In today's video
we are going to discuss
how to maximize the cash value
of a life insurance policy
and we're going to address this question
what is the cash value
actually growing by each year
in your whole life insurance policy?
Let's jump right into an exercise
let's pretend
that you have a whole life insurance policy
and your cash value today is $10,000
we'll pretend for the sake of this example
your premium is due tomorrow
and your premium is $1,000 per year
so you make your $1,000 premium payment
and then for the next year
your cash value appreciates to $12,000
so it was $10,000 it has grown to $12,000
so the question is
what is the gain in this example?
Well the answer to the question
is that the gain is $1,000
the reason why
is because we have to factor in
the $1,000 payment you have made.
I emphasize this point
because this comes up quite a bit
when it comes to whole life insurance
many times people believe or are told
you had $10,000
and your policy grew by $2,000 this year
it grew from $10,000 to $12,000
however what is sometimes neglected
or brushed over
or people find out after the fact
is that the premium payment
was not considered.
Another example here
let's make this a little bit more extreme
let's pretend that you had cash value
of $100,000
so let's call it $100,000
you elected the pay in $10,000 this year
so there's your payment
and the cash value the next year
appreciates to $120,000
it was $100,000 now it's $120,000
what was your gain this particular year?
Well it grew from $100,000 to $120,000
so that's $20,000
however
we want to make sure that we factor in
the $10,000 payment
that you made out of pocket as well
which would bring your net gain
down to $10,000.
Another way to demonstrate this
is let's pretend for a moment
that the cash value was $100,000
you paid in 0 this year
and the cash value grew to $110,000
so with zero out of pocket on your end
what's the net gain?
It's $10,000
so any time we're looking at the growth
meaning what did the policy
actually grow by this year
we always want to account
for any dividends and interests
that are applied to the policy
but then also any payments we make as well.
So let's take a look at an example here
we will begin with an illustration
so here we've got a policy
on a 40-year-old male
paying in $100,000 per year
for 10 years
as we look at this policy
here's the payment
of $100,000 per year for 10 years
policy designed for maximum cash value
minimum premium
maximum PUA
all the fun stuff
the total cash value
here's your money column
the 1st year cash value is $89,536
and so you made that $100,000 payment
how much did your cash value
or your cash if you want to refer to it this way
grow by in this particular year?
Well we lost a little bit more than $10,000
I paid in $100,000
I have $89,000 and change
no matter how I spin this
that is a negative $10,500 hit
if we just want to round off
so I lost money.
Now the next year
the end of year 1
your cash value is $89,536
by year 2 your cash value is now $186,160
so how much did it grow by this year?
Some would say hey your cash value
grew by almost $100,000
call it about $97,000
however
when we factor in this $100,000 payment
if I was earning 0% over here
and I just threw $100,000
into a 0% bank account
that cash value
would grow by $100,000
this should be $189,000 and change
yet it's less than what I paid in
now the reason for this
is because the worst years
of a life insurance policy
are most often the 1st and 2nd year
with whole life insurance
and it gets better and better
each year after that
but what I can see here
is that I'm actually negative
in the 1st and 2nd year
and then each year it gradually gets better.
What's my growth each year though?
Years 2 to 3 I paid $100,000
it grew from $186,000 to $290,000
if I don't count the payment I made
what do I see here?
$186,000 to $290,000
that's $104,000 there
that's fantastic
after I back out the $100,000 payment
it's $4,000 of actual cash value growth
that I'm receiving
from the insurance company.
Let's break this model down on Excel
we'll have some fun here
so here we've got the same policy
there's our 1st year $89,000 and change
2nd year $186,000 and change
what is highlighted in yellow
represents the break-even point
what that means is by year 4
this is your policy
you've paid in $100,000 per year for 4 years
which is $400,000
and you have $400,000
you also have that death benefit
that is appreciating over time as well
but the question is
what is your cash value actually growing by?
This may seem simple to some
some people get very very frustrated with this
so let's take a look here
year 1 you paid in $100,000
your cash value is $89,000 and change
there's that negative $10,500
so I took a hit in the 1st year.
When we look at the next year
if I'm just going to simplify things
this is the wrong way of doing things first
here we go
so year 2
could I make this case?
If you're in the business
you would say absolutely not
however for the sake of transparency
we're going to start with this model
year 1 cash value is $89,500
next year it's $186,160
so it is a true statement
that your cash value has grown
from $89,500 to $186,000
so I saw the cash value increase
by $96,000 and change
however that's not the reality of it
the reality of it
is that you paid in $100,000
so your net cash value increase
is not $96,000
what it is here
let's look at this
same thing
so what we're doing here
is backing out the payments
we're making each year
what I mean when I say that
looking at year 2
year 1 is pretty simple
but year 2 what happens?
You paid in $100,000
cash value grew
from $89,000 to $186,000
again if you just got
your full $100,000 payment back
what would happen this year
is that would be $189,536
yet it's $186,000 and change
so what had happened here
is when we factor in
the $100,000 payment
that you made into this policy
we have a negative hit there
of about $3,300
the next year however
you see that things are a little bit different
you paying $100,000
it grows from $186,000 to $290,000
meaning you received
the $100,000 you paid into the policy
you got that back
and then a little bit more
of $4,300 on top of it
and each year we see the net growth
get stronger and stronger
but anytime we're looking at the growth rate
or the total cash value growth
on a life insurance policy
it is always always important to factor in
the actual payment you are making as well
because if I just look at the total
cash value figure
I'm over-inflating things
and that's where people get upset.
So I hope you enjoyed this video
the fun question to hit on
what am I actually earning on my cash value
remember to always factor in
your actual payments as well
premium and PUA payments.
I hope you enjoyed this video
if you have any questions
that you'd like to ask
feel free to leave them
in the comments below
email us anytime
and as always I hope this helps.
Thank you so much.
Hey guys Steve Parisi here
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