
and then also withdrawals.
He had some additional questions
or follow-up questions
this guy
what are the penalties?
Are there any penalties?
The answer to that question is no
with a whole life insurance policy
you do not have any penalties
you do not have any surrender charges
nothing like that.
A lot of times people
will assume that this exists
and a big reason why
is because if we were to look at a
similar type of cash value
life insurance product
a universal life product
usually we see this
through an indexed universal life product
you will see what is called the surrender value
what you'll also have is accumulation value
and on illustration or your policy
you might see an accumulation value
of let's say $50,000
but then a surrender value of $20,000
it depends on how old the policy is really
but the surrender value
represents the value that you will receive
if you surrender the policy
so if you were to cash it out
there's your surrender value there.
Now IULs are not our specialty
but sometimes people do ask about penalties
because of the terminology
we see in universal life type products
but to get back to this question about penalties
do they exist with whole life insurance products?
They do not
so with penalties
while there's no penalty
if you cash the policy out
or access your cash value
what I do like to describe to individuals
let's go back to this
$100,000 in cash value example
here's something I like to explain
because I view it this way myself
if I want to access that money
there's no penalty
that I'm going to be dinged with
however if I take out a loan what will I have?
There's going to be loan interest
a cost to borrow
the rate will depend on the
insurance company and product that I have
but that interest is a cost
that goes to the insurance company
yes it's not a penalty
but it is money out of my pocket
to the insurance carrier
it's beneficial to be aware of that.
Another thing people look at
is when I'm paying into the policy
so let's say I make a payment
of $10,000 per year
let's say this policy is brand new
this is you
you make a $10,000 payment
and we'll assume that your cash value
in the 1st year is $8,500
so you paid in $10,000
you have $8,500
if you said I don't want to do this anymore
let me cash this thing out
what's the hit there
or what could you view as a penalty?
Technically it's not a penalty
but what's the cost?
It's $1,500 that was the hit in the 1st year.
Worst part about a whole life insurance policy
will be the 1st year
even when we maximize the cash value
we've got that negative hit
right out of the gates
so we're going to minimize it
and break-even as early as possible
this way we're not losing any money
when we look at the policy.
And his last question was
when are there no penalties?
Which there aren't
it is good to highlight these items though
I found a lot of people do appreciate that
he mentioned that he did want to use the policy
for real estate and business
so what we'll look at in a case like that
when someone says what I want to do
is maximize the cash value
and then be able to use it
well what we'll look at is something like this
so here's a full illustration
one page from a full illustration
we've got the guaranteed values
if he likes to look at things conservatively
and then we've got the current dividend rate
on the far right when you see intermediate
that represents a middle-of-the-road dividend
a rate between the present dividend rate
and the guaranteed rate
but if we look at the net cash value
under the current dividend column
here's the cash value buildup
we see that he makes 5 payments
of $100,000 per year
that's a total of $500,000
he's paid into the policy
he paid nothing into the policy thereafter
a lot of people are attracted to these
shorter funding scenarios
but then he wants to be able to use the money
I want to use it for real estate
so what people really like to see
specifically
is what is my policy growing by each year
whether it's a percentage or a dollar amount
and if I'm going to use it through policy loans
okay what's the cost to borrow?
Let me compare the cost to borrow
with the interest I received
from the insurance company
the total earnings
the dollar amount I got from them
that way I can look at it side by side
so how we do that
scroll your eyes to the far right
and see what is my policy growing by
compared to what am I paying in loan interest
so here
the yearly cash value growth is $14,400
where that came from
so if we look over here
year 4 you're at $405,000 and change
in cash value
we paid in $100,000
so if we just paid in $100,000
that would bring us up to $505,000
but then we see the cash value
is now $519,000 and change
so the total growth we received
from the insurance company is $14,404
so what people like to look at
going back to this
is what's the growth
compared to the loan interest each year
so I can see it on an annual basis
and then also I can look at my total gain
compared to the total interest paid
that's often what's very helpful
for someone like this individual
who wants to use this policy
again for business and real estate
and then we'll look at
something like we see here
if he pays interest only
or if he elect to pay it off
and he can pay it down however he wants
there is just one payment of $250,000
usually if we don't see it like that
let's do it this way
there he goes now it's paid off
I can see that I paid
almost $69,000 in total interest
the total gain on the policy however
is $282,000 and change
where that comes from
is the fact that you've paid in
a total of $500,000
the cash value is $782,000
so the difference is the gain
the $282,000 and change
do you see that?
And then the same thing
with the annual earnings each year
compared to the annual interest paid
so he had a number of questions
and as usual I talked a bit too much
about the additional details
really we like sharing experiences
of what others practice
or they've learned with their policies
when they've asked similar questions.
One of the things I always appreciate
when I speak with a professional is
when they share
someone who's in perhaps
a similar position to me
they say here's what someone else did
in your position
or here's a similar question they asked
kind of to follow up with what you just asked
so usually we go through that.
Anyway I hope this was helpful
if you enjoyed the video
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and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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