Alright today
we are going to go through
one of my favorite topics
when it comes to cash value
life insurance
policy design.
Something that we talk about
all the time
it is my favorite thing
when it comes to whole life insurance
because you can maximize a policy
for cash value
this is what corporations do
the elite
the ultra-wealthy
and anyone can do it
with any dollar amount.
So what I want to talk about
is policy design
but really the impact
that the 7702 change
in the industry as a whole
has really affected policy design
and the first thing I'll state
whether you are in the industry
or you're considering a policy right now
policy design
has not really been impacted.
So specifically what I mean
is when it comes to policy design
your money
is being paid into a whole life
insurance policy
now the fun part here
which so many people are not aware of
is that when it comes to your money
going into a policy
typically what do you think?
If you're going to buy a life insurance policy
you pay a premium
and that premium
buys you a death benefit.
However
if you're going to pay
any amount of money into a product
you can actually choose
where your money goes.
Your money can be directed
toward the insurance premium
I'll often refer to this
as the insurance expense.
Dollars that are directed
toward the premium piece
do not show up in cash value
typically for the 1st year
and sometimes years 1 and 2
this depends on the company
and product.
The reason why
this is when the company
is going to overcharge us
for the death benefit upfront.
Now as you continue
to make premium payments
say it's $10,000,
$1,000, whatever,
beginning the 2nd year
or beginning the 3rd year
depending on the company and product
those premium dollars
will begin to show up in cash value.
So a premium
typically when I hear the word premium
and I think of my
auto insurance policy
I think expense
flat bill forever
whereas with this
yes I have the word premium
but it does begin
to come back to cash value
and I do earn dividends and interest
on premium dollars over time.
We're going to look at an example too.
But then I can pay money
toward this PUA Rider
and I'll often refer to this
as a cash dump in.
PUA by the way
stands for paid-up additions
that's the technical insurance term
you would see if you're looking at
a life insurance contract
or an illustration.
Dollars you pay here
in respect to cash value
show up in cash value
that's money you can access right away
that begins to earn
the guaranteed rate right away
that begins to earn dividends
this is the key to accelerating
the cash value component
on a life insurance policy.
Now it does buy you
some death benefit
but the primary purchase
or the primary reason
people put money into this Rider
is often to accelerate
the cash value growth of a policy.
So as I go through this
if you said hey Steve
I am interested
in a whole life insurance policy
and my main objective
or the main point of interest
is the cash value.
How do I maximize that cash value?
And I'll even go as far to say
that I don't care about
the death benefit right now.
A lot of people we work with
express that exactly
and then they ask
or I'll ask the question for them
depending on their knowledge level
how much research they've done
can I put 0% of my payment
toward the premium
and everything else toward PUAs
to maximize the cash value?
And the answer is
I wish
we cannot go quite that aggressive
and the reason why
really has to do with
limits that exist.
When it comes to limits
I have 2 limits
that I want to be aware of
as a consumer
as a policyholder
also as an agent.
The first limit
is the insurance company limitation.
Insurance companies
will have limits
on how aggressive
they will allow one to go
in respect to the premium
and PUA component.
What you'll find is with the
larger mutual companies
like a MassMutual,
Guardian,
New York Life,
or Northwestern Mutual
typically
the most aggressive I can go
is around a 10/90 split.
So what that means
is if I was paying in
call it $100,000 per year
let me rephrase that
because that may seem high to some.
If someone said
I want the ability
to pay in up to $100,000 per year
but I do not want to get a bill
for $100,000
because then it will feel like a burden
what if I can't pay it?
What they could do
is literally this.
We would set it up
where the premium
is $10,000 per year
that $10,000
does not show up in cash value
in the 1st year
because the company
is going to overcharge me
for a death benefit upfront.
Whereas the PUA Rider
is optional
I can add money there if I want to
but I do not have to
that can be another $90,000 per year.
Now touching on those
major mutual companies
some will allow you to go
a bit more aggressive
than a 10/90 split
so I can get that base premium
maybe down to 9%
and some smaller companies
will allow you to go
even lower than that.
There's a smaller company today
I was modeling
we got it down to 5%
still did not make sense
to move forward with it
for a number of reasons
but still my point is
when it comes to different blends
you can often go lower than 10%
depends on the company.
My point is
limits
first limit is the insurance company
in respect to my premium
and PUA payment
so in a case like this
with a $100,000
I'm billed for the $10,000
that's what I commit to
but I can add up to $90,000
depending on my situation each year.
So has the 7702 change
impacted those limits at all?
No,
and we're going to look at an example
that demonstrates exactly that
with one company here.
The other limit I have
IRS [Internal Revenue Service] limitations
so this has to do with a MEC limit
on a life insurance policy.
So the core benefits
to a whole life insurance policy
are what?
It is a safe,
liquid,
and the third one
tax-free area to position money.
Tax-free
if I do things right.
Any life insurance policy
can become classified
as a MEC
this stands for
modified endowment contract
if this occurs what happens
is my cash value
will still grow tax-deferred
but if I ever want to access my money
and I have a MEC policy
it's taxable
I should rephrase
the gains are taxable
when I pull it out
I also have a 10% penalty tax.
It's ugly
I don't want it.
Now the fun part is
it's easy to prevent
and here's how.
Every policy
has what is called a MEC limit
which is exactly what it sounds like
it's a limit
that determines the maximum
amount of money
one can pay into a policy per year
and still have their policy classified
as a life insurance policy
therefore access
the cash value tax-free
and not the taxable investment.
Here's the fun part
you the policyholder
can actually set that limit
wherever you want
and how you do that
is when we actually design a policy
you will find that that MEC limit
has a direct relationship
to an individual's age
and total death benefit.
Now this video
is about the impact of the 7702
so how has this
impacted these limits?
Well what determines the MEC limit
is still the age and death benefit
however there's a difference now
and the difference is this
since the 1980s
most life insurance companies
when it came to
whole life insurance products
had a guaranteed rate of 4%
so all companies
with their MEC limits
were about the same.
What that means
is if you are a 40-year-old male
and you wanted to use this example
you wanted to pay $100,000 per year in
at a 4% guarantee
the MEC limit for $100,000
that would require
a death benefit
of about $2,800,000.
Now with this new 7702 change
what has happened
guaranteed rates have come down
so for example
if I have a guaranteed rate
not a 4%
because that's completely gone
beginning 2022
if you already have a contract
with a guaranteed rate of 4%
you're locked in
so you don't have to worry
about that changing.
But if you go with a
company and product
that has a guaranteed rate of 3%
what will happen
is you would need a death benefit
of just over
$2,000,000 in order to obtain
that same $100,000 MEC limit.
If the guaranteed rate was 2%
we would need a death benefit
of a little south of $1,500,000
to get the same $100,000 MEC limit.
So I know that can be
a little confusing
we've got other content
that really breaks that down.
But my point is
when it comes to policy design
now that companies have the
ability to choose
the different guaranteed rates they select
that ranges between 2% and 3.75%
there will be an impact
when it comes to policy design.
Now this the first limit
is the most important
in my personal opinion
when you really look at
how to maximize
the cash value of a policy
but we do need to make sure
that we're designing it
if your goal is maximum cash value
that that death benefit
and MEC limit is not too high
at a number we'll never hit
because that will cost us
it'll be a higher insurance expense
and will cost us
in terms of performance.
So it's good to be aware
of that type of stuff
which if you're working with us
we're aware of that
and we can certainly
go through that with you
or just make sure it's set up properly.
If you're an agent
we do have our agent training business
which certainly
we'll make sure that we train you
and coach you appropriately.
But let's look at some examples here
so what I want to start with
let's compare the old product
with that 4% guarantee
how we would always design policies
and then the new product
this way we can see the difference.
So old product first
always start with the old one
what we're used to.
We've got a life insurance
illustration up here
age 40 male
if I'm you
so let me rephrase
if I'm you
and I have the knowledge that I have
in the insurance industry
my question would be this
with a cash value life insurance policy
where is my money going?
When corporations
are paying money into these products
that's what they're looking for.
Where is my money going?
How do I copy the wealthy
the corporations
to make sure
everything is set up properly?
Money can go where?
Toward the premium
here we go
$9,000 and change
just under $9,100.
That premium
buys me a whole life insurance
death benefit
of about $520,000.
If we stopped there
that would give you a MEC limit
with the old product
this is a guaranteed rate of 4%
that would give you a MEC limit
of about $20,000 a little bit more.
We have a MEC limit
of $100,000 in this example
how we did that
is this guy
is a term insurance Rider
add those 2 together
and you get this guy down here
your net death benefit of $2,800,000.
Here's why I'm going through this
based on the old products
pre-7702 change
an age 40 male
this $2,800,000 death benefit
gives him guess what
from a MEC limit standpoint?
$100,000 per year
that is the minimum
death benefit needed
to have the ability
to pay in up to $100,000 per year.
Now back up to policy design
so that's the MEC limit
premium $9,000 and change
PUA.
What's the difference
between those 2 numbers?
Do you notice a relationship?
That premium times what?
10X is that figure
off by about a penny.
So this company
will allow us to 10X the base premium
in PUAs per year
so what we solved here for
was a total desired payment
of $100,000 per year
that's how much they wanted to pay in
and the absolute minimum premium
minimize expenses
and stuff the cash value
that's what this individual
wanted to do.
So as we look at the cash value here
what do you notice?
Net cash value
$100,000 per year
only for 5 years going in
breaking even
between years 3 and 4
88% to 89% right off the bat.
Now let's transition into the new one
too many tabs up
here we go.
So exact same product
but based on the new 7702 limitations
what do you notice
about the premium and PUA design?
Identical
the company has not
made any adjustments there
in fact I had
a number of conversations
with this company on those limits
to see if there's any way we could
make them more aggressive
lowering that premium further
to maximize consumer value
and the answer is no.
The limits
have really stayed the same
in the 1st year
they do allow larger lump sums
this is 1 company
all companies are different by the way
but the limits haven't changed
which you know is good for transparency
this way we can be very thorough
when we communicate
any information we receive
from companies
when changes occur in the industry.
But what do you notice?
That premium
there we go
purchases one a death benefit
that is less than the example
in the first policy we looked at
the old one
that had a guaranteed rate of 4%
this has a guaranteed rate of 3%.
That premium purchases you
a lesser death benefit
now we still have to attach a term Rider
because all things are equal
in this example
where the individual
this 40-year-old male
wanted to pay in $100,000 per year
we're looking at the impact
of the 7702 change.
So if you're in a position right now
so we're shooting this video
August 19, 2021
you do have the choice
to go with the old product
or the new product
and we've got other videos
that weigh out the pros and cons.
The new products fine
the guarantees are not as attractive
so if someone is really attracted to
the strongest guarantees possible
that's where the guaranteed rate of 4%
really is the winner in that respect
but there's pros and cons
like anytime
we never want to try and push someone
to say get in right now
it's a fire sale!
Like no,
weigh the pros and cons out
that's what I would want to see
if I am purchasing something
don't rush me
just provide all the information
so it's transparent.
But anyway
net death benefit
just north of $2,000,000
this is the minimum death benefit
needed to do what?
Give me that MEC limit
of guess what?
$100,000
same thing with a premium
and PUA blend
look at that 10X it
just like the last example.
The point here
is all things are equal
when we look at the cash value difference
you will see a difference
so upfront there's less
this is the exact same product
the company
this particular company
did raise their PUA Rider fee
which takes more off the top
based on those PUA payments
takes a little bit longer to break even
breaking even between years 4 and 5
instead of 3 and 4.
So there's little differences too
that don't really have an impact
on policy design
but they do have an impact
on policies
and of course
we can always compare
and contrast as well
as we look at the different guys
old break-even
new break-even
but we cover this in other videos as well.
So I hope you enjoyed this video
if you did
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and as always
I hope this helps.
Hey guys Steve Parisi here.
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