How do you know
if a whole life insurance policy
is truly set up for maximum cash value?
We're going to go through exactly
how to design a policy
for maximum cash value
in this video
we're going to look at some illustrations
some numbers
so you know exactly what to look for
if you're considering a policy
or if you already have a policy
let's get into it.
So with a whole life insurance policy
what many people are not aware of
is that you the policyholder
can actually choose
where your money goes.
Unlike most insurance products out there
whether it's
a traditional term life insurance policy
auto insurance
any type of insurance typically
has a benefit
meaning if it's a term policy
when I die a death benefit is paid out
and that costs me a certain premium
and it is what it is
I pay that premium no matter what
however
with a whole life insurance policy
specifically when someone is interested
in maximum cash value
you may feel that
you don't care about the death benefit
we hear that all the time
you can choose where your money goes
between these 2 areas.
I can decide if my money is directed
toward the insurance premium
which I'll refer to often
as the initial insurance expense
or if your dollars are directed
toward this PUA Rider
PUA stands for paid-up additions Rider
I'll often refer to this
for simplicity as a cash dump in
and you'll see why in a second.
So the premium
I like to refer to it as the
initial insurance expense
then the PUA Rider
I'll refer to as a cash dump in
so if this is me paying money into a policy
I want to understand the relationship
of these 2 areas
let's assume
that I want to pay in $100,000 per year
and if that seems like a big number
this can be $10,000 per year
if it seems like a small number
it can be $1,000,000 per year
it's all relative based on
the design of this policy
so any dollars that are directed
toward the premium piece
of a life insurance policy
with respect to the cash value
which is the point of interest
to just about everyone we work with
premium dollars often result in zero
or a very small percentage
showing up in cash value in the 1st year
and sometimes the 1st and 2nd year
the reason why
is premium dollars are primarily
going to purchase a death benefit for me
right off the bat
now as time passes
as I continue to make premium payments
if I fund it for a long period of time
premium dollars do build
cash value over time
with a traditional
whole life insurance policy
typically you'll find that premium dollars
show up in cash value
beginning the 3rd year
those begin then
to earn the guaranteed rate
and dividends I can access it
and it gets better and better
as time passes
but the 1st 2 years I'm behind the curve
nothing to show for it
it doesn't look that good.
Whereas these guys this PUA Rider
which I like to refer to as a cash dump in
anything I pay in here
guess what?
It shows up in cash value
that's money I can access right away
it begins to earn the guaranteed rate
it begins to earn dividends
this is the key
to maximizing the cash value
both on a guaranteed
and non-guaranteed basis from day 1
and throughout the life of the policy.
Now it will purchase me
some life insurance
typically it is a very small amount
compared to premium dollars
but it does purchase me
some death benefit
however
just about everyone we work with
primarily pays money in here
to this Rider right here
for the cash value benefit
so naturally
the follow-up question we get
let me ask first
what's your follow-up question
as you see this?
if you want to pay in $100,000 per year
and you can choose
how much of that $100,000
goes toward the premium
and how much goes
toward this PUA Rider
where would you like
to direct your money?
Well the question we get frequently
the question I had
when I was brand new to all of this
almost 10 years ago
the question my father asked me
the first time
I was looking at these numbers
was can I just put
everything into the PUA Rider
and zero into the premium
because I don't care
about the death benefit?
The answer is not quite
there are minimums that are set by
2 institutions
or 2 large entities out there
(1) is the insurance company
that we're working with.
We see this 10X limitation right here
what this means
is whatever your total payment is
typically you can drive
the insurance premium piece
as low as 10%
you'll see that to be the case
with many of your
major mutual companies
like a MassMutual
Guardian
New York Life
or Northwestern Mutual
the big 4 in the industry
what this 10/90 refers to
is if I'm paying in $100,000 per year
I can set the minimum premium
as low as $10,000 per year
and then I have the ability
not commitment
but the ability
to throw another $90,000 per year
into PUAs
which helps accelerate
the cash value growth
and I see a cash-rich policy from day 1
throughout the life of the policy.
So why I like to ask that question
how much do you want the ability
to pay into a policy
on any given year
is because it helps us determine
what your minimum will be.
Think of it this way
if you said hey I want the ability
to put in up to $100,000 per year
knowing that the insurance company
will allow you to 10X
that minimum base premium
I know I need to set
the minimum premium at least $10,000.
If you said $100,000 Steve
that's way too high
I'm looking to pay in $10,000 per year
well then we would set
the minimum premium at 10%
of that total desired payment
which would be $1,000
which now allows you the policyholder
to commit to that minimum of $1,000
and then at your discretion
you can add more funds
up to a total of $10,000 per year
so what's really nice about this
is it really allows you
to take a life insurance policy
when set up properly
is a safe, liquid
tax-free area to position your money
it allows you to take
that life insurance product
and turn it into a flexible savings asset
in the sense that you can commit
to the minimum amount only
and just pour excess funds
into the policy anytime you want
but what we want to be aware of
is that limitation
that is set by the insurance company
this way we don't go
too low in the minimum
meaning if things go very very well
and I want the ability to pay in
$500,000 per year
I can't have a policy
with a $2,000 minimum premium
it would have to be at least $50,000
so it's good to have awareness on that
but with respect to the limits
the insurance company
will often allow you to 10X.
That is not the case
of all insurance companies out there
and in fact
even your major mutual companies
have different limits
that are all very close to that 10X multiple
but they do vary a bit
so when we're working with anyone
as we look at different companies
we're going to be very transparent
and show you the exact dollar figures
this way you know exactly
how low you can go at the premium.
So first limit
insurance company limitations
the second limit to be aware of is IRS limit
so we've got this MEC limit here
MEC represents
modified endowment contract.
Any life insurance policy
can become classified
as a modified endowment contract
if it does
the cash value growth
is still tax-deferred
but anything you access
you have to pay ordinary income tax
on the gains
and then also a 10% penalty on the gains
if you touch it
prior to the age of 59 and a half
to summarize
we don't want a MEC to occur
it strips the cash value
of that tax-free benefit
so how we prevent it
is every policy
has what is called a MEC limit
now the fun part
is that we can actually set that limit
wherever we want
you have control of that
when we first set up the policy
if you want to get very technical
what you'll find
is that the measuring stick
that the IRS uses
to determine that MEC limit
really is based on an individual's age
and total death benefit
the guaranteed rate and gender
with the life insurance policy
does have a play as well
but the main factor or factors
is an individual's age and death benefit
but in most cases
if someone said hey I want the ability
to pay in $100,000 per year
what we're going to do
is set that MEC limit at
or above $100,000
the minimum premium at $10,000
so setting that at $100,000
allows us to set the death benefit
at the lowest amount possible
which helps us minimize the costs
as much as possible
this way you've got more cash value.
Fun stuff, right?
Fairly technical
let's look at a couple examples here
so as we look at the charts here
we've got 3 different policies
with 2 different companies
so company A that's one option
and then 2 options with company B
so before we just start
looking at the numbers
or first let me add this
here's what to look for just for simplicity
you've got $100,000 per year
going into these examples for 5 years
this is based on a 40-year-old male
and here's the key indicator
to know if a policy
is set up for maximum cash value
from day 1
of that $100,000 you should see
anywhere between 80%
and 90% of that payment
in cash value in the 1st year alone
that is the key indicator
now depending on the company
the product
how they actually credit
dividends to the product
will have an impact
on long-term performance
and this is where we like to
compare and contrast
show a number of options
this way the policyholder if it's you
can really select the option
that you know is best for you
and will complement
what you're trying to accomplish
as the years' pass
but as we look at these options
here's what I want to touch on
so where is your money going?
So going back to the whiteboard
money can go where?
Towards the insurance premium
or toward PUAs
premium insurance expense
PUAs cash dump in.
Where do I find that on an illustration?
Here's one company
this guy represents the premium
we see that it is set at $10,000
where I came up with that number
is here we've got $100,000 per year
going into the policy
of the $100,000
$10,000 is directed toward the premium
everything else is directed toward PUAs
I'll rephrase
we do have a little over $1,000
is directed toward
a term insurance Rider as well
the reason for that
is adding term insurance
is a way to increase the death benefit
and when one says
well I don't care about the death benefit
what that has a direct relationship to
the death benefit is what?
MEC limit
age and total death benefit
have a direct relationship to the MEC limit
so if I want the ability
to pay in $100,000 per year
I need a MEC limit of at least $100,000
and a minimum premium
of at least $10,000
so that's where we came up
with the examples in this chart
for this illustration
there's your total cash value column
$92,115
that'll match the Excel spreadsheet
if we look at the other example
here we go
where's the money going?
So we see a total of $100,000 going in
this is one of the
major mutual companies
here's the premium
look at this
$9,090
where we came up with that number?
Here's your PUA payment
the PUA payment
is 10X the base premium
so technically in this example
we can 11X our base premium
with respect to a total payment each year
if we wanted to go that aggressive
it doesn't make a huge difference
but that just demonstrates the examples
between different companies
and products
where some are 10X
some are 11X
some are a little bit less depends again
on the company and product
but here we see payments going in
$100,000 per year for 5 years
nothing thereafter
that's your actual out-of-pocket
net cash value
year 1 $83,000 and change
almost $84,000
break-even point in this example year 5
where I paid in a total of $500,000
and I have $500,000
$502,000 to be precise.
So there's a couple examples there
going back to the Excel spreadsheet
which simplifies everything
we've got it side by side
company A there you go
cash value $83,733
between years 4 and 5
really year 5 is the break-even point
where I'm cash on cash
after that I pay nothing in
however I can continue to do so
if I want to
and the cash value continues to grow.
Then we see company B
option 1
that's fun stuff, isn't it?
$100,000 per year for 5 years
there we go $86,000 right off the bat
breaking even also year 5
between years 4 and 5.
Here's option 2 with company B
all of these are funding for 5 years
which mainly demonstrates
a short funding period
as many people are attracted to that
however
if one states well I want to fund longer
than just 2 years
can I continue to pump money into it?
The answer is yes
here's option 2
or I should say option 2 with company B
where you see it's the exact same product
this was actually
the illustration we started with
the detailed illustration
you'll see through the 1st 5 years
everything's identical here
and the only difference now
is that the individual stated
I'd like to continue to pump money
into the policy
because I still have money to pay in
whether it's $100,000
whether it is $10,000
whether it's $50,000
the nice thing here
is when we design a policy
for maximum cash value
if you're still paying into it
if you still want the option
to make payments
we still have to pay
our minimum premium
if we make
the minimum premium payment
then you still have the ability
to make additional PUA payments
if you don't pay the minimum premium
typically you cannot make
additional PUA payments.
So if someone says
you know I'm not sure
if I want to stop funding after 5 years
how do I continue to keep the option open
to pump money in?
The answer would be
we have to continue to
or you have to continue
to pay the minimum premium in that case
and then you can add additional funds
on top of it.
So I hope this one was helpful
I hope you had as much fun
as I did with this
talking about policy design.
If you have any questions
please feel free to reach out
you can call or email us anytime
and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
if you enjoyed the content you just saw
please subscribe
like
and hit the notification bell
for future videos.
If you'd like more information
or to see some
custom policies for yourself
feel free to call
or email our offices
at the contact information below.