CV Q&A
which stands for cash value
question and answers.
So we received a recent email
from someone who is a bit older
and here's his question
it read, Hi
I am 74 years old
would this still work for me?
Referring to a
whole life insurance policy
specifically designed for
high cash value
and then he said
say that I bring a few million dollars
to the table
so I saw that, I'm like whoa.
And then 2nd I'm like okay
we get this quite a bit
in this particular case
I recognize the email address
this was someone I had spoke with
a number of years ago
and he lives out west
and he's got some oil investments
it is legitimate just the timing is key here
so finally it looks like
things are going to work out for him
where he's expecting to receive
his investment coming back
and the amount of money he thought
and he still wants to consider a
whole life insurance policy.
When him and I first connected
this was a number of years ago
he was under the age of 70
and it worked
dividend rates are higher.
So his question is
will this still work for me
and say I bring a big pile of cash
specifically what would it look like?
So the amount we're going to look at here
is $3,000,000 total
that's the amount
he wants to consider
not what he wants to do
what he wants to consider
moving into a policy
so here policy design is critical.
Simply if I'm working with
that amount of money
or any amount of money
but that lump sum
going into a policy
how do I ensure
I maximize the cash value
and long-term death benefit?
Very very important here
company selection
product selection
is also going to be important
especially as I get older.
So the premium
the older I grow
the more it makes sense to
minimize that base premium period.
When you look at every single case
in respect to maximizing cash value
and long-term death benefits
typically a minimum premium
will always do the trick for you.
So we minimized it
as low as we could go
which in some examples is 10%
some a little bit less actually
you'll see exactly what I mean
as we look at it here
I'm going to pull up the breakdown.
But the goal
is to maximize cash value
because he's taking cash he has
he wants to move it
into a life insurance policy
for the core benefits
safe
better than a bank account
liquid
he can access it any time he wants
and then it's got the tax advantage
tax free if he doesn't
MEC [Modified Endowment Contract] it out
cash it out with a gain
nothing like that.
So he's very attracted to it
and the death benefit's important as well
especially in this particular situation
I mean this is an asset transfer play
where you can take $3,000,000 of liquidity
cash
put it into a life insurance policy
and immediately
leave north of $4,000,000
income tax-free to his beneficiaries
so from a legacy standpoint
and a death benefit play
there is a nice advantage there too.
So here's the big thing
timing
ideally he'd like to do it
and I'd like to do it in 2021.
Why I say that ideally in 2021
is what do we have going on?
He's uncertain
if he's going to be able to do it in 2021
or 2022
depends on the timing of the investment
so if you're in a similar situation to this
with any amount of money
hey I've got funds coming in
I think I like this
but I don't know exactly
when I can start.
What do we get going on?
7702 impact
so in a case like this
what an agent wants to do
so if you're in the business
and you have clients like this
or people in this position
I stress
do not try and pressure them
or rush them in
to the new product
or the old product
before this change occurs
because if they can't do it
just because the funds aren't there yet
and they get the sense
you're trying to push them
and pressure them
what do you think the likelihood
of them coming back to you
when they're actually ready to move
forward with the policy are?
They still might come back
but they might go shop as well
because people do not like
that uncomfortable pressure situation
especially when things
are outside of their control.
So what we're going to do
in this example
is look at the impact
if this was me
what I would want to see is first
what is the most optimal policy design
so minimizing that premium
maximizing the PUA [Paid-up additions] Rider
that will do the trick
you're going to see the numbers here
so how do I optimize that?
Number of years
I'll just tell you the number of years
at that age
it made sense to spread it out a bit more
6 years is key
but I want to see both
show me the product
pre-7702 changes
with the higher guarantee rate of 4%
then also post 7702 changes
and what do we have here?
Guaranteed rate of 4%
versus 3%
also you've got a higher PUA fee
with the new product
with the option we're going to look at here
which means the upfront values
won't be quite as strong.
Now aside from cash value
what was the big impact
with the 7702 change?
MEC limits and death benefits
the new product
typically gets us less death benefit
with not the exception
but with the interesting point
that the older we grow
the less of an impact it actually has.
So you'll see that
as we look at the numbers
let's first look at the design
so if this is you
and you're saying okay
I'm looking at a large amount of money
it could be any dollar figure
I want to make sure
that it's set up properly
this is my money going into a policy
I don't want to find out after the fact
that things weren't set up right.
So how do I identify
these stereo instructions?
So 74 years old
second best health class
regular preferred
he's healthy
he's got a couple minor issues
but we ran the second-best class in this issue
healthy last I spoke with him.
Here's what I want to touch on
total payment is what?
$500,000.
Where's the minimum premium?
Money can go where?
Toward the premium
or towards the PUA component.
There's your premium
a little bit less than 10%
so this particular company
this is Guardian by the way
they will allow you to
10X your base premium and PUAs
as far as a maximum payment per year
if you wanted to.
Now if you go 9X 10X
or 10X or 11X whatever it might be
doesn't make a huge difference
when you grow older
it does with a short pay like this
but here's really what I want to emphasize
if you do the math here
this is not a clean 11X.
Aside from the premium
and PUA limitations
there's another issue here
let's see if we can capture it all
which we can.
So if I may direct your attention
to the far right-hand corner
where it reads net death benefit
death benefit's $4,500,000
now this is a product thing
all companies and products
have different options
here's your whole life piece
and then here's your term Rider.
And yes
we are using a term insurance Rider
for someone in their 70s
here's the cost for the term Rider
almost $14,000 in the 1st year
this is the old product.
So with the guaranteed rate of 4%
so the true minimum would be what?
$46,000 plus call it
the $14,000 term cost.
What I will state
guaranteed
and non-guaranteed values
that term cost may seem high
relative to the amount
it's actually not
this is by far
when you crunch the numbers
and run a comparison
in his best interest
to have this term Rider still attached
in this particular scenario
because he's got the lump sum of money
the $3,000,000
funding it for 6 years
7 years or less then he's done.
If it's 7 years or less
you remove the term Rider
after year 7 anyway
in a max cash value design.
So as we look at this guy
what do we notice?
A lot of columns
here's your premium
here's your total out of pocket
so his total amount was how much?
$3,000,000
spread it out over 6 years
at that age
why I did that?
That was the sweet spot
you have this balance to know okay
do I just make the entire
lump-sum payment upfront?
The answer in that particular case is no
the reason why
is no matter what you do with the policy
this base premium
is going to be due for 7 years.
So what that means
is if you are not paying it
like what we see here in year 7
you've got a $46,000 premium due
and the cost of the term
your out of pocket is 0
so what that means
your cash value over here still goes up
which is fantastic
but the policy
is paying for the cost of insurance
the base premium
and term cost
through dividends and interest
it's internally funding itself.
So what's important to be aware of here
just from a lump sum funding scenario is
if I make the full payment upfront
what that's going to require
is the policy now is to pay for itself
for a number of years
so depending on my age
it often makes sense to
spread the payments out
if I'm older 5 or 6 years
if I'm 40
it might make sense to do it over 4 years
something like that
and we've got other content on that
but in this particular case
it made the most sense
to fund it for 5 years
this allowed
or only required 1 year
where it had to pay for itself
through dividends and interest
which gave him a nice advantage here
by this point in time
just the rate it's compounding
covered that premium no problem
even when you look at the guarantees
you're still in a good position.
So there's my cash value
breakdown of the illustration
and exactly where the money is going
okay.
Now let's look at a comparison
what we ran in here
at the comparison sheet
and what we're going to look at here
is the same product with 2 options
so same product
with 2 options.
What I mean when I say that
is we have the standard dividend rate
and then also their indexed feature
now why I say the same product
is when you start a policy
with a basic dividend
if you're in a state
that approves the indexed feature
you can go back and forth over time
I can attach the index feature
put it at 0%
it never costs me a dime
I've got a basic dividend-paying
whole life insurance policy
but if I ever want to turn this on
and have my cash value linked
to the S&P 500 index
is a good option
just to be aware of
some people like it
some people don't
but from an awareness standpoint
it's fantastic.
Here's the $500,000 per year
for 6 years
this matches the illustration
breaks even
between years 5 and 6.
Keep in mind this is for a 74-year-old
not the best class health rating
by any means
breaking even between years 5 and 6
based on the basic
dividend assumption.
So often have you ever heard
or have you ever thought
I'm too old
for a whole life insurance policy?
There's no way it can work
it's going to be expensive.
If you're price shopping and saying
I just want a $1,000,000 death benefit
what does it cost me
that'll often be the case
the older we grow
the more expensive it becomes.
However
if your goal is maximizing cash value
maximizing the long-term death benefit
you say okay
here's how much I want to pay in
or here are my goals
what can you do with the policy design?
To the agent
here's what you get
my point here
or the way how I would answer that question
is we can customize the policy
by going back to the
whiteboard demonstration
reducing the premium
pumping more money into PUAs
growing the cash value
this gives you more of a living benefit
which you have access to
anytime you want
and here's your death benefits
look at that.
So here is really what was appealing
he moves in $3,000,000
that came from investment
to just cash
and there's a death benefit
that has paid 100% income tax-free
to his beneficiaries.
The IRR represents
the net growth rate year over year
after all the insurance expenses
fees everything
what is it actually growing by
1st year it's negative
the main reason why it's negative
what does not show up in cash value
is that premium
which was the $45,000 and change
and also the cost of the term Rider
that's the hit
beginning year 2
the premium comes back
you're capturing just about everything
term cost is causing a little bit of drag
but then you start picking up the pace
compound interest
all that good stuff
and the cash value grows over time.
Then here
index feature
same exact thing
just better values
because we're using
an indexed assumption
which is good to look at
but I mean
personally I like to look at things
more conservative
and progress from there.
Let's look at the 7702 update
so if he said hey I can't start right now
things just didn't work out
2022 is when it's going to happen
maybe it's 2025
depending on timing and such.
If that's the case
well here we go
what we did here was optimize
the same $3,000,000 lump sum
going into a cash value
life insurance policy
I want to optimize that
meaning I want to
minimize the death benefit.
The death benefit $4,150,000
gives him a MEC limit
of guess how much?
$500,000
If you go back
to the guaranteed rate of 4%
the old product
we had a death benefit of how much?
$4,500,000 based on the
old guarantees
and the old MEC laws
he had a MEC limit of $500,000
so on both models
we solved for the minimum
amount of life insurance
in order to maximize the cash value.
Now with the new change
with this particular company
we've got a higher PUA fee
which is why we have more of a hit upfront
it's almost a negative 20% hit
meaning I pay in
$500,000 in the 1st year
and I have $400,000.
As the years pass
it gets better and better
breaks even here
between years 6 and 7
based on the present dividend rate
the index feature
between 5 and 6 a year better.
With the new product
weaker upfront
due to the higher PUA fee
but with the restructure of the pricing
lower insurance expenses
it has greater long-term potential
not greater long-term cash values
potential.
You can refer to any
of our 7702 videos for that
just to be transparent
I like them all but
I don't like when people brush over details.
So side by side
we see exactly how it works
IRR definitely does have more potential
with the new product
look at that on the right
with the indexed feature
a lot of potential
but again it's indexed.
Anyway
I hope that this video was helpful
and answered some of the questions.
So to answer his question
would this still work for me?
The answer is yes
especially with the amount he's looking at
and by the way you can
slice a 0 off too
it'll be the exact same thing
just scale everything down to 10%
so I bring this much
so I just answer that question
yes it would work with
that amount of money
or any amount of money really
we'll always aim to
maximize the cash value
that's the case
if someone's paying in $3,000,000
or $3,000
like it's always the same thing
from a ratio standpoint
granted there's minimums
and maximums
still
it's good just to have the awareness
and be treated the same
regardless of the dollar amount going in.
So I hope you enjoyed this one
please reach out
if you have any questions at all
and we'll talk to you soon.
Thanks so much.
Hey guys Steve Parisi here
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