Accumulation value is the amount of money earning
interest. Surrender value only matters if you
cancel. In this episode, I'm going to explain the difference and answer the
question, "What is the difference between
accumulation value and surrender value on a life insurance
policy?"
Hi, I'm Doug Andrew and I've been helping people
optimize their financial assets and minimize
taxes for more than 46 years. One of my favorite vehicles to help people
accumulate their money tax-free and then be able to access that money
tax free for 40, 50 years if they live that long and then
when they finally die.
To have whatever they leave behind
blossom in value and transfer income tax free.
i use what I call The Laser Fund. Now, a laser fund
is a max funded indexed universal life insurance policy.
Structured primarily for living benefits tax-free
income. But it also blossoms when you ultimately pass away and transfers
income tax free. So, when people start looking at a max
funded index, universal life. They go, "Wait a minute.
What's the difference here on my statements?"
It's usually the first 10 years. Maybe 15 years.
Between the accumulation value column and the surrender value column. So,
let me tell you the difference and why it really doesn't matter unless
you are thinking of canceling the contract. And if you're thinking that in
the beginning, I would recommend don't take one out. So,
in a lot of my training YouTube's regarding max funded index
universal life, I will use examples of somebody funding it with
maybe 1,000 a month. Maybe 10 thousand a year.
Maybe 100,000 a year. Maybe 500,000 a year. Doesn't
matter what you begin with that really counts. It's what you end
up with. So, let's use a very simple example here of $500,000.
If you're trying to comply with the tax citations Tefra, Defra and
Tamra which I explained in other YouTube educational videos,
then I cannot put in the entire 500,000 and one fell
swoop after June 21, 1988, I have to comply with the
Tamra test. That stands for technical and miscellaneous revenue act.
I can only put in about 20 a year during the first 5 years. And then I'm
grandfathered to have tax-free income thereafter. So, when I'm putting
money into my indexed universal life, if my goal is to have the least amount
of insurance the IRS will let me get away with and
put in the most money as fast as they allow,
then if it's 500,000 which we call the guideline
single premium, the most I could put in would be
20% of that each year for the first 5 years. 100,000 per year.
And so, when you look at the illustration, you're only putting in a 100,000 a year
but you're required to have the amount of insurance
under Tefra and Defra for the entire 500,000.
So, people look at the difference and they say, "Well, golly!
I put in 100,000. My accumulation value is 100,000.
And at the end of the first year with interest, maybe even more than that.
But look, the surrender value is only 60,000
or 70,000." The surrender value only comes into play is if you cancel
the contract. It doesn't come into play if you need to
access money. If you put in $100,000,
you went in and wanted to grab 20, 30, 40, 50 thousand, you can do that. That's
not surrendering the policy. When you totally cancel an insurance
policy, that's called surrendering the contract.
And then the insurance company has to make up for the expenses
incurred to establish it in the first place.
Those expenses in the long run only drain out about 1%
of the overall rate of return. If you earn 11, you're netting 10.
Most asset managers charge 1$ or more for your entire life on what the
account grows to. With indexed universal life, you're only
actually charged on the new money that goes in. Not on the money
that's growing. And so, that's why many times in the long
haul, with a 500,000 indexed universal life
insurance policy when I say 500,000, that's not the
death benefit. That's the money you put into it. You
want that to double about every 7, 7 ½ years
if possible if you can earn rates of return of 9.6% which is
what I've averaged. I've actually averaged 9.62
over the long haul. But many years, I've averaged more than 10.
Like the last 25 years, 10.07. I'm talking about
since universal life started in 1980. And so,
it's not going to look real flashy during the early years because
you're only funding it maybe 20% a year.
After 5 years now, the surrender value comes up and it equals the accumulation
value. But I would not set it up if you were going to be totally taking out
100% of your money in the early years. That's not what this is
about. This is for long-term goals. Long-term
meaning 5 years or longer down the road like
retirement. Most people make mistakes in America
by using long-term investments for short-range
goals or the opposite. They use short-term investments like a bank or
credit union for long-range goals. And they're only earning like 1%. No.
You use long-term investments for long-range
goals. So, you choose investments based upon
which ones are going to generate the most
at the time in life you're going to be using the money the most
10, 15, 20, 30 years down the road. It doesn't mean you can't access the money.
If you can access in the first year 20, 30, 40 percent, that's usually
sufficient in the event of an emergency. But after 5 years,
if you put in 500,000, the accumulation and surrender value are getting closer
and closer together. By the 10th year, many times, the
surrender value equals the accumulation value. Some
policies, it takes 15 years. But if you're concerned about making
sure that the accumulation value is the same
as the accumulation value, that there is no surrender charge if you
were to cancel or access as much money as possible, you can design
your policy to do that but there's trade-offs. So, what are the
trade-offs? Let me explain first of all what the
insurance company does. Every year, they credit you interest
based upon the general account portfolio if you choose
the fixed option. The fixed universal life.
But if you use indexed universal life and you link to an
index in any given year, they are going to credit you
the indexing rate based upon the index you chose.
Maybe the S&P 500, the Dow Jones, the Russell 2000. The
Barclays U.S dynamic balance index or a combination of all of those.
And this is where I have some years been credited
17, 25 percent, even higher with performance factors that we talk about
in other educational videos. But see they credit
which number on your insurance policy. They credit that to the accumulation
value. The accumulation value is the amount of
money that the insurance company is crediting you interest on. So, if you
put in 100,000 and another 200,
it is the higher number. That's what they're crediting you interest on is
that number or that balance. The surrender
value only comes into play is if you did
something stupid like surrendering and canceling the entire policy
in the early years. And they have to do that because
they had to establish it and incur those costs just like
in another video that I want you to watch it's like a 5-story building. If
the building is only 20% leased or 40% leased
or 60% leased in the first few years, because
that's what the IRS says. You have to wait 5 years to fill up
your insurance policy. It's not going to perform very well
until it's 100% full. The same is true as with an
insurance policy. When it's maximum funded,
pretty soon, the surrender value comes very close
and then equals the accumulation value. If you're concerned about making sure
that you have access to 100% of the accumulation value,
you can take out a waiver of surrender rider or they're sometimes called
different things. And you can do that but there's
trade-offs. What's the trade-off? By doing that,
you have access to 100% of the accumulation value during the early
years. But you're actually paying a little bit
for that 100%% liquidity because down the road, if you're doing it
for income, let's say it grows to 2 million or 3
million dollars and you want to pull out 300,000
a year, in other words, a 10% payout.
If you chose to use the indexed universal life and have the surrender
value be different the first early years, you will likely experience maybe an
8 to a 10 percent payout tax free. But if you chose to have
the waiver of surrender rider, the trade-off
might be a half percent less in payout. Instead of
getting a payout of on every million 80,000 a year,
maybe you're only going to be able to take out 75,000
a year. Well, I would rather have 80,000 a year.
If your goal is to maximize your income and you want to have 8 to 10 payouts,
then just go ahead and have the
difference be there because you can still access
money. Most emergencies do not require people to
take out 100% of what you put in in the early
years. Otherwise, maybe this is not the right
vehicle for you. So, make sure you analyze what your goals
are and once you understand that, realize you are earning all of your
growth, all of your interest on the accumulation value. The
surrender value really doesn't mean anything unless you were to totally
cancel the contract during the early years. I'm one
for the maximum income down the road. So, I don't worry about the surrender value.
I want the money credited at the highest possible rate
as I can during the growth years. And I want the highest possible
income down the road. That's why I don't worry about the surrender
value or surrender charge because I've never incurred it.
So, if this has intrigued you and you want to see some numbers some
charts, I would recommend my most recent book. It's book number 11 called The
Laser Fund. It's 2 books in 1. This one
is 200 pages comprised of 14 chapters with
all kinds of charts and graphs. You'll see in here the accumulation value
column next to the surrender value column
and when they equal each other. And how your money is growing based upon the
accumulation value. If you want to learn how this works with
stories, you can flip the book over. This is 100 pages 12 chapters with 62
actual client stories. And so, I'll tell you what. Don't pay $20
for the book. I will gift you a copy of that for free.
You simply go to
laserfund.com. L-A-S-E-R, fund, ".com" to claim your free copy. You contribute
$5.95 towards the shipping and handling and I will buy the book. And you
contribute towards the shipping and handling.
There's options in there if you'd like to listen and learn, watch and learn
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