Round 2.
In this video
we are going to look at a similar scenario
almost identical to the last video
with one difference
a higher variable loan interest rate.
So in the last video
we looked at an age 40 male
A 10-Pay policy with MassMutual
6% dividend interest rate
he funded the policy
at $100,000 per year for 10 years
took a $500,00 loan in policy year 6
and we illustrated what it looks like
if I repay the loan
pay interest only
and don't repay it at all.
With the variable loan rate
the policy is non-direct recognition
so the only difference in this example
we've got a higher cost to borrow
so we can see what's my total out-of-pocket
and interest cost in this example
I can also measure
what's the cost to borrow
and what's my internal rate of return
because you may recall the dividend rate
is not my net internal rate of return
meaning it's not my net growth rate
4.5% is closer to the average
which we don't have the average
in these scenarios
the annual will top out closer to 5%
but it takes some time
for that annual IRR to pick up
the 1st year in these examples
it's a little north of negative 10%
so again I want awareness on that.
A great area to position money
safe, liquid, tax-free are my core benefits
a lot of people
are attracted to it for that reason
in addition to the death benefit
but then with the loans
that's what we're going to look at here
so let's have some fun.
What we will begin with
before we just dive into the Excel spreadsheet
like the last video
is the illustration
let's validate things
we've got the 10-Pay product
this is identical to the last scenario
literally the only change here that I made
was I just increased the loan interest rate
because we can't increase the
variable loan rate
not the fixed
eventually we will get to the fixed rate
not in this video though.
So here we go
annual outlay column
which if you're just looking at
a growth illustration that represents
your premium and PUA payment
and any term Riders.
What do we see here?
5 years looks good
negative $400,000 in year 6
the reason for that
is you take a policy loan in year 6 of $500,000
so the software assumes that you make
a $100,000 payment
then you take a $500,000 loan
which means the total output
was negative $400,000.
Then we see $120,000 per year
year 7 through 10
the reason for that
is what this is assuming
is that you continue to pay
the $100,000 premium and PUA payment
and then on top of it
you pay another $20,000
in loan interest each year
after 10 years we're no longer paying
anything into the policy
and in this particular illustration
we're looking at loan interest only
so we cover the loan interest
out of pocket each year at 4%
we've got $20,000
4% of the $500,000.
Money column
net cash value
net death benefit
total outstanding loan
you'll see it hold steady at $500,000
because I continuously pay
the loan interest each year
and we've got other videos
that explains all the other columns.
The one thing if you're comparing illustrations
instead of spreadsheets
this dividend column
if we look at the growth illustration
meaning no loans on the illustration
that dividend column will be identical
because again this is non-direct recognition
with the variable loan rate.
Non-direct recognition
means that the company does not recognize
the fact that we borrow
and continues to apply the same dividends
on my entire cash value
money's still in equity
so in this example year 6
and the outstanding $500,000
as if I never touched it
they do that by collateralizing the death benefit
and I do have loan interest as well.
One last thing on the dividends
that column does not include
the guaranteed rate
that causes so much confusion
more often than not
but again we've got other content on that.
So let's look at these scenarios, shall we?
What we've got here is the growth scenario
same thing as the last video
$100,000 per year
by year 4 we break even
year 1 we're negative
we have less than what we paid in
often when people express
the reasons they don't start
whole life insurance policies
or what's the number one reason we hear
why someone would not do it
is the 1st year it's the worst year
I have less than what I pay in.
The best year
about a whole life insurance policy
is every year after the 1st year
it gets better and better as the time passes.
So year 1 $100,000 goes in
I've got $89,000 and change
negative 10% hit a little bit more.
Next year $100,000 goes in
grows from $89,000 to $186,000
that's less than $100,000
meaning I still have a negative hit
on my money
in fact, let's look at the IRR real quick here
4% there we go, okay.
So what do we notice?
Negative 10% 10.46% in the 1st year
almost 1.8%
negative 1.8% in the next year
when do I hit 4% in this example?
On the annual IRR not the average
between years 9 and 10
assuming the dividend rate does not change
so what is valuable or good to be aware of
a lot of real estate investors point this out
they appreciate when it's pointed out for them
so over here
we kicked the loan interest rate up
so we made this more conservative
as we kicked that up
4% cost to borrow $20,000
or 4% of $500,000 is $20,000
so if I'm paying 4% consistently
what do I have?
Between years 9 and 10
when I actually see a positive spread there
a big point of interest.
Now in this example
we take the $500,000 loan
there's my cash value
that drops the available equity I can access
and so does the death benefit
collateralized dollar for dollar
any time I take a policy loan
so if I die with a loan outstanding
this is the net death benefit
that's paid out to my beneficiaries
that does account for the outstanding loan
now the year 7 through 10
I'm still paying the premium
this is you you're still paying the premium
you may elect to pay the loan back too
you could say I'm paying the premium
I can't pay the loan back on top of it
interest only sure
because I don't want the loan balance
to compound
but I can't pay the principal back as well
i thought I could maybe but I can't
so I only pay the loan interest
loan interest comes due
purple represents
additional out of pocket on your end
the loan interest
and then here
what do you notice?
I continue to pay the loan interest each year
why it goes down
is because now you're applying
the $100,000 per year
and you were making in payments
toward the loan balance
loan repayments now
and if you look at these numbers and think
hey $100,000 is a bit large
we can literally peel a zero off
and you'd see a very very consistent pattern
you might have to use a different product
but you'll see a very very similar policy
cash value, all that good stuff
the same is true if we add a zero
and you're looking at
$1,000,000 per year going in
it tends to be all relative
if things are designed properly
if you go $1,000,000 per year actually
there be some other products available
that work a little bit differently
but anyway
I'm gonna try not to get sidetracked
because I do that way too much.
No repayment
I forgot to hit on the interest cost
sorry about that
back to the repayment.
Sometimes this board man
I love it but it doesn't always cooperate.
So I've got a cost to borrow
a 4% in this example
so let's tally up our total interest payments
so we paid $20,000 per year for 4 years
5 years technically
and there's my annual interest cost
here I go
I paid $140,000 in loan interest
so what some people look at here
is they say okay
this year my cash value is restored
if I look at both examples
if I just let it sit and grow $1,500,000
I paid it back $1,500,000
but I paid a $1,000,000 in
plus another $140,000 in interest costs
so $1,140,000 is what I've paid in
I've got $1,500,000
some people do like to look at it that way
just they're accounting for their
total out of pocket
it depends really
on what we're using the loan for as well.
No repayment
here we go
here loan interest compounds, why?
Because I'm not paying the loan interest
and it accrues at simple interest
only over the course of the year
if I don't pay it on my anniversary date
it will compound
so as I look at this guy
let's go down to 85 or 80 in this example
here we go perfect
that cash value and death benefit
are the net values
that do account for the loan outstanding
so if I die at age 80 $3,900,000 is paid out
if at age 80 I want to go on a vacation
I want to buy a nice boat or something like that
and I've got another $3,000,000 in cash value
I do have access to that
the $1,800,000 almost $1,900,000
in my loan balance here
that cash value and death benefit
are net of that figure.
If I were to pay that off at age 80
let's say I sell a boat or a house
or something I have at 80
and I say okay I want to
leave more money to my heirs
a tax-free death benefit
well here's what the values would look like
if I just repay it
everything's fully restored
to exactly what it would have been
as if I never touched it in the first place
because I've got
the non-direct recognition feature here
and there's not much of a difference
with direct recognition
we're going to look at a direct recognition
with the same policy actually in the next video
that one will be interesting
there's a bit of a curveball there
with how that works.
To wrap this one up
as we look at interest-only payments
same thing
I don't need to spend a ton of time on this
you'll notice there's the loan year 6
and all of these models are identical
there's the 4% cost to borrow
and I just pay the $20,000 indefinitely.
If you really want to have some fun with this
you could do this see
let's see if this will work
I might have one too many columns
but that's okay, perfect.
So we could look at
what are my total payments over time
because I'm paying loan interest each year
let's do this say alright what is my total?
Total out of pocket
so this is going to tally up my premium
and PUA payments plus loan interest
it's far enough.
Oh I forgot one important thing
there we go
so where this gets fun
so you can look at
what are my total payments
accounting for the loan interest?
Now if I have a loan outstanding anywhere
I've got to pay interest on it
but someone might say
I want to take a policy withdrawal instead
as I look at this guy
so what did I pay out of pocket by year 20?
It's $1,280,000
and what's my net cash value?
It's $1,402,000
so we've paid in $1,280,000
however I've got to deduct the $500,000
what I mean when I say that is the $500,000
so let's do that real quick
there we go
I thought the numbers weren't adding up there
let's go back to year 20
and here we've got a $900,000 gain
meaning I've got $900,000 more
than what I paid in
that looks more like what it should
so I've got the $1,400,000
and I've paid out of pocket
the total input to the policy $780,000
because I do want to account
for the $500,000 loan
that's money I can view it as
money that came back
hopefully that made sense
but it's cool to look at this kind of stuff
just if we want to add more
some people like it simple
I always like simple stuff
some like to continue to build
on spreadsheets.
I hope you enjoyed this one
if you did please hit the like button
leave a comment if you have any thoughts
or would like to see any different scenarios
and as always I hope this helps.
Thank you so much
have a great day.
Hey guys Steve Parisi here
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