What is going on everybody?
Steve Parisi here
I hope your day's off to a great start.
In this video
we are going to go through
how to design
a whole life insurance policy
for maximum cash value.
When it comes to whole life insurance
a common assumption
is that I am purchasing
a life insurance policy
if you've ever been presented
whole life insurance
or perhaps you've owned it in the past
let me know if you've thought of it like this
I have a policy
where I pay a premium
I have a death benefit
typically that premium is very high
I view it as expensive
I'm told I have this great cash value benefit
but in the 1st year
I have next to nothing
or perhaps I have a percentage
of my payment in cash value
but when I really look at the numbers
it takes me something like 10 years
just to break even
meaning if I've paid in $10,000 per year
for 10 years
a total of $100,000
at that point in time
I have $100,000
and I'm in the red negative
all the way up until year 10.
This is why people typically
do not like whole life insurance
and they say okay
I hear these great things about it
that the wealthy put a lot of money here
it's safe, liquid, tax-free
but then I see an option and frankly
I'm not interested
like I'm not going to waste my money
or wait 10 years just to get it back.
But then when it comes to
a whole life insurance policy
here's the key on this
did you know
here we go
did you know
that if you're paying
any amount of money into a policy
you the policyholder
can actually decide
where your money goes.
At the end of the day
your money can go toward 1 of 2 areas
I can direct my money
toward the insurance premium
or directly toward this PUA Rider.
Premium dollars
I like to refer to these as
insurance expense dollars
initially if I pay any amount of money
toward the premium
with a traditional
whole life insurance policy
say it's $1,000
I won't see anything
show up in cash value
often in the 1st year
and sometimes the 1st and 2nd year
and the main reason why
is that premium dollars
primarily purchase me
life insurance first
and then cash value is secondary
in the 1st year
2nd year
nothing shows up in cash value
beginning year 3
if you continue to make that
$1,000 per year payment
I would see it come back to cash value
but a nice way to explain it
from the insurance company's perspective
is that they are going to overcharge you
for the cost of insurance
the whole life death benefit upfront.
Whereas PUA
that stands for paid-up additions
this Rider I like to refer to it
as a cash dump in
if I were to pay the same
dollar amount here $1,000
I would see that show up in cash value
that's money you can access right away
that begins to earn
the guaranteed rate right away
it begins to earn dividends
this is the key to accelerating
the cash value component
of a whole life insurance policy.
Now it does buy you
some additional death benefit as well
but just about everyone that we work with
when they are pumping money
into this component right here
guess what they're interested in?
The cash value
so many people express
I don't care about the death benefit
I'm interested in the cash value primarily
that is why I'm paying money
into a whole life insurance policy.
It reminds me of a story
when I was in my early years in the business
when I first got into the business
for a couple years
I'm playing around with the design software
I'm sitting on the couch next to my dad
and he's always been into numbers
finance
investing
it's always been his thing
and he's looking at the numbers
and he says huh you know that's interesting
you know if I put money into this policy
can I just put
nothing into the premium
and put everything there
into that PUA piece?
Because he was interested
in the cash value
and my answer was well dad
we can't go quite that low
you have to put something in the premium.
And my dad being my dad
at that point in time
said I don't want to do it then
and about 10 years later
he purchased the policy
he might have been 8 years later
but my point
is he was not interested
at all in the death benefit
he was interested
in the cash value component
because with the whole life insurance policy
it is a safe
liquid
tax-free area to position money
I can also borrow against that policy
and my money continues to compound
as if the money were still there.
But naturally if I go back to
the story about dad
he wanted to pay nothing
toward the premium
he has to pay something
toward the premium
here is the question right here that comes up
following up okay
I'd like to pay 0 here
if I can't go 0
how low can I go?
And the answer to that question varies
depends really on the insurance company
you'll find with the top
companies in the industry
your 4 major mutuals
a MassMutual
Guardian
New York Life
or Northwestern Mutual
who have always been just leaders
in respect to crediting
the strongest actual cash values
to policyholders
you'll find that typically
the lowest you can drive that premium
is approximately 10%
which allows me to then allocate
90% toward the PUA component
so what that would mean
to demonstrate
if you said okay
I'd like to be able to pay
$10,000 per year into a policy
but I do not want to get a bill for that
I don't care about the death benefit
I'm interested in cash value
how do I get the best possible cash value
assuming I make this
$10,000 per year payment?
And what you could do literally
with the design
is set it up where we have a
$1,000 minimum premium
that would be your annual commitment
so you're billed for that each year
and then at your discretion
you can add up to another
$9,000 per year into PUAs
totaling the $10,000
and to be very transparent
all companies have different limits
some companies
if you have a $1,000 base premium
will allow you to pay another
$10,000 into PUAs
for a total of $11,000
some smaller companies have no limits
where you can go much lower than 10%
so it does depend on the company.
But really to reiterate this story
how low can you go
does depend on the company
but what we found
with the top companies
those 4 major mutuals
which have always credited
the strongest cash values
when we drive the premium
as low as we can
that's where we really set up that
perfect storm
where we have maximum cash value
on a guaranteed
and non-guaranteed basis
and looking at history
and policies that have actually
lived the test of time
we've seen this to be the case
even more so.
So that limit
that I just referred to there
that 10/90 split
10% premium
would be an insurance company limit
so that's the first limit
I need to be aware of.
The second limit
would be this guy
this MEC which stands for
modified endowment contract.
So a huge draw
to cash value life insurance
is in respect to the cash value
if you do everything properly
you can access that money tax-free
anytime you want without penalty
if you do everything properly.
Don't you love it when people just say
if you do this?
I'm not going to tell you everything.
So if your policy
becomes classified as a MEC
a modified endowment contract
in the eyes
of the IRS [Internal Revenue Service]
what happens specifically
is your cash value
still grows tax-deferred
your death benefit is still paid out
100% income tax-free
but with a modified endowment contract
if you ever want to access the cash value
what will happen to be very specific here
is in respect to the gains
(1) you must pay ordinary income tax
and then (2)
if you touch it prior to the age
of 59 and a 1/2
we have an additional 10% penalty tax
and again this is only on the gains
but still
it ruins a lot of the attractive features
that come with a whole life insurance policy
in respect to the cash value.
So why I mention that
is when it comes to a policy
every policy
has what is called a MEC limit
and here's the fun part
that I love so much
you the policyholder and your agent
when you first open the policy
can actually set that MEC limit
wherever you'd like.
To get technical for a moment
you'll find that MEC limit
has a direct relationship
to an individual's age
gender
and the total amount of life insurance.
So if someone said hey
I'd like to have the ability to put in
say that same $10,000 per year
we could set that MEC limit at $10,000
it might require a $200,000
or $300,000 death benefit
again depends on my age and gender
there's a couple other factors
that go into it with the guaranteed rate
a company offers
but it is an IRS limit
that we want to set up appropriately
when we first start that policy.
So that's a quick demonstration
in respect to how we
design policies appropriately
if we were to look at a direct comparison
let's do that
we are going to look at a policy
on a 35-year-old male
paying in $20,000 per year
for 15 years up until the age of 50.
Now what's interesting about this example
is we've got the same company
same product
same out-of-pocket payment
$20,000 per year
but a different design
so what is the impact
to the consumer in this example?
Here 1st year
we see he pays in $20,000
this is an example
with a 100% insurance expense
so this is a policy where I pay a premium
have a death benefit
I could view it as an expensive premium
and then eventually
I see cash value build up over time.
So there's the $20,000 payment
right off the bat
about $700 in cash value.
Going back to the whiteboard
if you pay money towards premium
what happens in the 1st year?
Sometimes the 1st and 2nd year
nothing shows up in cash value
or a very small amount in this example.
Year 2 I pay in $20,000
I get just about all of that back
it starts coming back to work for me
but as I scroll down here
I see it takes about 12 years
where I have paid in
a total of $240,000
and I have $240,000
12 years just to get my money back
this right here
has been such a pain point
for so many individuals
in respect to whole life insurance
where they are interested in a policy
because the cash value
is safe, liquid, tax-free
that cash value is what they were sold on
that's why they want the policy
but then they see this
and like listen I don't want to wait
more than 10 years
just to break even
there are so many other things
I can do with my money in the meantime
it doesn't make sense for me
I'm not sold on it.
So this is typically
a big problem for individuals
when it comes to whole life insurance
where it takes too long
to get their money back
maybe it's 7 years sometimes
whatever it might be.
But let's transition to
the example on the right
which is the same company
same out of pocket for the individual
$20,000 in the 1st year
and he's got about $16,500 right off the bat.
The column on the far right
represents the cash value difference
how much more he has in cash value
with this option
compared to this option.
So what do we notice here?
Right off the bat
you've got almost $16,000 more
year 2 make the same $20,000 payment
I've paid in a total of $40,000
I've got $36,000
so $4,000 so far over 2 years
has not shown up in cash value.
What's highlighted in yellow here
year 5
represents my break-even point
there we go
I got a $100,000 in cash value
and almost $23,000 or more
in available cash value
when I compare the 2 options
again with the same company
identical product
all of that good stuff.
As I look at the years pass
what do I notice here?
Well if I look at the end of the funding period
year 15
we've got about $90,000
more in cash value
so from start to finish
you have greater value
with the example
with the minimum premium.
Another thing that is a huge selling point
in my opinion
is the option on the right
my commitment
because the premium is minimized
is a little bit less than $2,000
and that's per year
I'm sorry a little bit more
than $2,000 per year
but that's my commitment
and I can add more money into the policy
up to a total of $20,000 per year
if I choose to do so
so I have a ton of flexibility there
in the event life happens
I'm not committed to that $20,000 each year.
And this is really what we have found
to make or break
a whole life insurance policy
when it comes to the design
how do I design it
for maximum cash value
because when the cash value is maximized
that's when I am interested
in moving money here
I've got a death benefit as well over time
which is fantastic
and I can access that cash value
anytime I want to or if I need
because it's there
and this type of design typically
gives you greater value
on a non-guaranteed basis
if you want to look at the guarantees
we see the same thing over time
apples-to-apples comparison
on a guaranteed basis
the example gives me more money as well.
So I hope this video helped
I hope you enjoyed it
if you have any questions
please feel free to reach out anytime
and I'll talk to you soon.
Thanks again.
Hey guys Steve Parisi here
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