okay so here we're going to go through loan interest rates and we're gonna particularly
focus on mass mutual here so let's jump into it mass mutual they're 2020 dividend rates will be
6.2 percent and they have to loan interest rates available they have a variable loan rate which
we're gonna go into full detail on and then they have a fixed loan rate quick sidenote to
the two if we elect the variable loan rate what happened is the policy functions as a non direct
recognition policy if we select the fixed loan rate option the policy will function as a direct
recognition contract now one thing I will add on that fixed loan rate if we utilize that we
do not have the ability to use certain riders MassMutual provides to build in flexibility so
we rarely use it let's get into the variable loan rate how it works because I hear the term
variable and what do I think that rate can just shoot up on me well firstly what it is tied to so
MassMutual as a company sets a floor for their variable loan rate of 5% that is as low as it
can go for all policyholders it's been there for several years now as the loan interest rate has
been the interest rate environment has been very low now that floor what it is tied to I should say
what their variable rate altogether is tied to his Moody's corporate bond index average to sum
it up a triple-a rated bond now the variable loan rate with MassMutual as a company is tied directly
to that average bond index rate as one goes up the other can go up and down with it now the floor for
the companies rate again is 5% there's no floor for this it's been 3% and changed probably right
around three and a half percent right now it's been under five percent for several years point
being the company's rate will adjust with this bond rate unless it's below five percent that's
why the company has had a variable loan rate at 5% for so long now let's say that the rate shoots
up from 5% to 8% MassMutual as a company well they're variable loan rate will shoot up from 5
to 8 percent here's the thing for a policyholder I've got protections meaning if I start a policy
today what's the date today November 19th 2019 and the variable loan rate is 5 percent as a
policy holder so November 2019 will loan rate is 5 percent give ourselves some more space here
so variable loan rate is 5% November
2020 will say MassMutual as a company let's assume the loan interest rate shoots up to 10%
which won't happen but let's say it does does that mean as a policyholder my loan rate will increase
to 10% as well the answer is no I have protection on how much the loan rate can increase per year
here's how it works if I started with a 5% rate the maximum my loan rate can increase per year
is half a percent so what this means is if the insurance companies loan interest rate goes from
5% to 10% my rate as a policyholder will go from 5% to five and a half percent it cannot increase
by more than half a percent per year or 50 basis points now with that said let's say over a course
of 10 years my loan rate as a policyholder shoots up to 10 percent so variable loan rate eventually
gets up to 10 percent and then we'll assume that as a company their variable loan rate plummeted
goes back down to 5 percent as a policyholder remember I'm at 10 it's gradually creeped up I
will experience a drop all the way back down to 5 percent there's no floor on how much it can
go down with the exception being the 5% floor now an item we have not touched on yet is when
does my variable loan rate adjust with MassMutual which if I started a policy on November 19th 2019
and what's going to happen is November 19th of each year is when the company will look at what
is their loan rate as a whole as an insurance company what's my loan rate as a policyholder
and that's what is going to be pegged to my insurance policy so it it can adjust every
year on my anniversary date depending on what the actual variable rate is at that point in
time let's look at an example next let's assume that we have a policy where I have cash value of
$100,000 nice round number we've got the 2020 dividend rate of 6.2% and we are assuming the
variable loan rate which is presently at 5% if I book if I have $100,000 and I'm gonna borrow out
half of it $50,000 that means my loan balance is going to be 50,000 at 5% that 5% obviously
equates to $2,500 that is loan interest that goes we're not back to myself to the insurance company
now as a policyholder here's how it works for me that dividend rate of 6.2% continues to accrue I'm
still going to earn dividends on the full $100,000 as if I never touched the money in the first place
no lost opportunity cost keeps on going now that dividend rate 6.2 percent will be applied to any
money in cash and also the same to any money outstanding in loans a non direct recognition
policy does not recognize the fact that I have a loan outstanding money keeps on turning doing it
doing exactly what I wanted to do let's look at a quick example here so what we have is a
policy of a 40 year old male first paying in 50 a year for 10 years the first example is pretty
straightforward in the sense that we're gonna look at the policy accumulation and really what
it looks like I just parked money and let it sit and grow so here's my 50k for 10 years this policy
is designed with a 1090 split meaning five K base premium small term rider everything else plowing
into pu a's cash value so 15 year 144 just about at the end of the first policy year how that's
so cash rich upfront if this is the first time I've seen a high cash value policy like this
non MEC all that good stuff this is a 1090 split we drove the premium insurance expenses down as
low as the company limits and IRS would permit break-even point between years four and five
that's all set up properly what we can also look at here your year for cash 195 death benefit one
nine two three your forecast on the example on the right which is the exact same policy
except we're gonna look at borrowing and then repaying I want to see exactly what that loan
will look like on a massmutual policy okay as we scroll here here's my 200k loan that we pull out
two hundred thousand dollars when I pull out 200k here's what's going to happen my loan balance loan
interest each year so you see the five percent $10,000 that loan interest each year we're going
to start repaying at 20k per year we can make the repayment to whatever we want the point is here
whatever you see this a loan interest amount we put this column in here for this reason each year
this is the interest expense that goes to the insurance institution the five percent charge
important to be aware of that we do not pay the loan interest expense back to ourselves
now you see the loan balance chip away I'm paying 20,000 a year whole purpose of this
is when I borrow money I'm still receiving the dividend on what my entire cash value so here
I pull that 200k equity drop from 195 to 42 versus over here it's 252 cash value is the
equity I have access that's the money I can pull out now they're telling us they're still gonna
pay a 6.2 percent dividend rate on the full cash balance as if I never pulled it out in
the first place how they do that one there is an interest expense but mainly they collateralize my
death benefit here look at the two death benefit values and what do I notice dollar-for-dollar
reduction I pull out two hundred thousand I see a $200,000 reduction on the total amount of life
insurance remember a life insurance company's first and foremost goal is to do what pay out
life insurance claims so if I die with a loan outstanding that means they have to pay that
much less out if a claim is paid out if I die now really what I want to look at here is the
loan interest expense that's money that's going to MassMutual every year 5% but they're still
paying me dividends as if I never touch the money in the first place so what you will find and this
will be very consistent if I pay alone back in a year five years 20 years whenever if it's paid
back I pay back the principal and interest I don't throw anything extra into the policy I'll see my
cash value and death benefit restored to exactly what it would have been as if I never touched it
in the first place non direct recognition the company does not recognize the fact
that I have a loan outstanding if I selected the variable loan interest rate on the pile
so that is MassMutual variable loan rates and that's all I got more to come in the future