Alright time to look at an actual policy.
In this video
we are going to look at a policy
for my friend KM.
Now when I say my friend
we actually have become friends
over the years
I like her and her husband a lot
I actually had the privilege
of meeting her in person
most people we work with
it is almost all remote
over zoom and phone calls
but she doesn't live too far
she lives in Jersey we're in PA
and she actually pre-COVID
before the pandemic hit
she came to an event we had
down in Bethlehem Pennsylvania
which was a lot of fun
and just a neat little story
her and GP who we'll talk about later
actually met each other
so we all sat at the same table
and it was a ton of fun
and a lot of other people
came to that event as well
but anyway that's me just telling stories.
What her plan was, well I should start
with the company she selected
as we looked at different options
was a massive size company
called MassMutual
her plan was to have a policy
with a total funding period of 10 years
and specifically what she wanted to do
was move $75,000 per year into the policy
years 1 through 2
and then years 3 through 10
pay a total of $50,000 into the policy.
Now what's really neat
or interesting about this case is
plans have changed
she's not paying the same
dollar amount in
for the same period of time
she has adjusted payments
as the years have passed
and she actually wants to stop earlier
than the 10th year
so she's planning to retire early
she might continue to do things
she enjoys working
she's really smart
I say that sincerely
she's a very very intelligent person
I'm always impressed when I speak with her
but regardless of what she does
she says hey if I retire
and we're going to take income
from this policy at some point in time
what's it look like if I stop early?
So we're going to look at just that
but before we just jump into
her stopping payments early
let's see the original plan.
She started the policy in 2017
so why that's important
is when we look at
MassMutual as a company
when we looked at the original illustration
let's pull that up
here's the original illustration
it started in 2017
and you'll actually see that down here
the 2017 dividend schedule right there
this is when she started the policy
that's when this illustration is actually
when it was run
and you can tell also
if you've been in the game for a little bit
by that logo
that's not MassMutual's logo anymore
they have updated it
but before I just jump into everything here
I talked about MassMutual's dividend rate
so here's the important piece
with historical performance
or what's very valuable
to look at I should say.
2017 when she started
what was the insurance company's
dividend interest rate?
Right here is 6.7%
what's important to note about that
is when we look at a full illustration
like what we just had up
and what I'm going to go back to
that illustration
if it reads current values
is based on the company's
present dividend rate
and it assumes that dividend rate
will be applied every single year.
That doesn't happen
we can tell from the dividend history here
this is where it's very very important
to track policy performance
we can look at in-force illustrations
what I like to look at
and what we're going to reference
in this video
are annual statements
that allows one to see
what was actually paid
real cash value
real death benefit
and then we can also cross reference that
with the illustration
to see if it performed on par
or if something's up.
So here we go 6.7%
next year what happened?
The dividend came down to 6.4%
it did the same thing
or remained at 6.4% for 2019
so 2018 is 6.4%
in 2019 is 6.4%
2020 came down again to 6.2%
and then 2021 and 2022 is 6%
she's in 2022 right now in this policy year
her anniversary date is October
so she's nearing the end of policy year 5
and entering policy year 6
so let's take a look here and have some fun.
What we will begin with
if I could speak today
is the original illustration.
Alright so what do we have here
from a funding standpoint?
Annual net outlay is $75,000 per year
years 1 and 2
and then $50,000 per year
years 3 through 10
where is the money going?
Policy design
premium
so this is something that once in a while
we were able to get a little bit lower
than 10%
we wouldn't be able to do it today
a clean 10% would be $7,500
here it's just about $7,300
so we're just under 10%
MassMutual and their software has
tightened things up a bit
where if we try to run a design
where it's not a 10/90 split
we'll get a warning
before it was on the illustration
now it's on the software that says
it's not 10% of the base premium
fix it because it won't be approved for sale
it's not quite that harsh in their language
but the 10/90 split is the most aggressive
they will allow with their products.
In any event we're right there in this case
we've got 75 years 1 and 2
and then $50,000 a year thereafter.
So years 1 through 2
how much has been paid into this policy?
It was $150,000.
By year 4 how much has been paid in?
So year 3 you've got $200,000
because another $50,000 went in
and then year 4 a total of $250,000
based on the present dividend scale
of 6.7%
if that remains constant forever
what will she have?
It's $250,000 exactly or $239 over
but you're right there.
The death benefit is overinflated here
when I say overinflated
we've got a MEC limit
that's higher than $75,000
so that MEC limit
we want to make sure is high enough
to accommodate the funding
so we'll see it
on the bottom right-hand corner
MEC limit's about $80,000.
Now I wanna mention something here too
what happens to unused MEC space?
So for example to illustrate
if this is you
year 1 you pay in $75,000
the IRS limitation
the MEC limit was $80,000
that means you could have paid in
another $5,000 but you did not
so what happens here is the unused $5,000
will actually roll over to the next year
so your MEC limit then in year 2
resets at $80,000 plus
the unused MEC space
from the prior year $5,000, $85,000.
The same thing will happen in the next year
the unused MEC space rolls over
is added on top of the $85,000
so your total unused MEC space now
is $90,000 or an additional $10,000
my point is unused MEC space
will roll over year to year
and you've got the ability
to make a large catch-up payment
in those cases
we have seen companies
allow people to exceed
their 10% minimum premium
no problem
because we're making up for lost time
and I think the company knows
that hey this person can't keep doing it
otherwise they'll run into a MEC situation
but why I mention that here
is this is a case
where that actually happened
just as she has pivoted her strategy.
So where we got the actual values
you're about to see
which will be on the Excel
comparison sheet
are as follows
so there's your dividend history
she started her policy in 2017
her first annual statement here
is right here
so here we've got
this is interesting on annual statements
where it reads annual base premium
that's not the base premium
as we just saw in the breakdown
so the annual statement
the language can be confusing
but here the base premium
will include any scheduled Rider
listed in the Rider sections.
When you've got Riders attached
like LISR and ALIR those are PUA
and term Riders with MassMutual
on the statement
they're all referred to as base premium
which can be scary for some people
because typically
once we dig into policy design
we know base premium bad
doesn't show up in cash value
right out of the gates
in this particular case the base premium
is exactly what we saw in the illustration
about $7,300
but ending cash value
the end of the 1st year
is $65,000 almost $66,000
now if a policy is backdated
you will see the 1st year's net cash value
a little bit less than the illustration.
So let's take a look here actually
well before we take a look
this was the annual statement
at the end of the 1st year
and then here's the annual statement
at the end of 2021
which the cash value here
is $381,000 and change
so as you see the actual values
that have occurred each year
where we get those
are from the annual statements
and this is really just call it
an added service we provide
for people we work with
when we want to track
the performance over time
and the reason why is
if you have a policy
you can track the performance
by referencing your annual statements
but that's a lot of work
or you can create
your own Excel spreadsheet
but that's a lot of work
so it's an added service
we like to throw in there
which we recently started doing
because it takes some time but
we're getting it more systemized now.
So what we've got actually
the original illustration
on the left exported to Excel
and how you can tell here
there you go
break-even point year 4
exactly it's $250,239.
Now the worst year is the 1st year
I pay in $75,000 I've got $65,683
so I take almost a $10,000 hit
what did not show up in cash value
in the 1st year
the biggest bite out of my cash value
was the base premium payment
where the other smaller bites came from
(A) from the term Rider cost
which is very low in this case
and then (2) from the PUA Rider fee
there are PUA Rider fees
if I make a PUA payment
in year 1 I'll usually see
depends on the company today
but somewhere between 90% and 95%
of that PUA payment
shows up in cash value in the 1st year
it's money I have access to and such
it's really the key
to accelerating the cash value growth.
Let's see what actually happened
so there's her projection
based on the dividend rate of 6.7%
we don't have the declining dividends here
I could put them on Excel
you'll see them in the next couple of videos
for different folks
but remember where we mentioned those
catch-up payments
the non-MEC catch-up payment
look at year 3 here
as far as what she has actually done.
So years 1 and 2
she funded exactly according to plan
the 1st year you can tell here
she did not backdate the policy
because the annual statement
matched that illustration
so when you look
at a life insurance illustration
the cash values are most valid
based on the year that you're in
here we have a projected cash value
the actual value hit
exactly what was projected
where that will not be the case
is if we backdate a policy
because PUA payments are always applied
based on the date of deposit
base premium dollars are applied
based on the date
that we backdate a policy
if we're paying monthly
and making PUA payments monthly
they're applied based on the date of deposit
so there's a couple of small things there
that we need to be aware of
which people look at
it's their money to say hey
why are my values not matching up
here it did because she paid on time
boom there's the value.
The next year
what happened with the dividend rate?
So year 1 it was 6.7%
year 2 well before we do that
on this illustration
the original illustration
what did the dividend project?
6.7% every year
what did it actually hit?
Is 6.4% for the next 2 years
so she paid the same dollar amount in
but with a slightly reduced dividend
what's the difference in cash value?
It's what we would expect
a couple hundred bucks
very minimal there
30 basis point reduction
she's got over 6 figures in there
so about $400 there less in cash value
as a result of the dividend reduction.
Now year 3 gets interesting
because the plan was to pay in $50,000
and what she did is hey
how much can I pay in
what's my total non-MEC catch-up payment
because she had some rollover space
and she threw in
almost right up to the dollar
we left a couple bucks in space there
and max funded it
made a big payment
okay she's at $230,000
this is where the original projection
can't really use it as a comparison anymore
because now the actual plan has differed
from the original illustration
we can still look at the break-even point
where it was year 4
year 4 now she pays in $60,000
a total of $300,000 in
and just about there.
What's your dividend rate in year 4?
It's 6.2%
so it's come down
somewhat significantly now
50 basis points but still
you're just about there
in the break-even point.
What I'll add is the policy design
and break-even points
are just actual performance
there's a big impact here
meaning actual performance is impacted
based on the policy design
specifically what I mean
is if you've got a policy
that is weighted heavily
toward the base premium
when dividends go down
that is impacted more
we see policies tend to underperform.
When we have a policy
that is weighted heavier toward PUAs
when dividends go down
we do not see as much of an impact
meaning when dividends decline
we see base premium dollars
and the actual dividend that is applied
more severely impacted.
What's interesting
is when the opposite occurs
that's not always the case
and that's based on historical performance
actual policies we've seen
and we've got some studies on that
if you'd like to see that
leave a comment below
and we will certainly provide that video.
So let's continue on here
year 5 she paid in $70,000
so what's that mean
scaled the payment up again
you kind of see what she's doing here
she was aggressively funding it
because the original plan
was to fund it for 10 years
but now her plans to retire earlier
so she aggressively funds it the 1st 5 years
she has $370,000 in
$381,000 in cash value
this year 2022 the projected cash value
this is October of 2022
is on pace to hit just about $407,000
and she's only paid
the minimum premium now
and her plan is to perhaps pay that
for another 2 years and then stop
maybe she'll keep going
but right now this is the plan
so this is what we put together
we can adjust as the years pass
just like we did initially
but tracking the performance here
so if we stop here
looking good
and there we go
this is with the minimum premium
in years 7 and 8
nothing thereafter
cash value continues to accrue
we can throw an internal rate of return
on this if we'd like
for this example we will not
we're going to keep it simple.
Let's look at one more example
and see what it looks like
if she decides
to scale her payments up again
she can go back up to $75,000 if she wants
but here let's see what it looks like
if she pays in $50,000
and I thought about
or I look at this and think about
adding a couple more years
to get the same $550,000 in
but let's not do that
let's assume instead of the minimum
2 more years of $50,000
what happens?
There's your cash value performance
it looks good overall
a strong policy
so does it actually work?
In this example yes
granted we're 5 years
we're in our 6th year right now
but this is the kind of stuff
we track as the years pass
just to make sure policies are performing
and even if they're underperforming
I mean there's nothing we can do
to enhance the performance
and make the company
apply a higher dividend rate
to a whole life insurance policy
we can set it up
to be as strong as it possibly can
from the get-go
looking at companies that have delivered
designs that have delivered
the greatest value
but once it's out of the gates
like okay it is what it is
but my point is if it's set up correctly
we've seen them deliver
and we've got case studies that date back
much much further than 5 years
which we can send you.
I hope you enjoyed this one though
I had a ton of fun with this
and putting this together.
If you have any questions
please leave a comment below.
If you enjoyed this
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and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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