Have you heard mixed opinions
about whole life insurance in the past?
Earlier this week
I was speaking with an individual
who is considering putting in
over 6 figures per year
into a whole life insurance policy
and he's doing that
because he sees the benefits
he kind of has that wow moment to say
I didn't know you could do all of this
with the whole life insurance policy
this is a fantastic product
however years ago
he was pitched on the same
whole life insurance product
but he looked at it and said
there's no way
I'm going to put money into this thing
it's horrible
it takes over 10 years
just to get my money back
so the question for me
if I'm the consumer would be
like what's the difference?
Why are there so many opinions out there
about whole life insurance
specifically focusing on the cash value
and how do I make sure
if I'm considering a policy
that it is truly set up in my best interest
not the agent's best interest
not someone else's
who thinks they have my best interest in mind
or thinks this is how policy should be done
how do I maximize the cash value
for me as the policyholder?
I'm pretending I'm you
so I'm going to go through
exactly what makes a good policy
what to look for
and how to set it up for maximum cash value
let's have some fun.
So when it comes to
a whole life insurance policy
there are really 2 approaches one can take
the first is you can buy a policy
meaning you say hey
I want a $1,000,000 whole life insurance policy
and I give you a quote and state
it's going to cost you $20,000 per year
that's the worst approach in my opinion
I much prefer the second approach which is
when you take a whole life insurance policy
did you know that you can actually choose
where your money goes.
At the end of the day there are 2 areas
in a whole life insurance policy
where you can actually
allocate your dollars
the first is the insurance premium
this is often referred to as the base premium
with the whole life insurance policy
and the second is referred to as a PUA
that stands for paid-up addition Rider
and how I translate the two
is I'll often refer to as the premium
as the initial insurance expense
and the PUA Rider as a cash dump in.
Here's why
let's pretend for a moment
that you are paying $1,000 per year
toward the insurance premium piece
of a life insurance policy
premium dollars
with respect to your cash value
often do not show up in cash value
in the 1st year
and sometimes the 1st and 2nd year
let's assume it's just year 1 for this example
meaning if your premium is $1,000
$10,000 or $100,000
whatever it might be
the premium piece
does not show up in cash value in the 1st year
the reason why
is that the insurance company
is going to overcharge you
for the death benefit upfront
depending on your age
that $1,000 premium
may purchase you call it $50,000
in actual whole life insurance death benefit.
Now as you continue
to make premium payments
what you will find
beginning the 2nd year
that $1,000 shows up in cash value
it begins to earn dividends and interest
the guaranteed rate
you can access the money
and it gets better and better
however the 1st year
that premium does not show up in cash value
whereas the other area
the PUA component here
what I like to refer to as a cash dump in
if I pay the same $1,000 toward this component
guess what?
I will see just about $1,000
show up in cash value right off the bat
why I say just about $1,000
and not the full $1,000
is companies do have fees
that are associated with this Rider
to be specific if I pay $1,000 in
I might see between $900,000
and $950,000 in the cash value immediately
that begins to compound
and quickly make up for the fee
that the company assessed to it
but here's the point of attraction
money I pay toward this PUA Rider
is money I can access right away
money that begins
to earn the guaranteed rate right away
money that begins to earn dividends
this is really the key
to maximizing the cash value
on a life insurance policy
getting more money here
toward this PUA component.
Now you will find that PUA dollars
do purchase you some life insurance
PUA represents paid-up additions
meaning anytime I make a payment
I see it shows up in cash value
but it purchases me paid-up life insurance
why I have the term paid-up there
is because these payments are optional
I can elect to add money to the PUA Rider
or not add money to the PUA Rider
100% up to me
so a question we frequently get here is
hey thanks for going to that Steve
I don't really care about the death benefit
I'm interested in the cash value piece
how do I put 0% of my money into the premium
and plow everything else into the PUA Rider
maximizing the cash value from day 1?
And the answer is
we cannot go quite that aggressive
because there are limits
that I need awareness around
so when it comes to limits that exist
there's really 2 limits
that I want to have awareness on
as a consumer
if you're considering a policy
the first is the insurance company limit
and what you'll find
with some of the top companies
your 4 major mutual companies
a MassMutual
Guardian
New York Life
or Northwestern Mutual
I can typically 10X the minimum base premium
so what this means
is if I had $1,000 base premium
the company will often permit me
to throw in another $9,000 per year into PUAs
for a total of $10,000 per year
but I'm not committed to the full $10,000
so I can commit to the minimum premium
of $1,000 and then add another $9,000
at my discretion
some companies permit that the adjustment
or the additional funds are only added
when my premium is due
it depends on the company
and their flexibility terms
but typically you'll find
again with the top companies
that I can 10X my base premium.
Why I emphasize that
were the top companies
is that some smaller companies
allow you to exceed those 10X limitations
we do prefer the larger carriers
the 4 major mutual companies specifically
because we've seen them deliver
the strongest actual cash values
to policyholders.
So first limit to be aware of
is this 10X limitation
if I have a premium of $1,000
I can pay a total of $10,000 into the policy
if you said hey Steve I'd like the ability
to pay in $100,000 per year
like the gentleman
I mentioned earlier in this video
considering 6 figures per year
going into a policy
well in that particular case
he would want to set his minimum premium
at guess what?
$10,000 and squeeze the zero in there
this way he can 10X his minimum base premium
and get a total of
$100,000 per year into the policy.
So first limit to be aware of
is the insurance company's limitation
the second limit is our friends at the IRS
so any life insurance policy
can become classified as this MEC
which represents modified endowment contract
if a life insurance policy
becomes classified as a MEC
the tax benefits
that come along with the cash value
are out the window.
If my life insurance policy is not a MEC
I can access the cash value completely tax-free
it's very very attractive
to so many people in that respect
especially those in a higher-income tax bracket
because it's a safe, liquid
tax-free area to position money.
Now if your policy becomes classified
as this modified endowment contract
what happens specifically
is the cash value grows tax-deferred
but anything you access
with respect to the gains only
you have to pay
ordinary income tax on the gains
and if I'm under the age of 59 and a half
I have to pay a 10% penalty tax
it's not fun at all
so how I prevent that MEC from occurring
is every policy has what is called a MEC limit
and here's the fun part
you can tell I'm a true Insurance nerd
when I'm talking about these terms
and how it's fun
the fun part
is that you can actually set that limit
wherever you want
what you'll find to be technical here
is that the IRS really uses an individual's age
and total death benefit
on a life insurance policy
think of that as the measuring stick
that the IRS uses to determine
if a life insurance policy
is viewed as life insurance in their eyes
or a pure taxable investment
so I do need to be aware of that
really as the agent
but as from a consumer standpoint
it is good to have an awareness
really around the fact
that you can set that MEC limit
wherever you want.
If you ever hear hey you can't have a policy
with this much cash value because it'll MEC
I would question it a bit further
mainly because we can set that MEC limit
wherever we want and it's very easy to prevent
so let's look at some numbers
that specifically speak
to the policy design piece here
so what we've got here
is first the example on the left
a traditional policy
what I mean when I say that
is just a policy where the individual
purchases a death benefit
he pays $100,000 per year
a 100% base premium
meaning of his $100,000
every penny of it
is directed toward the premium.
Remember the 2 areas?
In red we had the premium
in blue we had the PUA Rider
everything's going into premium
here's this cash value in the 1st year
not quite a zero
but it doesn't look that good
he pays in $100,000
and has about $3,600 to show for it
this is based on a 50-year-old male
with one of the major mutual companies
as he continues to make
the $100,000 per year payment
what do we notice?
He pays into it for 10 years
up until the age of 60
a total of $1,000,000 in
it's not until year 11 when he finally sees
more than $1,000,000 in cash value
that's a long time to breakeven
and that's assuming
that the company's crediting rate
stays exactly where it is
or it will likely come down for a little bit
now what's interesting about this
is on the far right
you've got the exact same company
exact same policy
exact same out-of-pocket for the individual
but designed a bit differently
or I should say much differently
same out of pocket
the $100,000 per year
but where is the money going?
Your money can go toward the premium
or toward PUAs
here's the premium of $10,000
we do have other Riders attached to this policy
term insurance Riders and such
which if you have questions on that
we've got other video content
that goes into detail
but basically what you'll see here
minimum premium
minimum expenses
right off the bat we've got over 80%
of our payment in cash value
and that can be higher
with different products as well
but look at this exact same company
there's your cash value difference on day 1
$78,000 and more value
for the out-of-pocket payment
is identical to the consumer
so if you're interested
in a whole life insurance policy
specifically for cash value
this is the kind of stuff I want awareness around
so I make the right decision
and don't find out after the fact.
Look at some other things here
my breakeven
what this yellow represents
is when I have more money in cash value
than what I paid into it
so by year 5 I'd paid in $500,000
and I have $500,000
that is $110,000 more
than the example on the left
with the $100,000 insurance premium example
as I look at age 60
what do you notice here?
Almost $1,250,000
$234,000 more in this example
compared to the traditional policy
now there are many different ways
to design a policy
but this just provides a quick overview
on how to design a policy
for maximum cash value.
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Hey guys Steve Parisi here
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