Today's topic
is whole life insurance policies and flexibility.
So when it comes
to whole life insurance policies
everyone we work with
is primarily interested in the cash value
the death benefit often has value
but the cash value is what people
are interested in
how do I maximize that cash value
and then how do I use it?
However with that said
what is often a turnoff
to a whole life insurance policy
is being committed to a large premium
every single year
or if you're paying it monthly
having to pay that same dollar amount
every single month.
What a lot of people like
with whole life insurance products
is when they can design them to be very flexible
so we're going to talk about exactly that today.
What we hear quite a bit
or what a lot of people like to do
with whole life insurance products
is have them designed in a manner
where they can commit to a minimal amount
that never feels like a burden
and they can pay that minimal amount yearly
some companies allow them to pay it monthly
and then add more money to the policy
at discretion.
Pretty interesting, isn't it?
Because when we think of a life insurance policy
typically what comes to mind
with respect to payments?
Well the insurance company says
here's your life insurance policy
and here's the premium you must pay
however if you're interested in cash value
what you can actually do
is set it up in a manner
where you're committed to that
minimum premium
and then 100% at your discretion
you can add more money into that PUA Rider
in a life insurance policy
PUA stands for paid-up additions
and that's how you can really accelerate
the cash value growth.
So what we've got here today
we've got an individual
who wants to commit to a small amount
and then add more money to the policy
at leisure
specifically what he wants to do is as follows
he wants the ability to fund
up to $100,000 per year
but he does not want the policy
to feel like a burden
the key word right there
his cash flow fluctuates quite a bit
this is very common
among business owners
and real estate investors
they know they can fund a policy
with a large amount of money
and they want to for a number of reasons
but what they don't want
is to be obligated to a high dollar amount
because their cash flow fluctuates.
So the question we receive is this
what's the minimum I have to pay?
What's the minimum premium
meaning what's the minimum
I have to commit to with the ability
to add more money to this policy?
Here's the most important part
policy design
so we've got a minimum premium
this will include the base premium
and also a term insurance Rider
we'll have a MEC limit
MEC stands for modified endowment contract
we do not want our policy
to become classified as a MEC
because if it does
the cash value will be taxed if we access it
specifically the gains will be taxed
as ordinary income
there's potential penalties
we want to make sure the policy
does not become classified as a MEC.
I would check out our policy design video
which provides a full breakdown
on how to design a policy
for maximum cash value and prevent a MEC
but then this PUA Rider
which is adding more money to your policy
which immediately accelerates
the cash value growth
those can be added at leisure.
So let's go through a breakdown
of exactly how this works
what we will begin with is the design
so this individual wants to do what?
He wants the ability
to pay up to $100,000 per year
but he does not want the policy
to feel like a burden
so having awareness
of the insurance company you are considering
particularly their limits
what's the maximum you can pay into a policy?
How low can you go on the premium piece?
Because when you take out
a life insurance policy
a lot of people are not aware of this
is you the policyholder can actually decide
where your money goes
your money can go
toward the insurance premium
or toward the PUA Rider
with a lot of the top companies
your major mutual companies
you'll often see that that minimum premium
can be driven as low as 10%
now 10% of what is the question
the answer is 10%
of the maximum desired payment
and not all companies are 10%
some are a little bit lower
some are a little bit higher
but generally you'll see it around that range
with the top companies out there
so if I have a 10% minimum premium
and I want the ability
to pay up to $100,000 per year
what would your minimum commitment be?
Well it'll be 10% of the $100,000
so what a lot of people we work with do
is a design just like this
where they want the ability
to go up to $100,000 per year
but only commit to $10,000.
Now staying on that premium piece
if we were to only pay the minimum premium
what you'll find with most insurance products
is that in the 1st year nothing
or a very small percentage of that payment
will actually show up in cash value
as the years pass and you continue to make
that premium payment
it will come back to cash value
particularly
in the example I'll pull up in a minute
you'll see that beginning year 2
the minimum premium
begins to come back to cash value
at least a portion of it
and you'll see it accelerate over time
but the 1st year the majority of that
really purchases the death benefit
on a life insurance policy
and we don't see much cash value build-up.
Now this guy
this unscheduled PUA
and again PUA
represents paid-up addition Rider
we have the word unscheduled here
because it's unscheduled
or I should say we can set it up
in an unscheduled manner
and if it's unscheduled all that means
is you will not be billed for the PUA payment
the same time you're billed for the premium
you can elect to add money into that PUA Rider
every week, every month
one time a year
no additional funds
it can be very very flexible
now what's very important on this point
is the company selection is critical
some companies like Guardian for example
has an extremely flexible PUA Rider
where you can do what I just mentioned
you can just add money into PUAs anytime
it could be through your online portal
mobile app
you can mail on the check
very very flexible
there are limits
as far as how the policy is designed
which we've got other content that covers that.
Some other companies
like MassMutual for example
allows you to adjust your PUA payment
one time per year
and we have to pay at the same time
as our base premium is paid
so not quite as flexible
but MassMutual has some other examples
so that's where understanding
the insurance company we're selecting
or if we're looking at a variety of companies
understanding the rules
or making sure your agent
is providing you with that awareness
is important upfront
we don't want to find out
a better option existed after the fact
that perhaps provided more flexibility
with respect to what we were looking for
but on this point unscheduled PUA
is very flexible
we can add it when we want to add it.
PUA payments
show up in cash value
you'll typically see
depending on the insurance company
and product in the 1st year
somewhere between 90% to 95% of the payment
show up in cash value immediately
meaning if you made $10,000
unscheduled PUA payment
the next day
you would see anywhere between $9,000
and $9,500 in cash value
and that does begin to compound over time
and we will see it exceed what we've paid in
typically by the following year.
PUA payments
do buy us additional death benefit as well
but everyone is often interested in this Rider
for the cash value benefit.
Now we see a MEC limit of $100,000
that MEC limit is exactly what it sounds like
what are the core benefits to the cash value
that often attracts individuals to these products?
There are 3 of them
(1) it's a safe area to position money
(2) it's liquid we can access that cash value
and then (3) tax-free
tax-free if we do not trigger a taxable event
one example
is a modified endowment contract
how we prevent
a modified endowment contract from occurring
is by setting the policy up
with the needed MEC limit
so if I want the ability
to pay in up to $100,000 per year
I want a MEC limit of at least $100,000
we can set that MEC limit wherever we want
what you'll find
is that it has a direct relationship
to an individual's age
and total death benefit
on the life insurance product.
So we've got a 40-year-old male
in this particular case
and with the company and product we selected
we need the death benefit
of just over $2,000,000
to accommodate that $100,000 MEC limit.
Let's take a look
so what we're going to take a look at first
is a policy with just the minimum going in
and this is going to
follow the same model we just looked at
so what we have on the left is as follows
we've got minimum commitment
base plus term Rider
base is the base premium
a term insurance Rider
is a cost-effective way
to add more death benefit
which mainly gets our MEC limit
up to where we want it
if we don't add a term Rider
what that will force is a higher base premium
and the higher the base premium
the less you'll have in cash value
especially the 1st year
so adding a term Rider
allows you to keep that base premium low
and going back to this individual's goals
commit to a minimal amount
and be able to add more funds at discretion
a term Rider allows him to do exactly that
so each year
he's committed to $10,000 per year
and this example assumes he pays it forever
he doesn't have to pay into it forever
but we're looking at that
in this particular example.
Then we've got unscheduled PUA Rider
adding more money into the product
nothing added
first we want to see what the policy looks like
if we only pay the minimum
so his net annual outlay
is the minimum commitment
of $10,000 per year
then we've got his total payments
which tally up the total payments
he's made over time
you'll see year 15 is highlighted in yellow
that represents his break-even point
breakeven represents when his cash value
is equal to or greater than his total payments
so if you have ever looked at a traditional
whole life insurance policy before
it may have looked similar to this
traditional whole life insurance products
where I just pay a minimum premium
it often take somewhere between 10
and 15 years just to break even
it's not that attractive
I like to refer to it as an excellent example
of what not to do
if high cash value is your goal.
now with that said
the purpose of showing this example first
is because paying just the minimum
does generate cash value over time
granted it takes a while
it still builds cash value
and when we hear the word premium
we often think pure cost
but in this case it is building equity
which is important
it's important to note that
when we look at the max funded example
or when we start to
add more money to the policy.
So now we've got the whole life death benefit
and then also this term insurance Rider
the net death benefit
is the total death benefit
made up of both the whole life benefit
and the term Rider
so what you'll notice here as time passes
the whole life death benefit increases
the term Rider death benefit decreases
and after the 7th year
we removed it altogether.
I'll add that removing that term Rider
is optional
this is something that we would recommend
to a client we're working with
if they want to fund for a short period of time
call it 7 years or less
or if it's a situation similar to this
where they plan on adding more money
so we add a term Rider
so the policy is equipped
to be able to handle more payments from them
but then they don't do it
life happens
and they couldn't add money to the policy.
If that's the case what you can do
after starting a policy
is reduced or removed altogether
a term insurance Rider
now the reason it's done after the 7th year
has to do with what is referred to as a 7-Pay test
which has to do with our MEC test and MEC limit
so these 1st 7 years is important
I promise it's not randomly picked
so this example again shows just the minimum
now let's compare this
with adding more money.
So what we're going to look at here
is the exact same policy
we've got the minimum commitment
of $10,000 per year
and then here
we've got our unscheduled PUA Rider
now that death benefit of $2,050,000
do you remember
how we came up with that number?
MEC limit
he wanted the ability
to add how much money per year?
Up to $100,000 per year
okay so in this example
is he adding $100,000 every year?
No, he's not
he's adding it in years he can
some years it's not up to $100,000
this is meant to demonstrate
somewhat random funding
so here's what he's committed to
and this $10,000 can be paid yearly
or monthly
unscheduled PUA
so the 1st year he adds in an additional $90,000
for a total of $100,000 out of pocket
there's his 1st-year cash value
of $88,000 and change
what you'll also notice
look at the whole life death benefit here
it's higher than the example over here
and the reason why
is because when you add funds
to your PUA Rider
we always think cash value
however PUA payments do purchase you
additional whole life insurance
PUA stands for paid-up additions
meaning it purchases us
paid-up additional life insurance
it's paid-up
because PUA payments are optional
we can add them
but we're not always billed for them
like the base premium
not in this case at least.
So as we add money
yes we get more cash value
but our whole life death benefit goes up
and our term Rider amount decreases
however the death benefit with this design
remains level at $2,050,000
so then what we do the next 2 years
we add some extra funds
of $40,000 into PUAs
the net outlay each year is $50,000
then in year 4
we pay just the minimum of $10,000
total out-of-pocket is $210,000 over 4 years
my break-even point is year 4.
Interesting, isn't it?
By adding more funds into PUAs
look at the improved break-even point
that's the key right there
PUAs is how you accelerate
the cash value growth
in a whole life insurance product.
So then what we did here
some years add additional funds into PUAs
have a couple years
where we go back up to $100,000
and he gets a total
let's scroll down here
of just over $750,000 into the policy
$775,000 to be precise
funds it up until age 65
and there's our cash value
death benefit what's interesting here
is as the term Rider naturally decreased
we now have all whole life insurance.
So before we wrap up
let's take a look at this exact same scenario
but without any dividends applied
so what we got next
is the exact same scenario
so on the left is what we just looked at
but this is based on the company's
present dividend rate
but here we're assuming in the illustration
no dividends at all
just the guaranteed rate is applied to the policy
so what happens
the break-even point is greatly delayed
between years 9 and 10
instead of at year 4
like we see to the example on the left.
Now this is with one of the major mutual
life insurance companies
we've seen consistently deliver
strong cash values
however it is beneficial
to look at conservative scenarios
whether it's a reduced dividend
or you want to look at just the guaranteed rate
to really set expectations
at a very very low standard
and then we end up seeing a lot more money
than what we looked at initially
some people like to do that
I totally get it
but seeing both options in my opinion
does not hurt at all.
So exact same funding schedule
there's the amount in
there's the death benefit as well
you'll see a significant difference
if dividends are not paid
however if you're positioned
with one of the major mutual companies
where we've seen them consistently deliver
you should be seeing performance
more similar to this
it's not guaranteed
but as we've tracked the actual performance
of a policy over time
we've seen that to be the case
which is extremely comforting
because when you look at
whole life insurance sales
when policies don't deliver
or drastically underdeliver
from what is Illustrated
that's where people can get upset
and I get it because it's their money
both based on the cash value
what you have now
and then also based on the death benefit
what's going to be paid out
to your beneficiaries
but overall this study
is meant to demonstrate
what a policy looks like
or could potentially look like
if you want to commit just to the minimum only
and then add more funds at leisure
it's very common to see individuals do this
so the policy does not feel like a burden.
I hope you enjoyed this video
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If you have any questions or comments
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and I hope this helps.
I'll talk to you soon.
Hey guys Steve Parisi here
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