Does whole life insurance actually work?
Meaning you're looking at
a whole life insurance policy
you're interested in the cash value
you see these projections that look good
you think this is a good area to put money
I like the idea that it's safe
liquid, tax-free
I'd like to access my cash value
for opportunities
but does it actually work?
I've seen
I've read
I've heard a lot of bad stories
about whole life insurance
yes the illustration looks beautiful
but what happens if it underdelivers?
Because this is what I hear
about people who actually take out
whole life insurance products
or just underdelivers that are not happy.
Well in this video
and really this entire video series
we are going to look at policies that
are more recent
they're about 5 years old
some are a little bit older
but policies that were issued
right around 5 years ago
and we can see how they were designed
what the original plan was
in some cases you'll see an event
where people stuck to the plan
meaning they had a plan to pay in
X amount of dollars
and they paid exactly that dollar amount in
for that exact time frame.
You'll see some people plan
to pay into it for 5 years
and not another penny thereafter
whereas others had a plan
to pay into it for a certain period of time
or a certain dollar amount
life happened they had to pivot
how are those policies performing?
So tracking the actual performance
is something we like to do
and you're going to get some insight
as to how whole life insurance policies
actually perform
more recent policies.
If we go back 5 years
you'll see with almost
every life insurance company out there
if you look at what the dividend rate was
5 years ago compared to what it is today
it's declined it's come down.
Now if you'd like to see policies
that are older than 5 years
we do have videos some are public
on our YouTube channel
some are not we make it available
to those we are working with
but please reach out
we can certainly send
some of the public ones
if you have a hard time finding them
on our channel
and we can certainly talk to you about
making the other ones available
if you're interested in seeing some
historic policies
that were issued back in the 70s
80s, 90s, and early 2000s
but let's get on into this video.
So the majority of the case studies
we will look at in this video series
will be about 5 years old
and what the majority of these people
have expressed
these are people that we work with
I'm still working with on a regular basis
the want, the desire here
there are many desires as far as
why they took these policies out
but number one
I want as much money
as I can have upfront.
So the attraction
to a whole life insurance policy
the reason why a lot of these individuals
took policies out
is because of the safety
if there's a market correction
when I say market
stock market or economy
if there's a recession life insurance
has always been a secure area
to position money
that will produce somewhere between
3% to 5%
just continues to appreciate over time
the long-term benefit is attractive
the liquidity, the tax-free feature
all that good stuff
but what's not attractive at all
is typically the lack of equity
in the early years
meaning I take that whack
I've got a lot less money than what I pay in
and that's frankly why people don't do it
it's too much of a hit right out of the gates.
So the number one question
or the objection that people had
I want is what?
To have as much money as I can upfront
so we did just that
you'll see what was projected
and then what they actually had
how to do that
or I should say what to look for in this case
is you typically want to see between
80% to 90% of your payment
in 1st-year cash value
that is an indicator that the policy is set up
with a minimum base premium
maximum cash value
and maximum flexibility.
There are some
high early cash value products
that do credit a little bit more than 90%
you'll see between 90%
and 95% of your payment
in cash value in the 1st year
but on average it'll fall between 80%
and 90% in the 1st year
as far as what to look for
if you want maximum cash value upfront
in addition
to maximum cash value long term.
Next piece
access to capital for opportunities
so why the upfront cash value is important
is before I even hit on that
an advantage to cash value
life insurance is what?
When you look at the liquidity feature
I can access my cash value
and it continues to compound
as if I never touched it in the first place
so if I have $100,000 in cash value
it's growing by a net rate
an internal rate of return of 4%
if I let that $100,000 sit and grow
or if I borrow $50,000 against it
if I take a $50,000 loan
I continue to receive the 4%
internal rate of return
on the full $100,000
as if I never touched it in the first place
no lost opportunity cost
the company does that
by collateralizing the death benefit.
The point here why I mention that
is that's a draw or a point of attraction
to cash value life insurance
but having access to capital
particularly in the early years
is very important
meaning if someone has to take
a huge hit upfront
say it's 50% or more in year 1
and they don't have access to money
they don't care about that benefit
because like I don't have
access to the capital
I'm not going to give it up
for a long period of time
so typically we want to break even
anywhere between
4 and 5 years on average
sometimes a little bit longer
depending on the company
and product we're looking at
but on average 4 to 5 years
sometimes 4 to 6
but that's what we want to look at
in the break-even.
Break-even means that I have equal
or greater value in cash
so equal or greater cash value
than what I've paid in
for example
if you're paying in $100,000 per year
for 5 years
by the 5th year you've paid in $500,000 total
if I have $500,000 at that point in time
I break even
whereas the early years
I have less than what I paid in
that's not my break-even point.
Okay let's continue on here
the next point ability to pump in
large amounts of money into a policy
so this has to do with policy design
and MEC limit
the key word there ability
so the individuals here
are not just going to automatically
throw money into the policy
they're planning on it
but they want the ability to do so
what that also means
is in the event that life happens
and they don't have money
to fund the policy with
maybe they're dedicating
their resources elsewhere
they want the ability to scale back
on their payments too
and not be penalized
so this has to do with policy design
and setting the MEC limit
which is policy design in itself
but when we design that policy
for maximum cash value
if someone is paying in
call it $100,000 per year
or they want the ability
to pay in $100,000 per year
how we would design that policy
is exactly like this
they would have a premium
of about $10,000
they'd have a term Rider attached as well
which would be minimal
as far as a cost standpoint
but then the ability
to throw another $90,000 per year
into the PUA Rider
which we see accelerate
the cash value growth
I've got access to that money
right off the bat
that's really the key
to maximizing the cash value
of a life insurance policy.
So the point here
is they want minimum expenses
and the ability
to plow the dollar amount in that
they want to pay into a policy
so flexibility is very important there
they don't want to feel obligated
to a big bill
nope give me the flexibility
and give me maximum cash value
they didn't quite say it like that
but you know what I mean.
Flexibility to adjust funding
so this one's huge
and company selection
does play a role here
and this is something
we talk about frequently
just to hit on 2 examples real quick
company rules
we typically recommend
the 4 major mutual companies
we primarily use
MassMutual and Guardian
when you look at their
PUA flexibility provisions
MassMutual has a couple of them
but if I'm going to just give
a simplified overview
if you set things up properly
MassMutual
you can adjust your PUA payment
one time per year every year
without any medical underwriting at all
provided that adjustment is made and paid
on your policy anniversary date
so that's when your premium is due
your policy anniversary date
if year 1 I pay in $50,000
year 2 comes I say I'd like to add more
as long as I do it
when that premium is due
it doesn't have to be the exact day
I've got a 60-day window
30 days before through 30 days after
to make that change
we can adjust the amount on the back end
and then you can send the money in
very flexible there
so one time per year
without underwriting is the key
if I want to add funds at random
to a MassMutual policy
I usually have to go through underwriting
they do have some PUA Riders available
that allow me to avoid that
but it can be kind of a hassle
and a lot of people don't like it.
Guardian is another example
is very flexible
they will allow a policyholder
to commit to the minimum only
and throw additional PUAs
into the policy at leisure
mobile app
online portal
you can send in a check
very very flexible
the policy design however
is very important there
as far as how much I can add in the PUAs
being able to make sure
I can pay in 10X is very important
we've got other content on that
I'll talk about it all day
and just keep talking
so I'm going to stop myself.
And growth rate
or internal rate of return
is maximized
this one I think you'll find interesting
so when it comes to the growth rate
the internal rate of return on a policy
the break-even point
hitting it when I wanted to hit it
between years 4 and 5
something that's very important here
is if I take a policy out
and I'm able to max fund it
meaning 10X my base premium
fund up to the MEC limit
really for the 1st 2 years of a policy
you'll see that your break-even point
generally will fall between years 4 and 5
and this is based on reality
not just illustrations
you're going to see realities on policies
that have lived the test of time
but if I'm able to max fund
during the 1st and 2nd year
which when you look at
a whole life insurance policy
when are the expenses heaviest
the 1st and 2nd year
so if I'm able to offset that in a sense
by juicing the policy
that's what really beefs up
the cash value upfront
it hits my breakeven point earlier
I'll see the strongest guarantees
everything will look good moving forward
and what's interesting
is when we look at
the different case studies
you're going to see some examples
where people did that
not all of them
this will be a really fun case study
as we progress through
the different examples
where some people stuck to the plan
some people adjusted
some max funded just years 1 and 2
paid the minimum thereafter
but the purpose of this case study
or these case studies
as we look at each one in the next 5 videos
is really to provide information
examples
if you're trying to figure out hey
I think I want to do this
or I don't know if I want to do this
can I see some actual case studies
that's what we're going to go through here
and we're going to look at in most of them
what was originally projected
and then what actually happened
in a declining dividend
interest rate environment.
Here are the names
of the friends we will be looking at here
we're just going to use
abbreviated names here
KM, CL, GP, LJ, and AD
Anthony Davis of the Los Angeles Lakers
I'm just kidding
then company selection
the original plan and how it is performing
so we're going to have a lot of fun.
If you have any questions
on any of the material I went through here
or additional things
or questions you have
if you're considering
a whole life insurance policy
that you say hey here's a plan I have
when you've looked at actual policies
have you seen this
actually happen over time?
Please leave them in the comments below
I do look at those
and we can certainly respond
via comments or create some case studies
and you can email us direct as well.
I hope this helps
I'll talk to you soon.
Hey guys Steve Parisi here
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