- Different types of life insurance explained.
In this educational episode,
I'm going to address term life insurance
versus permanent life insurance,
cash value life insurance.
Get ready.
I'm gonna simplify this,
but hopefully it will give you a better understanding.
(bright music)
So I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for nearly five decades.
And clear back in 1974 when I started,
I got my Series 1 securities license
and also my insurance license.
And I've helped thousands of people
be able to prepare for long-term goals such as retirement
by utilizing life insurance for living benefits.
But let me explain some things to you
because back in 1974,
I was a big buy term insurance
and invest the difference proponent
until EF Hutton came out
with universal life in 1980.
Prior to 1980,
there was only term life insurance and whole life insurance.
Whole life insurance was primarily designed
for death benefit.
But let me explain the differences here in this episode
so that you'll begin to understand
a little bit about how life insurance works.
Because all life insurance, termed and permanent,
all have a term insurance charge or component,
the actual mortality cost associated with it, okay?
So throughout the years, especially in my career,
when I first started in 1974,
the insurance companies were using the CSO.
That's commissioners standard ordinary mortality table
based on 1958.
So in 1958,
the government put out the mortality tables.
And back then, for 30-year-olds,
the actual amount of 30-year-olds,
if you took 1,030 year olds,
2.13 would die that year.
So that's called the mortality rate.
Out of every thousand 30-year-olds in America,
2.13 would be dead at the end of that year, okay?
So that's called the mortality rate.
Why is that important?
Well, let's simplify this.
Let's round it down to two,
because in 1980,
they revisited because medicine and everything advanced.
And so the mortality table came down
to about 1.93.
And then in 2001, it came down again.
In 2017, so it adjust.
But I wanna keep this simple in this episode.
So let's just round this to two.
Out of every thousand 30-year-olds,
two will be dead at the end of that year.
So let's simplify
and say that we have this fraternal organization
and there's a thousand of us in this fraternity
and we're all 30 years old
and we're all males, okay?
And we decide we wanna provide a death benefit
for the two who will not be here at the end of the year
because they're gonna die based upon these mortality tables.
So we pass a hat around the room
and we're collecting money
so that we could leave behind a thousand bucks
to the two spouses or widows that we're gonna leave behind.
Let's say we're all married, okay?
So how much would we have to contribute to the hat
to end up with a thousand dollars
for two widows, beneficiaries,
that will need some help at the end of that year?
Well, we all have to contribute two bucks.
We have to collect $2,000
to have a thousand for those two widows.
Does that make sense?
Okay.
And so the mortality cost might be $2.
But see, if we continue to contribute money
and pass around the hat every year,
we're gonna have to keep putting
more and more money into the hat.
By the time we're all 40,
some of us will have been gone
and we're gonna have to contribute
maybe $3.50 at age 40
instead of $2.
At age 50, we're gonna have to contribute $8.32
because that's the mortality rate.
And this again, is based upon 1958.
It's a little bit better than that now,
but this is the concept I'm talking about.
When we're all 60,
about a third of us will already be gone, okay?
The other two-thirds of us
are gonna have to contribute $20.34 cents to the hat
in order to have a thousand dollars
to pay out to the widows
for those that will die from age 60 to age 61.
Does that make sense?
Well, at age 65,
we've gotta contribute nearly $32.
At age 70, we have to contribute nearly 50 bucks.
At age 80, we've gotta be contributing almost $110
for that year.
And at age 90, we've gotta be chipping in 228 bucks.
In fact, the 1958 mortality says
that if you're a hundred years old
and you wanna provide a thousand dollars death benefit,
you need to contribute a thousand bucks, okay?
Because you will likely die from age 100 to age 101
based upon that mortality table, okay?
So hopefully this is making some sense.
So what I wanna do is illustrate the difference
'cause that's term insurance.
But see, those mortality costs are inherent
in every single insurance policy,
whether it's whole life,
universal life, or term insurance.
So on this chart, I'm gonna simplify it.
Going up here is the cost of insurance,
these mortality charges, okay?
Across here is the age.
So we're gonna start out at age 30 like I did
and we're gonna go every 10 years to age 100.
So based upon what I was talking about,
term life insurance is going to get more expensive.
You're gonna have to contribute more money
on annual renewable term every single year
because I haven't filled in all the years in between here
in order to have that insurance coverage,
if you were buying an annual renewable term insurance policy
where your premium goes up every single year.
So I'm just putting this on a straight line.
It might be actually curving up like this,
but I wanna keep it simple here.
So this is term life insurance.
And so what I was telling people to do back in 1974
is buy this term insurance and invest the difference
between that and maybe what you would put
into a whole life insurance policy,
which is more money as you're gonna see here.
And if you put that into a mutual fund
and if you could earn 12%,
you'll come out ahead,
which was true mathematically.
But then if you earn 12%
and at the end of the day you had to pay tax,
many of my clients who accumulated money
were between a federal and state income tax bracket
paying 33% or more in taxes on the back end.
And so if you earn 12,
you're only netting eight in a 33% bracket,
and there might be fees and so forth.
And so you had to earn 12 to net seven.
The fact of the matter
is a lot of people who have their money in the market
aren't really earning 12.
They're earning nine.
And so if you're earning nine,
you're only netting six after tax
and maybe only 5% after taxes and fees, okay?
But the point is this, term life insurance,
you're just paying for the pure cost
of if you happen to die.
Now, whole life insurance, when it was introduced,
they said, "Hey,
let's look at paying like 20 to $30
into this life insurance policy
even starting at age 30.
Let's pay 20 or 30 bucks into this.
And so you're way overpaying here the early years
because that's not the premium,
the money you'd have to put into that hat,
until you were 60 or 65 years old.
So you're way overpaying the early years, why?
Well, so that the two thirds of us
who make it to beyond age 65,
we can keep paying that level premium
of let's say $25 per thousand
the rest of our life
so that we have a level premium.
And so we're underpaying the later years
because we overpaid the early years
and we built up this equity.
We overpaid.
And so when you overpay, that builds cash value.
And when that cash value grows
and the insurance company,
actually because they have physical exams,
they do underwriting,
and they actually eliminate
probably 50% of these people who are gonna die.
And so the actual people who die
that they choose to ensure
is less than the mortality,
but they can charge you the full mortality cost.
But if the actual deaths per thousand
are only about half this
or less than that,
then the insurance company has excess money
and they can refund that to you.
But they call it a dividend,
but it's not a dividend in the true sense of the word.
US Treasury Decision 1783 said,
"Dividends of whole life insurance are not really dividends
in a commercial sense of the word.
They're refunds of overcharge."
Because they charged you this
but not that many people died
because they sort of screened them out
when they underwrite them, okay?
And so when they refund the overcharge
and they call it a dividend,
they're acting like,
"Well, we're being profitable
because we're only choosing to ensure certain people.
And so we're giving that dividend back to you
and it's a refund,
but you can leave it in the policy
and this will build up cash, okay?"
And so you're way overpaying the early years
so that you can underpay the latter years
and that builds up this cash value.
And hopefully the cash value is enough
that if you live to be a hundred years old,
the policy will not lapse.
It will always be guaranteed to have a death benefit.
So whole life insurance has guarantees
to make sure that if you pay what they tell you to pay
for as long as they tell you to pay it,
it's pretty rigid.
'Cause if you don't do that,
it lapses or it goes into a non-forfeiture option.
It's very rigid.
It's not flexible.
That you are covered with your whole life.
But it was designed primarily for death benefit.
That's the chassis.
Can you use the cash value for living benefits?
Yeah, but it wasn't really designed for living benefits.
That's what universal life was designed for in 1980.
In 1980, when universal life was introduced,
this was like by term invest the difference on steroids.
And I'll show you why.
But first of all, let's just talk
about different types of permanent insurance.
You could actually pay even more money
into a permanent life insurance policy
up to age 65.
These used to be called life paid up at 65,
but sometimes the guarantees weren't enough.
But the idea was,
once you way overpay
and you can stop at age 65 in the cash values
and the dividends should be enough to keep you covered
if you happen to live to be a hundred years old.
The policy won't lapse.
Okay, well, some of those policies do lapse.
And so they stop saying, "Well, this is paid up."
They didn't like using that terminology.
But you could pay a higher premium
and probably get away with paying no more premiums
after let's say 65.
Or what about you pay for 20 years?
This used to be called 20 pay.
So you pay even more into that permanent policy
for 20 years.
And because you have so much overpayment,
the cash value is sufficient enough
that it will likely keep the policy in force,
under worst case scenarios,
if you live to be a hundred years old, okay?
Well, then there was 10 pay.
Well, they don't like to say 10 pay and 20 pay
because there's some factors there that may make it lapse.
But nonetheless, based on historical performance,
maybe if you paid this much money in 10 years,
then the policy would likely stay enforced
with the cash value out to age 100 if you live that long.
And so that's how you overfund even more
than paying a level premium your whole life.
It's still called whole life.
Well, in 1980 when EF Hutton came out with universal life,
and then in 1997, indexed universal life,
what a lot of agents don't understand
is you're actually able to fund the life insurance
primarily for living benefits.
You're taking the least amount of insurance,
the IRS will let you get away with
and you're putting in the most premium
or money that the IRS allows.
So if you wanted to put in 500,000 bucks,
my heaven, you could buy a ton of life insurance
for $500,000.
But my clients weren't interested in the most death benefit.
They wanted the best rate of return on $500,000.
They wanted the $500,000
to generate 50,000 a year of tax-free income.
They wanted that 500,000 bucks that they put into the policy
to double to a million in seven and a half years,
which it did.
Why, because they put in 500 grand.
They put in these large lump sums.
They funded the policy in five years.
Now you can't do that with whole life.
It takes at least seven years.
But you put in the entire amount in five years.
And so you're way overpaying, why?
Because you're not interested in the death benefit.
You're interested in that cash growing like crazy
because you want the 500,000
to double to a million and then to 2 million,
then to 4 million and to 8 million.
And we've had clients that experienced that.
Or you want that 500,000
to generate 50,000 a year of tax-free income
for the rest of your life.
You do that by structuring the policy
to take the least amount of insurance
and put in the most money
as the IRS allows.
So that, in a nutshell,
is the difference between term insurance,
whole life or permanent insurance.
Universal life is permanent insurance,
but universal life was designed
to accommodate even more money
faster than whole life.
And that's why it performs better, okay?
And I can show you all kinds of illustrations
to prove that point.
So if this is intriguing you
and you would like to learn more,
I would like to invite you to study.
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If you go to Amazon and purchase, thank you.
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and check out if you like to listen and learn
and watch and learn.
There's audio and video versions there.
Check out the educational webinars.
We teach on a regular basis.
They're free.
You can even schedule an appointment
with an IUL specialist that I have trained
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with no obligation, no cost to you,
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so that you can use it for living benefits
like I have for nearly 50 years.
(bright music)