What I want to talk about today
is funding a whole life insurance policy
and the different ways that you can do it
because when it comes to funding
a whole life insurance policy
this can often be an area that stops people
from even considering a policy.
There are typically 2 main reasons why
when it comes to funding
a whole life insurance policy
what people do not want is (1)
they do not want to be obligated
or committed
to paying a large premium every single year
and then (2)
people typically don't want to pay premiums
for their whole life.
When you hear the word whole life insurance
how long
do you think that you have to pay premiums?
It's very common for an individual to assume
well I thought you had to pay for your whole life
that's the name of the product, right?
You don't have to do that at all I promise
so we're going to look at some examples today
or I should say
we're going to discuss some examples
and we're going to talk about
really what a lot of people we work with
what they like to do with their policies
with respect to funding them
and how we set them up.
So when we look at the cash value benefits
this is often what attracts people
to a whole life insurance
they're taking the policy out
because they want to maximize the cash value
and then be able to use the cash value
and when we look at the cash value
core benefits it is safe
liquid and tax-free
tax-free if we do not trigger a taxable event
one of which is a MEC
which stands for modified endowment contract
we'll talk about that
a little bit more later in this video
but when it comes to money going into
a whole life insurance policy
so this specifically
is your money going into a policy
pretend this is you
here's the questions I would ask
or I should say the questions I would
encourage you to ask yourself
how much and how long?
Meaning how much
do you want to fund your policy with
and how long
would you like to fund the policy for?
Now the first question
I would phrase it a little bit differently
I would actually ask it like this
how much do you want the ability
to add into a policy on any given year?
Because if we go back to that first objection
which is where people often stop and say
I'm not interested in whole life insurance
because I don't want to
what was the first objection?
I don't want to have to pay
a huge premium every year
I don't want to be committed to this big bill
so going back to this question
how much do you want the ability
to fund a policy with every single year?
Well we can set a policy up to be very flexible.
I'll give you a quick example
we've got the first two down here
$100,000 per year
and then $100,000 per year
with minimum commitment
so what's cool about this
is this could be the exact same policy
for the exact same individual
we can set the policy up in a manner
where (A) we're paying $100,000 per year
and that's the dollar amount
an insurance company bills us
for every single year
so I billed for $100,000
and we can set it up for maximum cash value
but every year when I get that statement
and billing notice from the insurance company
I've got $100,000 per year.
The 2nd example we see $100,000 per year
but with minimum commitment
or what's that mean?
Well what that means is we can set it up
where we are only billed
for about $10,000 per year
but then at the same time
I can add more money into the policy at leisure
up to a total of $100,000
so that would be another $90,000
because my premium does count
toward the $100,000
and my point is
I'm billed for $100,000
and I can add up to $90,000 per year
but I don't have to do that either
so now all of a sudden what I've done
is taken a whole life insurance policy
designed for maximum cash value
and made it very flexible
where I know I can hit $100,000
but I don't want to be
committed to that every year
it kind of feels like a burden to me
but hey if I could commit
just to $10,000 per year
that would not feel like a burden at all
and this is true regardless
of the dollar amount you're looking at
if it's a maximum of $50,000 per year
guess where the minimum premium could be?
Close to about $5,000 per year.
If you're looking at $1,000,000 per year
guess where the minimum premium would be?
About $100,000 per year
so often we can drive that minimum premium
as low as 10%
with some of the top major mutual companies
your big 4
and some smaller companies
will also allow this
some actually even let you go lower
than this 10% minimum
my point is how much?
How much do you want the ability
to put that word there
to add to a policy on any given year?
If it's $100,000 per year
now we know we can design the policy
with a very low premium
so you can commit just to $10,000 per year.
The second question is how long?
How long do you want to pay into the policy?
And the most common answer I receive
when I ask someone this question is this
I don't know
which is perfectly fine by the way
but we don't know how long
we want to pay into it
however what I do typically see
is one states I know I can pay into it
or I know I want to pay into it
for at least 5 years
at least 10 years
after that I'm not quite sure
I want to keep on paying into this policy
I might want to just let the cash value grow
and then use it
accessing it like a line of credit
but I don't know that I want to pay forever
but I might want to pay forever
so that does have to do more with the product
and the agent that designs the policy
but guidance on this certainly does help.
For example
it's very common for individuals to state
here's how long I want to pay into it
or I've got a lump sum of money
say it's $1,000,000
how many years
should I move that money into the policy?
So with a lump sum
if you've got $1,000,000
what makes the most sense?
I remember years ago
I would get the question a lot
hey can I just throw this full $1,000,000
into a policy?
Whatever lump sum
the individual is dealing with
the company is paying a dividend rate of 6%
and if I just throw $1,000,000 in
it starts to earn that 6% dividend right away
correct?
It's not quite unfortunately
(1) we can look at how dividends work
but (2) we've got a life insurance product
and no matter what happens
we've got a premium that's due
at least through the 7th policy year
so if I just throw a lump sum into a policy
and I pay nothing beginning year 2
well that premium
has to be paid from somewhere
it's paid from the policy
which is going to drag on the performance.
So let me answer the question
by asking a question
if this is you
you want to throw $1,000,000 into a policy
and we're going to look at the same company
same product and everything's identical here
and I'm going to give you 3 options
and say which one do you think provides
the best overall value?
We've got option A
you're going to move that
$1,000,000 into a policy in 1 year
a one-time lump sum
option B is $250,000 for 4 years
a total of $1,000,000
or option C is $100,000 per year for 10 years
again same company
same product
everything's identical with the exception
of how we move that money into a policy.
Well this option
would produce the greatest results
and we've got videos
that provide a thorough breakdown
on lump sum payment
and exactly how that works
but a lump sum there
going back to the question
how long do I want to pay into it?
Well it's going to be a shorter period of time
and you might answer the question by saying
I've got a lump sum of money
tell me what to do
or show me the best option
and then we would do exactly that
or you might want to be able to pay forever
or stop at age 65 perhaps
there are many different ways
you can set up a policy
with respect to the funding period.
So let's take a look at
actually funding a policy
and what that looks like
with respect to the mechanics
so when I have a whole life insurance policy
let's say I'm this individual down here
I want to be able to pay
up to $100,000 per year
but I don't want to be billed for that
I do not want this policy to feel like a burden
I really like the benefits
that come with cash value life insurance
but man if I'm obligated
to this $100,000 per year
I'm just going to be
thinking about it all the time
and I'm going to be stressed out over nothing
like I don't want that.
Not to worry we can make it very flexible
so of that $100,000
did you know we can actually choose
where that money goes?
We can elect for it to go
toward the base premium
or the PUA Rider
base premium dollars if I have 10% here
which with those 4 major mutual companies
is often as low as I can drive the base premium
sometimes you can go lower
depending on the company and such
but let's say it's 10% in this example
$10,000 base premium
premium dollars
with a traditional whole life insurance policy
typically do not build cash value in the 1st year
sometimes it's the 1st and 2nd year
what's important to note
is premium dollars do build cash value over time
so if it's a traditional
whole life insurance policy
when I say traditional whole life insurance
I'm referring to a policy
that is called a whole life 100
or paid up at 100 or paid up at 121
so a whole life 100
means that the premiums are payable
up until age 100
and that's the most commonly
type of life insurance policy that is sold
my whole life 100
a traditional type of product
and those products typically do not build
any cash value from premium dollars
in the 1st and 2nd year
but in the 3rd year
I would see the majority of that $10,000
come back to cash value
it starts to compound
and get better and better from that point forward
but the reason they do not show up
in cash value initially
premium dollars that is
because the company
is going to overcharge me
for a death benefit upfront.
Let's say the death benefit is $500,000
let's make that a bit smaller
so $500,000 death benefit
and if I stop there
and say I don't care about the death benefit
I'm interested in the cash value
which is a response we often hear
what's important about the death benefit
is that it has a direct relationship
to that MEC limit
MEC is that modified endowment contract limit
and in this example a $500,000 death benefit
will get you approximately
$25,000 in MEC space
well pretend this is a 40-year-old individual
so I want to pay in $100,000 per year up here
I've got a base premium of $10,000
I want to keep that premium low
because it does not give me cash value initially
but I've got this MEC limit
which is that taxable line
if I pay more than that MEC limit into my policy
it becomes classified
as a modified endowment contract
then the cash value grows tax-deferred
anything I accessed
I've got to pay ordinary income tax on the gains
plus a potential 10% penalty tax
I don't want that MEC to occur
like no prevent it please.
So where I'm at right now
how much could I add to my PUA Rider?
Could I add another 90%
of my desired payment?
No, I could add another $15,000
because my MEC limit is $25,000
so what I need to do is raise my MEC limit
to prevent this taxable event
this aligns
with the third core benefit of the product
tax-free
the cash value that is
so there are 2 ways you can do that
(1) you can increase your premium
most people don't want to do that
because it forces
the minimum commitment higher
remember purpose of this
is to make it very flexible
I want flexible funding
so the policy does not feel like a burden
so what we can do then is this guy
we can add a term insurance Rider to the policy
let's say it's $1,000
that term Rider does not build cash value
however
that term Rider does buy us life insurance
of another $1,500,000
a term insurance Rider is a very cheap way
if you don't like the word cheap
a cost-effective way
to add more life insurance to your policy
which does what?
It adds more MEC space to the policy
so now
we've added another $75,000 of MEC space
when you add those 2 MEC limits together
because you've got the $500,000
whole life death benefit
plus the $1,500,000 term insurance Rider
all part of the same
whole life insurance death benefit
what's your MEC limit?
It's $100,000
so now what I can do
is commit to $11,000 per year
and a lot of times we'll set it up where
$10,000 is a combination
of both the base premium and term Rider
does depend on the company
but now if my minimum is $11,000 here
I can just throw another $89,000
into the policy at discretion
which will really maximize the cash value
and there's more to this
I would check out our video
on how to maximize the cash value
of a life insurance policy
to go through a full breakdown in this piece
but my point is this
when it comes to funding
a whole life insurance policy
what people don't want
is to be committed to a large bill
what people don't want
is to be committed
to making premium payments
for a long period of time
so what we'll often see is a case like this
where one is committed to $10,000 per year
or an amount they know they can handle
no problem
and then they'll add more money
into the policy at their discretion of $100,000
and then what you can also do
very very easily
is stop after a short period of time
because if you max fund a policy
by throwing more money
into the PUA component
you put yourself in a position
where if life happens and you can't pay
or if you just want to stop altogether
you can do that no problem
we'll often see individuals
say okay I want to go with this design
but then after 5 years
I've gotten a total of $500,000 into the policy
I'm good I don't have to pay anything else in
can I just stop?
The answer is yes
and here's what it looks like if you stop
based on the guaranteed values
and here's what it looks like if you stop
based on the non-guaranteed values
and here's what actually happens
when we track your performance year over year
as we continue to do that
the point though
is when it comes to funding
a whole life insurance policy
you do not need to be committed to a large bill
and you do not have to pay premiums
for a very long period of time
you can do either of those if you want to
but at the same time you can make it flexible
and now all of a sudden we have less stress
and can really use the policy to the full.
So I hope you enjoyed this video
let us know if you have any questions
please leave them below
and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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