How do people use
whole life insurance policies
as a savings asset
specifically focusing on the cash value?
When you look at whole life insurance
it has been used as a savings asset
for decades
when you look at wealthy individuals
corporations
they have consistently used
whole life insurance policies
as a means to store money
focusing on the cash value
that's often their point of interest
not so much the death benefit
although that does have a long-term benefit
it is very common to hear someone say
the reason why I'm taking this policy out
is for the cash value benefit.
Now when I look at the benefits
of a cash value life insurance policy
there are 3 core benefits in my opinion
the cash value is a safe
liquid
and tax-free area to position money
tax-free if I don't trigger a taxable event
one example would be
a modified endowment contract
the short version of that is a MEC.
Now today we are going to focus
on the safety
when I look at a whole life insurance policy
that is designed for maximum cash value
from day one
it is a safe area to position money
now what I mean when I say safe
here's why people put money
into these products
that are specifically interested
in the cash value.
When we look at the safety
there's no stock market risk
meaning when you actually
look at your cash value
in a pure whole life insurance product
it is not tied to
or invested in the stock market at all
the cash value growth
is based on the insurance company
that you select
the guaranteed rate
that's the minimum floor
that it can do no worse
than that guaranteed rate
and then also the insurance company
will often pay a surplus
on top of the guaranteed rate
the guaranteed rate
plus the surplus
result in the total dividend interest rate.
Now the net growth rate
on a whole life insurance policy
will likely fall somewhere between
3% and 5%
this is referred to as the
internal rate of return in the industry
keep in mind that I said net growth rate
this is the case
even if you see a product
that has a 6% dividend interest rate.
How could I have a 6%
dividend interest rate
if I see online
or from that insurance company
my dividend is 6%
but the best I'm going to earn
is potentially 5%
that doesn't make sense.
The reason why
is anytime you see any rate
from a life insurance company
on a whole life insurance product
always keep in mind
that that is always a gross rate
that rate does not factor in
the insurance expenses
the mortality charges
everything that comes
with that life insurance product
I want to look at the net growth rate
this is referred to in the industry
as the net internal rate of return.
Now going back to
why people use this as a savings asset
it is a very popular product
among what I like to refer to
as the cash cow
this term was first introduced to me
by my good friend Dr. Ace
when he said I'm kind of a cash cow Steve
that's why he was attracted
to this product
it's a great cash alternative.
If I have money in the bank
earning a very low-interest rate
or no interest at all
here's an asset
that provides the same safety
some view it as more safe
as money in the bank
banks put money into these products
cash value life insurance that is
but I can move money
that is in a bank account
over to a life insurance policy.
Now there are some drawbacks to this
to point out one drawback in this case
it would be the early years
no matter how well a policy is designed
I am going to take a hit in the early years
this has to do with
where my money is going
when you pay any dollar amount
into a life insurance policy
your money can go toward 2 areas
2 primary areas
toward the insurance premium
premium dollars do not show up
in cash value in the 1st year
because they buy you a death benefit
as you continue
to make premium payments
those premium payments
do show up in cash value
but the first area you can put money
is the premium
the second area is referred to as a PUA
it stands for paid-up additions Rider
I like to refer to this as a cash dump in.
Guess why we call it a cash dump in?
It shows up in cash value
it's money I can access
begins compounding
this is the key
to accelerating the cash value growth
in a whole life insurance policy
but with all that said
no matter how low I go in the premium
there's limits to how low I can go
depending on
the insurance company I select
I'm going to see
negative cash value in the 1st year
what that means
is if you were to pay in $1,000 into a policy
and it's designed with minimum expenses
I might see anywhere between $800
and $900 in cash value in the 1st year
meaning I'm taking somewhere
between a 10% to 20% hit.
As far as the reasons
why people don't do this
that's often the reason why
if someone asks what are the drawbacks
what's the number one reason
why someone would not do this
it's their early years
loss of liquidity.
As time passes
the product just gets better and better
when we look at the guaranteed values
and non-guaranteed values
upfront I take that hit
as long as I have transparency
around that fact
before I start a policy
then I can make an informed decision
which is nice
we like to make informed decisions.
Now on the same point
as far as the product being a savings asset
it's very flexible if it's set up properly
the flexibility is one of my favorite parts
here's why
when you hear the word insurance
let's think of life insurance
what do you think?
Well first it's kind of boring and scary
meaning I have to pay a premium
and when I die a death benefit is paid out
now if I told you that we could use this
as a savings asset
a safe
liquid
tax-free area to position money
we'll see it grow with no risk over time
somewhere between 3% to 5%
tax-free if you're in a high tax bracket
that's fantastic
you've got the loan feature
where you can borrow against it
and it keeps appreciating
like a piece of real estate
your entire cash value
not just the money remaining in equity
all of these fun benefits
but it's a life insurance policy.
Does that mean
that you have to keep paying premiums
for your whole life?
Absolutely not
if it's designed properly
so we can set up a policy
to be extremely flexible.
Did you know
that you can have a policy
where you can commit just to the minimum
and make additional payments
at your discretion
and those additional payments
will accelerate your cash value growth
meaning the additional payments you make
show up in cash value immediately
it begins compounding
and makes the policy better and better?
Take for example a $100,000 per year
if you said I want the ability
to pay in $100,000 per year
but I do not want to receive
a bill for $100,000 per year
can I set it up where it's flexible
and I can commit to a minimum amount?
The answer is 100% yes
we can design it in a manner
where we commit
only to $10,000 per year
10% of the desired maximum
and then at our discretion
we can throw an additional
$90,000 into the policy
all going toward cash value.
Now do I have to hit that $90,000?
No not at all
it can be set up where it's very flexible
this does depend on the company
and how the policy was designed
but it is possible.
Now if $100,000 seems like a lot
let's look at a $10,000 example
if you want the ability
to pay up to $10,000 per year
but you do not want to receive
a bill for $10,000 per year
we can set it up
where you're committed to $1,000
that's your yearly commitment
and you can throw
an additional $9,000 into the policy
at your discretion.
These are round numbers
sometimes the $1,000 maybe $1,200
or $1,300
sometimes it's a little bit less
depending on the company and product
my point is a policy
with most companies and products
can be designed where it's very very flexible
minimum premium
which results in
minimum insurance expenses
and then maximum cash value.
So to look at some examples here
let's take an example
of a cash cow first
someone with $1,000,000 in the bank
that has money in the bank
because he fears another recession
or market crash
he wants safety
somewhere where he can put his money
where he will not lose it
and also if an opportunity arises
he can access it.
A lot of cash cows
just through experience
from my personal experience
will take advantage of down markets
and of recessions
they want to be able to
take advantage of opportunities
whether it's stocks at a low price
real estate
investing in business
whatever it might be.
Let's take a look
so a quick example we have here
on the left
we've got a model of someone
moving that $1,000,000 into a policy
over 4 years
let's take a look here we go
55 years old $250,000 per year for 4 years
we can move this into the policy faster
however when we look at
conservative returns
meaning just the guaranteed rates
and guaranteed values
it makes the most sense
to spread it out over 4 years.
If you like technical details on this
we do have a number of videos
on our channel
which go into full detail.
What is highlighted in yellow
represents the break-even point
when he actually gets his $1,000,000 back
so what did we mention earlier
was the worst part about this?
Upfront
negative in the early years
he pays in $250,000
what does he have here?
So year 1 we're at $211,000
we pay in $250,000
it grows to $453,000
if he was earning 0% right here
you've got $211,000
and you're paying $250,000
what would it grow to the next year?
$461,000 it grew up $453,000
he took a hit again it's minimal
but he's not earning money
he's losing money
what's happening is in the 1st 2 years
of a life insurance policy
that's where the expenses are heaviest
we have them minimized
as low as we could possibly
drive them in this example
but they are still heaviest in the 1st 2 years
which is why I'm negative
on my annual internal rate of return.
Next year I pay in $250,000
I get my $250,000 back
and a little bit more on top of it
next year I get a little bit more
and it gets stronger and stronger
as the years' pass
it looks pretty good.
The annual IRR represents
what he is growing by each year
what his money is growing by each year
and the average internal rate of return
factors in the average
over a certain number of years.
If we look at the 15-year average here
what do we see?
Here's 15 years just about 3.4%
based on the company's
present dividend interest rate and such
but we've got a cash cow here
moving $1,000,000 into the policy
not another penny thereafter
he can continue to add funds
but he says
I don't like the idea of payments
let me just get the money in
and then I'll use this over the years
at my discretion
but it's pretty interesting
when we take a look at this.
So if we look at another example here
to have some more fun
here is a smaller example
of the $5,000 per year going in
or $5,000 and here's what it looks like
so to make this a little bit bigger
these examples are on younger individuals
let's just look at a 32-year-old here
what do we notice here?
$5,000 per year total going in
his minimum premium
is actually a little bit less
than $500 in this example
but we do want to factor in
term insurance
we've got some other pieces attached
so I used a round number in this example
but minimum premium
is the purpose of this
and then here's our annual outlay
total out of pocket each year $5,000
here we go
paying in $5,000 per year
getting his money back
between years 5 and 6
a small dollar amount
just like the $1,000,000 per year
if we go back to the $1,000,000 total
the $250,000 per year
his minimum commitment
is right around $25,000 per year.
Guess what this individual's
minimum commitment is?
It's actually a little bit higher than this
just with the way it's set up
and the requirements about $750 per year
with the option to go up to $5,000 per year
so it's designed
with a minimum insurance premium
maximum PUA allocation
that's that cash dump in
to really accelerate the cash value growth.
So I hope you enjoyed this video
if you'd like some further details
please leave a comment below
or feel free to reach out
we've got several videos
that really goes into detail
break down life insurance illustrations
and go through anything and everything
cash value life insurance
but if you did enjoy it
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Thanks so much.
Hey guys Steve Parisi here
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