Have you ever thought about
small policies for your kids?
A lot of people ask about this
whether their kids are minors
maybe they're adult children now
but we get the question
hey what would a policy look like
if I took it out my kid
and paid in $1,000 per year
or $5,000 per year?
Whatever the dollar amount is
what would it look like?
Because I like the idea
of starting a policy on my kid
where perhaps they don't see the value
but boy I wish I saw the value
or someone started a policy for me
when I was my child's age.
It's a good question
it comes up quite a bit
so in this video we are going to answer that
and we're going to look at
a couple different scenarios
this video is actually based on
an email we had recently received
from a mother
who had recently received an inheritance
and she would like to take
a portion of that inheritance
to start policies on her 3 children.
Now her 3 children are grown up
they're adults
either in their late 20s and early 30s
we're going to go through the specific ages
model everything out like we usually do
but she received an inheritance
and would like to take some of that money
and start smaller policies for her kids.
Now she mentioned a couple things
in her email right out of the gates
the first thing before we had
any communication she sent this
she said I'd like to give these policies
to the kids with no strings attached
meaning not required to pay anything
after I get the desired dollar amount
into the policies.
Meaning once she moves
that portion of money into the policies
on her 3 children
she does not want to be required
to pay anything
and she does not want her children
to be required to pay anything.
The next thing she mentioned is
when they receive the policy
I want them to have access
to as much cash value as possible
that is a specific goal of her
so she doesn't want to have to pay in
for a long period of time
I want to get the money
into the policy and stop
and then I want them to have
access to the money.
Now as we progress through this
we are going to show some options to (1)
show her exactly what she wants to see
just from a business process
or running a business
my firm belief is show the individual
what they want to see
if you as the professional
the agent feel better options exist
show that in addition
to what they want to see.
What drives me up the wall
is when I ask for a certain product or service
and someone shows me something else
because they think it's better for me
it's like now show me what I ask for.
So if you're in the business
make sure you're always showing the person
what they want to see first and foremost
and then you can show additional options.
Anyway let me get back on track
so I don't ramble here
so what she has specifically requested
is she wants to pay in $5,000 each
for each of her 3 children
but here's what she mentioned
which immediately told me
she was doing some research
which is good
she was interested in a 7-Pay policy
so the nice thing about a 7-Pay policy
is you can fund right up to the
MEC limit for 7 years
and then shut it down
with what is called a reduced paid-up option
this eliminates the premium altogether
and really what you'll find in most cases
is that it maximizes
the internal rate of return
the overall growth rate of the cash value
on a guaranteed and non-guaranteed basis
it can be very attractive.
So that's what she's interested in
in this particular case
so what we're going to look at here
is $5,000 per year
going into a policy for 7 years
so that's $35,000 total
$5,000 times 7 years
but over 3 policies
so that's actually just over $100,000 total
you'll see it
when we go through the numbers here.
But one of the things I mentioned earlier
show the individual what they want to see
however building additional awareness
is always a good thing in my opinion
we don't want to info overload someone
which I've definitely been guilty of many times
but providing that additional awareness
this way I don't get into an option
and then find out after the fact
if I could rewind the clock
I would do things a little bit differently
than what I did in the past.
So a lot of times when
people are interested in
starting policies for minors
or their children
who still have a long way to go just with life
funding it for 7 years and stopping
is appealing
when you look at the internal rate of return
however we might want to fund it
for a longer period of time
so if we can build in the option
to pay into the policy
for a longer period of time
would that be something
that you might be interested in?
Maybe
maybe not
if it was me
I would like to see it as an option.
So the kids might see the benefit
to adding more money to the policy
when they receive it
perhaps they receive it in year 7
or year 8
and they see wait a minute
this is a great area to position money
the cash value is safe
liquid
tax-free if it doesn't become
a modified endowment contract
or I don't trigger a taxable event
I've got all these benefits
and it's growing between
that 3% to 5% per year
like I'm interested in that
can I continue to add
more money to this product?
Can I keep on feeding the beast?
If we exercise that reduced paid-up option
after 7 years and just shut it down
the answer is no.
Back to options
we can actually go with the same policy
where I can elect to stop funding altogether
after 7 years
or I can keep funding
and I do not need to decide that upfront
we can build in a ton of flexibility
so when I hit year 7
I gift it to the kids
they want to keep funding it
they can keep funding it
completely up to them
or we can shut it down
so we don't have to decide now is my point.
Information here
specifically what we're going to look at
is as follows
we've got a 32-year-old male
31-year-old female
and 27-year-old male
I did not write that info
let me write it right here quick
male
female
male
funding $5,000 per year for 7 years
and then also $5,000 per year for 7 years
and then $1,000 per year
years 8 through 30
now they can continue to fund
a higher dollar amount
but what a lot of people appreciate
this is just from time and experience
is hey what's the policy look like
if I pay in $5,000 per year
but if my son or daughter
does want to continue to fund it
I don't know
that they're going to be comfortable
or have the ability to pay in
the full $5,000 per year
can they pay just the minimum premium
or in this case $1,000 per year?
The minimum premium
in some of these examples
is about $500 per year
a little bit less on some of them actually
but just for the sake of round numbers
we wanted to show
the $5,000 per year for 7 years
and then $5,000 per year for 7 years
so these 2 are the same policies
but what does it look like
if they keep pumping money into the policy?
And we're going to look at
2 different companies here
MassMutual and Guardian
2 of your 4 major mutual companies
let's get into it.
What we will begin with
is the exact option that she wanted to see
which is this guy
the $5,000 per year for 7 years
with nothing thereafter
not required to pay another penny
let's have some fun.
So what do we see here
32-year-old son
31-year-old daughter
and 27-year-old son
these examples are a pure 7-Pay
funding right up to the MEC limit for 7 years
and then shutting it down
I'll actually add that
we did over-inflate that MEC limit a little bit
which really doesn't matter in this case
but I did over-inflate it
it's higher than $5,000
and that allows them to continue
to pump money into the policy
beyond 7 years if they want to
but here's 7 years
not a penny thereafter
maximum cash value
1st year $5,000 goes in
about $4,200 right off the bat
what's highlighted in yellow
represents the break-even point
so as we look at our total payments
just about year 5
you've paid in $25,000
you have $24,917
by year 6 you are positive.
After year 7
you see no payments made whatsoever
the premium is not due
we completely killed it
with that reduced paid-up option
which eliminates the premium
once we execute that reduced paid-up option
even if we want to add money we cannot
we can borrow and repay all day long
but we cannot continue to make premium
or PUA payments
if we execute that reduced paid-up option.
You'll also notice
that the death benefit drops initially
when we do this
so here this is what she wanted to see
so we want to start
exactly where the client is
or the potential client is
where they want to start
cash value continues to grow
let's take a look at it over the long haul
there we go.
If we look at age 70 here what's he got?
$167,000 in cash value
$235,000 in death benefit
based on the present dividend interest rate
which will not remain steady
for the next 40 years
or in this case 39 years
it is going to adjust as time passes.
Moving on to the next example
31-year-old daughter
same $5,000 in
a little bit stronger cash value
not much of a difference
but a little bit more
by year 5 I'm positive
as opposed to the 32-year-old son
you're still just under $25,000.
Do you know why the difference exists there?
because they're about the same age
they're 1 year apart
females live longer than males on average
typically by about 7 years
so what that means
is that the internal insurance expenses
are a bit lower
now going back to that 7 years on average
and how that factors into life insurance pricing
is if we have a 31-year-old female
that would actually be comparable
subtract 7 from that
to a 24-year-old male
if you were to look at illustrations
or just price quote life insurance policies
you would find that a 24-year-old male
and 31-year-old female
will be priced very very similar
which is interesting
when you look at how it works.
So that's just me being a nerd
and going into life insurance policies to say
the reason why
I see a clean break-even of year 5
with a 31-year-old female
and not with a 32-year-old male
is because the internal expenses
are a little bit less
even though all things are equal
we minimize the base premium
maximize the cash value like we always do
but because she's a female
you've got a couple dollars more in cash value
$200 in this example
which does give you a clean
break-even of year 5.
Then when we look at the
27-year-old son
with him breaking even year 5
a bit younger here
as we look at this at year 10
check this out
they're all within
a couple hundred bucks of each other
and this is the 7-Pay
with no payments thereafter.
So this is just
a pretty straightforward example
of a MassMutual policy
maximized for cash value
max funding it for 7 years.
Then to provide a little bit more detail
we did put this together
which if you've watched
any of our content where we've got
real estate investors
or engineers paying in 6 figures per year
what they like to see is this kind of stuff
in my experience I've learned
that not everyone cares about this
but some people do
so what I'd like to do
is provide really both options
here's a detailed analysis
with the annual internal rates of return
and average internal rates of return
which are pulled directly
from the full illustrations
and then here's what it looks like without
and we provide the full illustrations as well
a lot of work to put together on the back end
but really what we're aiming for
is full transparency
and then also making it convenient
for the recipient
or the consumer in this particular case
but now we've got
the internal rates of return
which look fantastic across the board.
Let's look at
the 31-year-old female in this case
what this sheet represents
we've got the internal rates of return
but I don't really want to focus
on those in this example
what I want to focus on
is the different funding scenarios
in fact let's do that
I'm going to clean this up a little bit.
So as we look at this
what do you notice?
We've got the company name
and the description of each scenario
all on a 31-year-old female
we've got a MassMutual policy on the left
if you rewind this video a little bit
you'll notice that this scenario
is identical to the scenario we started with
this is that same MassMutual policy
funded for 7 years
nothing thereafter
cash value continues to grow
compared to another option
in this particular case Guardian
2 of the 4 major mutual companies
can't go wrong with any of them
even though they project
different long-term values
what I've noticed
is with Mass and Guardian
and New York Life and Northwestern Mutual
they all go back and forth with each other
and I've seen almost all of them
argue that we're the best
here's proof of it
but when I look at independent studies
I can't say that one company is just the best
if we could we would
with respect to the internal rate of return
is what I mean when I say that
but we see them always
go back and forth with each other
and here frankly it's very very close
if we look at the year 10 mark
$42,776 compared to $42,111
not much of a difference
and you've got different illustrations
from different companies in this example
breakeven point very comparable as well
with the products that we selected here.
But then
here's a quick sample
of the same policy
funded at $5,000 per year for 7 years
but what does it look like
if I want to continue
to make payments to this policy?
Whether it's the minimum premium
of just under $500 per year
or if we just round off to $1,000 per year
she'll be 38 at this point in time
she might say hey I like the idea
especially when I look at this policy
I add $1,000 I get that $1,000 back
plus about another $1,600 on top of it
and each year
the growth continues to accelerate
yeah this is a great area to position money
I've got the guarantees
I've got the dividends that are paid each year
dividends are not guaranteed
but have been paid for over 160 years
especially with these 2 carriers
so I've got all these benefits here
so I can keep on feeding this policy
keep feeding the beast if I want to
but I'm not required to do so.
We stopped it in 30 years
on all these examples
we can design it to go longer if we wanted to
at different amounts and such
but just from a conceptual standpoint
this allows the individual to see
what would this policy look like
if I start the policies for my kids
and I stop altogether
just like I want
with 2 different companies
I would go through the flexibility and such
of both as well
to help her refine her decision-making process
but then if they decide
to continue to pump money into it
what's the impact look like there?
Especially
if we go down to let's say 85
where the death benefit
starts to carry some more weight
or importance I should say to a lot of people
these examples now
$466,000 paid out income tax-free
versus the 7-Pay example is $352,000
just about $400,000
these death benefits
will be drastically different
than what's projected here
55 years down the road
just based on dividends
and how they fluctuate over time.
But my point is
you will see more money
if you continue to pump money
into the product
which can be viewed as an advantage
especially when passing money
when looking at generational wealth
whether we've got giant policies
small policies
it doesn't matter it's all relative
and it is paid out income tax-free.
So I hope you enjoyed this one
I enjoyed it quite a bit.
Thank you for the email
if you're watching this video
with the questions
because this is a question
that a lot of people have
and some additional points
some goals that were laid out
these are good goals just to mention
because it does get people thinking
with respect to what they can do
with high cash value life insurance policies.
If you enjoyed this
please hit the like button
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I appreciate you watching
all the way through the end
and as always I hope this helps.
Have a great day.
Hey guys Steve Parisi here
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