Let's look at an example here a quick case study.
(that's better)
So what we've got on the left is a basic example,
35-year-old male funding a policy of $30,000 for 5 years,
can easily design to go longer
but a short pay, breaking even year 4,
looks great, 10/90 split, 10% base premium,
Term Rider attached, there it is.
As the whole life death benefit goes up, the term comes down
keeping you level at the $1,000,000 death benefit.
Where we came up with the $1,000,00,
I should say the $30,000 figure here Is... (there you go)
based off the MEC [Modified Endowment Contract] limit.
Meaning, that $1,000,000 for a 35-year-old male
got us almost exactly a $30,000 MEC limit.
It was a couple hundred dollars higher with this particular company.
So this is a maximum cash value policy
based off of this 35-year-old situation he looks and says:
"Man, I like this but
I just don't think that I'm there yet,
it's not a fit right now."
No problem, let's propose a convertible term policy.
So now we take out a 20-year term,
$1,000,000 death benefit,
just under $500 per year for the annual premium.
So now he can make that premium payment every single year
guaranteed to remain level for 20 years
and he has the option to convert it partially or fully
during that 20-year period.
So that's the advantage and it is based off of his health rating,
she's a 35-year-old runner so we'll assume the best class.
A lot of times younger individuals will obtain these policies,
a lot of physicians when they're in med school,
their income is about to take a huge jump in a couple years
so they will lock in a convertible term policy
based off their health rating today and then they can flip it over
to whole life later without having to go through underwriting.
Okay, so we took the term policy out as an alternative to this
because it wasn't a fit yet.
Let's look at the limitations here
so 5 years in is when we're going to assume we convert this policy,
let's begin with the term policy on the left.
So 5 years in, we're in year 6 here when we decide to convert it
so the term begins year 6 in this example.
We are now 40 years old, the preferred design,
meaning this individual says: "Okay I can pay in the $30,000
let's go with the original plan I really like that
the idea of getting a $150,000 in,
the ability to keep paying but I want to stop altogether after that
I don't want to be required to."
So we've got $150,000 going in,
10/90 split very, very similar cash values
to the 35-year-old male individual.
This one's slightly less just because he's a bit older.
But we designed it with the same $3,000 base premium
added a bit more term because he's 40 now
for the same $1,000,000 death benefit
so the liability for the company is exactly the same,
looks good.
However, you may have observed this already
here we've got requires full underwriting,
This has to do with the limitations
this is the important piece here.
So the requirement here is when we convert the policy
if it's 5 years in this particular example
of the $1,000,000,
the whole life death benefit
must be a minimum of $500,000
which forces a base premium for a 40-year-old male
of $8,725.
Not $3,000 which is what he preferred.
If he wants that, that's going to require underwriting again.
So if he wants to convert the term policy to whole life insurance
it's going to force a higher base premium.
Now he can still pay in $30,000 per year
the MEC limit because he's older now is about $36,000
so we could optimize it a little bit more
than what we have illustrated here.
But let's assume just Apples to Apples
from a funding standpoint death benefit
here's what I wanted with the convertible term,
I couldn't get it because of the limitations that exist
with the particular insurance company here.
So here's my alternative, does it make sense
or does it make sense for me to go through underwriting?
Same out of pocket okay, break even's a bit delayed.
My cash value right off the bat is $53,000 less,
the reason why is the base premium is being overcharged in the 1st year with this example,
to satisfy the cost of the death benefit,
the primary cause of the death benefit I should state.
Now as time passes what happens?
Falls further and further behind.
Why this death benefit drops year 8 in all of the examples except for the term
(By the way, some extra information)
we illustrated a reduced paid-up there so we killed the premium
but cash value continues to fall behind and the reason why,
is due
to the higher base premium, how it was originally structured
which we were forced to do this.
So that is a limitation we want to be aware of.
You know a lot of times we receive calls from individuals stating:
"Hey I want to convert this term policy but my agent is showing me
a higher base premium, are they trying to take advantage of the situation? "
It's like: "No, they're not at all actually."
The issue is really outside of their control.
It has to do with the insurance company limitations.
And this stuff you've got to dig for it or learn through experience
that companies do assess limitations
on term insurance conversions when I'm blending a policy.
If I'm just buying a basic whole life insurance policy,
no problem, but if I want to design it with a minimum premium,
Term Rider, optimize the cash value,
there are limitations that I need to be aware of.
And this is a general video, why I mention this is
every company does have slightly different limitations.
I use that 5-year example quite a bit.
If I convert within the 1st 4 years
I can squeeze that premium a bit lower.
If it's beyond 5 years,
a lot of times I have that 50% whole life death benefit requirement
which forced in this particular example, an $8,700 premium
and the older he grows the higher that would be
its based on when he starts.
So it's good to be aware just of the information upfront
because the last thing I want
if I'm an agent putting someone in these products
or a consumer considering this,
is to think I can get this and then told "no" by the company
"you have to go with this option unless you go through underwriting"
and then the response is: "Well the whole point of buying
that convertible term policy was
so I didn't have to go through underwriting again."
So again know this is a lot of information.
If you have any questions feel free to reach out anytime.
As always I hope this helps, I'll talk to you soon.
Hey guys Steve Parisi here.
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