So we are going to take a look at a case study here. This is an individual who recently
acquired a policy with our company and it was designed for maximum cash value all that good stuff, but
He had a couple questions around how to best fund a policy while taking loans out as well and had a couple of really good questions
Around the best way to repay loans and if he should even repay the loan or if he should direct his money
Constantly toward premium and PUA payments. So let's get into it
What we've got to lay the specs out is a policy on a 36 year old male
He wanted to fund the policy initially with about 150 grand. He had 150k in savings - money he had access to
but wanted to get it into a policy over three years
So this is where you're going to see the first three years of the policy 50k per year going in
From that point forward up until age 60 he has $20,000 of cash flow to work with that
He wants to dedicate to funding the life insurance policy. Now, he'll always have the ability to go up to 50k
But the dedicated cash flow is 20k per year.
This is going to be important when we start to look at the loan payment options because what he wants to see is a loan
Coming out in policy year three
And then his question was "Hey, what's the best use of my twenty thousand dollars?"
Because if I'm funding a policy with 20k per year, I don't want to be locked in to paying that and have to pay
More money on top of that and loans meaning I don't want to have to pay 20k in premiums and PUA's
And then in addition to that throw money into loan repayments. No 20k is my cash flow
That's where he started - the 20k. What's the best use of that? That's my number, Steve. So we're gonna
Stick with the number of 20k and look at different options. Does it make sense to pay the loan down aggressively first?
Do I ignore the loan balance and just keep feeding the policy with premium and PUA payments or do I do a combination of both?
Do I pay some of that 20,000 into the policy and then the other portion of the 20k attacks the loan balance with?
Well,
Let's take a look
So first thing is first, let's look at the policy
Optimized for growth which this is going to look very consistent with most policies we designed
So there's the 50k for the first three years. This is a policy
with a 10%-90% split
So 10% premium, that would be 5k
He does have a turn rider attached on there as well
But the majority of the 45k
Is going toward PUA's accelerating cash value growth
for that total of 50k per year, okay
So we've got the cumulative payments break-even points between three and four
So he has access to that capital this way
He can take take advantage of the loan provision earlier rather than later
This does not give up long-term performance either, which is nice
so
Why we always like to look at the growth scenario first is anytime I look at any loan options
Any loan simulations is "What does my policy look like?"
Compared to the growth model meaning if I just pay money in there
Let it sit and grow I know how it's going to perform or get an idea on how it's performed - how it's going to perform
but
How does taking a loan actually impact it and then if I pay back pay interest only that's the kind of stuff
We like to compare so we've got more knowledge
In advance or more knowledge prior to actually executing that transaction
All right. So on the left we've got the growth model
50k for the first three years then 20k all the way through age
60 and one thing I did not touch on the last sheet is the total payments
Into that policy funding 20k per year up until age 60
Is 590 grand. That is his total input and the cash values a little over a million dollars in this example.
with that said
The number you want to keep in mind for all of these scenarios is $490,000 the reason why?
That's my net out of pocket
Considering the fact that I pay in that same schedule 50 for the first three years and then 20 per year
Up until age 60 but then also
Take out this loan of a hundred thousand dollars
So we backed the loan out
so I paid in 590 but when I pull out that 100k now my
Total net out of pocket is technically $490,000
And it will stay there
because
As we continue to look at models where he pays in 20k per year the max he pays in per year up until age 60
is 20k
at no point in time
Are we going to assume that he pays in more money on top of the 20,000
If he can do that, that'd be great. But again 20k is the number. So let's stick with the 20k
So first, let's examine the loan quick here
Because you haven't seen examples of how policy loans work. I take the 100k
My cash value is my equity that determines how much money I can access
And the example where I let it sit and grow it was 146,000
When I pulled out the 100 now it's 41,000
So where is the extra five or six thousand dollars there? Because I only pulled out 100. Why did it drop?
Down to 41. The reason why and we did this in all of the examples
Well, this one is easy to demonstrate. There's no payments at all
so
We have six thousand dollars of loan interest. The loan interest rate is six percent in this example
The policy will borrow from itself
It's going to borrow from the cash value to cover that loan interest that will happen
If I do not pay the loan balance or the loan interest on a life insurance policy
So that's why my cash value drops by more than the 100k and that's also why
I see my loan balance at 106 in policy year three
now
the beauty to a life insurance policy
Is i'm still going to earn dividends on any money in cash value
And any money outstanding in loans how and why the company does that is one I have loan interest but two
Look at your death benefit here. You're going to see this on every example
So the loan balance is 106
What is 2 million dollars
minus $106,000?
That exact number
Anytime we borrow from a life insurance policy the company still pays us dividends and interest on everything
but
They do collateralize our death benefit dollar for dollar
So if we die with a loan outstanding they're going to pay the death benefit out minus the loan balance, okay
Now let's take a look here
Why don't we focus on the
end of the funding period the age 60 value - age 60 cash value
so
He borrowed the 100k and then just ignored the loan. So here's the loan interest accruing
and by age 60
And dark red loan balance is just about 382k
His cumulative payments
$490,000. So he paid in 590 but then he pulled out a hundred. That's why we've got the 490 there
Cash value
663,000
death benefit
Just about 2 million. Paid in 490. I've got 663. This is the example where I pulled out a loan
And then just ignored it and said hey i'm going to keep paying my 20 grand per year
in premiums and PUA payments
because the thought here is
If I pull out a loan
I'm still earning interest on that right? So would it make more sense to?
Ignore the loan and continue to make premium and PUA payments?
Before I answer that let's look at the spreadsheet so we can actually see it
Do you ever get this saying? I love this saying.
People tend to trust what they see
Not always what they hear
And that's why we always show spreadsheets
Seriously, so on the left same scenario with the growth
Paying money in let it sit and grow and then this one was fun to put together the illustration software
So we paid in the $20,000 per year. I'm, sorry the 50 for three years and then
reallocated the $20,000
Towards the loan repayment
And then redirected it toward premium and PUA payment. So what we did here
You see 50 for the first three years that 100k loan the exact same
Relationship with cash value death benefit occurred in year three, but what we did then
Look at years four through nine
Money that we are allocating toward premium and PUA payments is zero. Zippo!
What we're doing with our twenty thousand dollars instead
Is directing it toward the loan payment. So here we are going to aggressively pay down
and then when year 10 came
There was about 24 just about $2,500
Left in the loan balance to pay off. So we paid that off and then put the difference - the excess here
the 175
Back towards premium and PUA payments. That way our net remained at 20k. Remember, Steve
My cash flow is 20k. I do not want to see more money going into the policy on top of it
It's good to look at this kind of stuff
If I have more money to add on top of it
Well that just accelerates everything and it looks better then but it's good to look at these consistent cash flow scenarios
so
What we are going to see here, actually, I forgot one important thing
Loans paid back year 10
Cash value
203,000
Net out of pocket technically has been 190 at that point in time. Okay
Cash value 752 almost 753,000
I paid the loan off first, so I don't have any loan interest dragging on the policy
After that loan was repaid, what did I start to do?
Redirect my money into the policy via premium and PUA payments
So what happened here?
752 almost 753. Do you remember what the value was in the last example? Go back here
Our last sheet is going to put them all side by side
663 out of pocket. We're just addressing the loan differently compared to
752. That's that's a substantial difference
And this is the same exact insurance company product design. Everything's identical. We've got the growth scenarios on the left here
So in this case, it makes sense to aggressively pay the loan off first we're going to look at one more scenario here
Scenario three
Same policy via the growth sample, but then
Same policy funding 50k for three years 100k loan. Everything's the same regarding the collateral
collateralized death benefit all that good stuff
But this one was fun
You'll want to look in bold blue here where it reads total out of pocket
The reason why is when we took that 100k loan out what what we solved for here was again
No payments in year three because you wanted to start payments after year three beginning year four, so we deferred it
Loan balance grew to 106 and then started paying it back
at
83.05 per year where we came up with that oddball number is I want the loan to be paid off
By age 60 at the end of the desired funding period so what we did here and we can always mix and match this
Doesn't have to be that oddball number. That's just my OCD
Here's our premium and PUA payments here
the difference 11,695. So
Why I mentioned look at the total out of pocket column in bold blue
Is if i'm paying
almost 11,700
In payments and 8 300 and loan interest that totals
The same 20k per year after the first three with 50 grand per year, okay
so
A lot of stuff going on. Let's look at the most important piece. Does it give me
More or less money at the end of the day. That's what I'm interested in
Because here I continued to feed money into premiums and PUA's
Every single year which in theory should continue to yield compound interest for me
Year 20
$734,000
so close
But no cigar
The last example still produce the most cash value. So here we have a nice side-by-side comparison
First we've got the growth sample
This example assumes no loans just paying money and letting it sit and grow that guy's obviously going to have the most cash value
Then we've got the other scenarios where we pulled out that hundred thousand
kept our cash flow identical
And attacked the loan
Now if we took a loan out in the growth sample
And then paid more money back on top of the loan then we'd see the cash value fully restored
Here we are not doing that
So
Who's the winner?
We've got it highlighted in yellow, but let's look at the end of the funding period
The example when I never pay the loan back. Instead,
I just continue to direct my cash flow toward premium and PUA payments the cash value must then
Borrow the loan interest to cover it each year
This example
Aggressively
Paying it off initially
So years was that four through nine my premium and PUA payments were zero
Because I directed all of my twenty thousand toward the loan payment
Then the example when I partially paid it back
734
This is much closer
However, as I chipped away at the loan interest first
There's your winner
Paying the loan off first
Does this mean it will always make sense to pay the loan off first? That's always the number one answer
No
not in any case this is something we do like to look at in every specific scenario because
my intent might be to
Sell a piece of property and pay a loan off in a lump sum five years down the road i'm gonna
Fund the policy in the meantime
Whatever my scenario is it's always going to be going to be a key spike case-based
basis
to some extent this is one key study which
The numbers came out interestingly enough to say hey instead of continuously funding the policy put the funding on hold
Kick that loan interest down in the loan balance and then redirect money into the policy and you walk away with more money
Which our goal is what maximize cash value and see how we can best utilize the money. So hope
Hope that you enjoyed this case study more to come in the future and we will talk to you soon
Hey guys! Steve Parisi here
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