What to look for when purchasing
a high cash value life insurance policy.
If you've ever been shown a cash value life insurance policy,
if you're in the market for one right now,
really the question to ask yourself
when you are looking at all the options,
trying to understand exactly how this works is,
what should I look for?
So, we're going to show you in this video
what to look for first, from a simplified standpoint.
And then we're going to start to break things down further
looking at the numbers of different writers and such.
This is really equipped...
-this video I should say, will equip you
with the knowledge you need to know
as far as the basics on how to set up a policy.
If we're an agent in the business
or if we are looking for a policy as a consumer
what we can instruct our agent,
if you're working with us
or any agent on exactly how to set up a policy.
And we do have businesses that
provide services to both those in the industry,
agents and also consumers setting up
and working with you over the life of your policy.
So, let's get into it.
We've got a goal of maximizing cash value.
What should I look for?
Here is the first thing.
When we are setting up a policy,
if we are maximizing the values,
we should see a first-year cash value
between 80-90% of what we pay in,
in the first year.
So for example, if I am paying in $10,000,
I should see somewhere between
$8,000 to $9,000 in the first year.
If I'm paying $100,000,
I should see somewhere between
$80,000 to $90,000 in the first year.
Now, what I will add is that
this is a high early cash value product,
or a product used by corporations
and a lot of executives.
You will sometimes see cash values,
that can get as high as 95% in the first year.
And there are pros and cons
to those high early cash value products,
but typically you'll see most policies
that generate strong long-term performance,
credit in the neighborhood of 80-90%.
A lot of times when we set policies up
you'll see them in that 85-88% range
and we're juicing policies
for long term performance
and getting as much as we can upfront as well.
Now, the things to be aware of
with a life insurance policy,
because you can take a policy
and slice it in a million different directions,
or a million different ways I should say.
Have you ever seen a whole life insurance policy
where you're paying money in
and you have zero in the beginning?
Or maybe 50% of what you paid in,
and it takes a long time to break even?
Quick side note, if we have 80-90%
in cash value in the first year,
we should typically break even
somewhere between 3-5 years.
Depending on the product and company
that we're using and such.
But here are the items to be aware of,
we've got the Base Premium, Term Rider
and MEC [Modified Endowment Contract] Limit.
So the Base Premium, that is first and foremost
going to purchase one,
the whole life insurance death benefit.
With a life insurance policy,
if I go with a traditional policy,
what happens with base premium dollars,
is first and foremost,
it purchases me a death benefit,
and you will find in respect to your cash value
zero of that base premium payment
shows up in cash value in the first year,
and sometimes the first and second year.
Again this depends on the company and product.
My point being, however,
is the Base Premium,
the company is going to overcharge me
for the death benefit upfront.
So I see next to nothing
in cash value in the early years.
As time passes you will see premium dollars
produce cash value or equity in the policy.
And why I like to mention that is,
we hear the word "premium"
or when you hear the word "premium"
typically what do you think?
Cost, expense, I'm buying an insurance product.
We do have an insurance benefit,
but even though it is a premium,
you do see it come back to cash value
and build equity over time as well.
Now a Term Insurance Rider,
is a very cost-effective method,
to purchase more death benefits.
Now you'll see why this is important
because many times we'll work with individuals
and they will express,
you may have felt the same way
"I don't care about the death benefit."
Or maybe it does have a play long term
or it's nice to have but, like
"I'm really interested in the cash value Steve,
that's what I want to obtain here."
Well, a Term Rider is a cheap way
to raise the death benefit.
And why will we often consider a Term Rider?
We like to show options with and without
but in the majority of cases,
we do use Term Insurance Riders.
and the reason why has to do with this MEC Limit.
So MEC stands for Modified Endowment Contract.
A huge benefit to a
cash value life insurance policy, is what?
Safe, liquid tax-free area to position money.
Now, a cash value life insurance policy,
can lose the tax benefits
that the cash value carries.
If this happens, well I should say,
one way this happens is,
if we trigger a Modified Endowment Contract.
If your life insurance policy becomes a MEC,
what happens is that your cash value
will still grow tax-deferred.
However, anything you access
you have to deal with income tax
in respect to the gains
and if we are under age 59 and a half
we have to deal with an additional 10% penalty tax.
In short, we don't want it.
It ruins everything.
Now the nice thing is,
what regulates that is
the IRS [Internal Revenue Service]
through a MEC Limit.
And, many people are not aware of this.
We can actually set that limit wherever we want.
You will find that limit
has a direct relationship,
to an individual's age and total death benefit,
on a life insurance policy.
So as we start to build out a policy
you'll begin to see okay,
"here's why the minimum premium,
here's why the Term Insurance Rider,
here's why the death benefit is important."
Because it's crucial just to understand enough
with that life insurance amount
to set our MEC Limit where we want it.
So, let's go over understanding
where your money is going?
So this is important.
We're going to demonstrate this,
what we looked at over here in the left,
a little bit further.
So, money can go where?
We've got these three areas, -the Base Premium.
If I have a Base Premium of $10,000 per year,
and let's assume that I am age 40,
depending on the product,
that may purchase me
north of $500,000 in whole life death benefit.
So, if you're looking to put $10,000 per year
into a policy for a $500,000 death benefit,
and you don't care about the death benefit,
you'll look at it and say,
okay, that premium does not show up
in cash value in the first year.
Often, it does not show up in cash value
in the first and second year.
As time passes more
and more comes back to equity.
However, that's an expensive
whole life insurance policy.
That's often how whole life insurance is viewed.
Now, where I'm going with this,
remember that MEC Limit for an age 40 male,
$500,000 in whole life insurance
may obtain him a MEC Limit
of approximately $20,000.
Will need to be a little bit higher than that.
But going to be about $20,000 in MEC Space.
That's how much $500,000
of life insurance obtains him.
So what this means is
if you said okay,
"I want the ability to put in $20,000 per year.
I don't wanna get a bill for $20,000 Steve,
but I want the ability to put in $20,000."
$500,000 in total life insurance
will get you approximately $20,000 MEC Limit
so you could fund up to $20,000 per year.
If you're age 40
and have that much life insurance.
We're going to show some numbers
here as well soon
so, or the next video,
so you get to see it a bit clearer.
But, we have a $10,000 premium,
so we often talk about a 10/90 split, meaning,
if I want to pay in $20,000,
I would want that premium to be what? $2,000
$2,000 might purchase me,
a $100,000 whole life insurance,
which might only get me, $5,000 in MEC Space.
So how do I get my keep my premium low?
How do I get it to a minimum,
And then plow funds into PUAs [Paid-up additions]?
That PUA Rider is critical
in order to accelerate the cash value
short term and long term
especially when we look at the guaranteed values.
We're going to look at
the guaranteed values in the next video as well,
because that's something
that has just always neglected
or said, "don't worry about it".
No.
We want to look at the worst-case scenario
this way we set expectations properly.
Because if we approach it guarantees
hey, if it does this bad
and I'm happy with it, that's great.
If I'm counting on the non-guarantees
and it only does what the guarantees do,
I'm not going to be happy, we don't want that.
So, let's assume
I want you to put in $20,000 per year.
$2,000 premium gives me a $5,000 MEC Limit.
What we will do in this case,
going back to the example on the left,
is attach a Term Insurance Rider to a policy.
This might cost $300 for the year,
to obtain me another $400,000
in whole life insurance benefits.
So, what we're doing here is
raising the death benefit at a very low cost,
so I can then keep my Base Premium at $2,000.
So call it my net costs now,
the initial costs are the $2,000 premium
plus the $300,000 Term Insurance Rider.
Keep that at a minimum,
the $2,000 on a premium, gives me
a $100,000 whole life insurance death benefit.
Let's separate this
because I know I've got a lot going on here.
Okay, Base Premium $2,000
gives you a $100,000 whole life insurance policy.
Term Rider of $300 gives you
another $400,000 in life insurance protection.
For a total of $500,000.
And again I know we don't care
about the death benefit.
What this has to do with,
going back to the left,
MEC Limit, 40 years old male $500,000,
gives you a MEC Limit of $20,000.
There we go. So I know that can be a bit technical
trying to break it down there thoroughly,
just to help you understand how the death benefit
and MEC Limit has a
direct relationship with each other.
Because the question that you'll likely have
and that always comes up is.
Hey, how do I improve my cash value?
How do I get it to the 80-90% level?
But every time I lower my premium,
my MEC Limit goes down.
I'm told I can't go with,
I can't have a lower base premium
because then it'll trigger a MEC.
Have you ever heard that?
So many times we hear that.
Which is not the case if,
we have knowledge around Term insurance Riders
and how to properly use them.
If you abuse them, if they're not used properly,
over time it can become risky.
But it's fairly easy to avoid the risk.
So, understanding
where the money is going is important.
Let's take a look here.
What we're going to look at in the next video
the case study will follow
everything we just laid out times five
in respect to the MEC Limit.
So we've got a 40-year-old male,
wanting to see a $100,000 MEC Limit
or I should see,
or should state wanting the ability
to pay in $100,000 per year,
but not commit to it.
Once maximum cash value, flexibility
and then show me the guaranteed value.
So, we're going to layout this scenario
more so in the next video.
I hope this was helpful we'll talk to you soon.
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.