Hey everybody
Steve here with IBC Global
today we are going to discuss
the cash value
and whole life insurance policies
how the cash value works
and how to maximize it
let's have some fun.
So with whole life insurance
specifically with individuals
who are focused on the cash value
one of two things usually occur
(1) they are presented
a whole life insurance policy
or they even purchase a policy
and their objective is cash value
they often state
I don't care about the death benefit
they get that policy
and then they go discuss it with friends
and family
a financial advisor
another insurance agent
and they found out
that they've been ripped off
and then you hear
whole life insurance is a scam
I bought it for the cash value
I was sold based on misinformation
you may have felt like that before.
But then
on the other side
you see big banks
corporations
wealthy individuals
position boatloads of cash here
and they say it's the best Jerry
the best
depending on when you were born
you may or may not know
what show that's from.
So when it comes to the cash value
of a whole life insurance policy
the people that we work with
at our company
so individuals and corporations
small and large
when they are purchasing
whole life insurance
really how they're purchasing it
is not how much death benefit can I buy
and how much does it cost
they're not interested in that approach
it's more so
I like the cash value
here's how much money
I would like to pay in
and how do I minimize my death benefit
and maximize the cash value?
Why they are interested
in the cash value
is typically for these 3 reasons
it is a safe
liquid
tax-free area to position money.
Now to provide some additional
information on these points
when I say safe
if things are going very very well
in the stock market and economy
or if things are growing very very poorly
you can expect a properly designed
whole life insurance policy
to produce somewhere between
3% to 5%
as far as a net growth rate
what the insurance company will refer to
as the internal rate of return.
Now if a policy is not set up properly
typically I can see it produced
between 1% to 2%
sometimes 3%
when we hear these horrific stories
of whole life insurance
and how people are just scammed
and ripped off
it is typically
when one is interested in the cash value
they purchase a policy
and it is not set up
for high cash value
it's structured in a fashion
where it's a very very high commission
typically to the insurance agent
which means it's more weighted
toward the death benefit
and the cash value is not attractive
that's where we see
a low growth rate
on whole life insurance policies
specifically around the cash value.
So safety
no matter what happens
your money will continue to go up over time.
Liquid
we can access the money anytime
a unique feature
to the cash value
in a life insurance policy
is that once you have money
in cash value
if I let it sit and grow
that's assuming it's earning
5% for simplicity
if I just let it sit and grow and earn 5%
it'll continue to earn 5%.
If I elect to borrow against the policy
let's assume that you have
a $100,000 in cash value
and you borrow $50,000 against that policy
there's $50,000 remaining
but you will continue to earn that 5%
net growth rate
on the full $100,000
as if you never touched it
in the first place.
Meaning there's no lost opportunity cost
and your money continues to compound
so where it's liquid
and I can access it anytime
the other feature
is that it constantly compounds
a lot of real estate investors
and business owners
are very attracted to the product
for that specific reason.
And then tax-free
but we have in bold caps there
IF
if I do things properly
the policy continues to grow tax-free
and I can access it tax-free.
So to provide a quick overview here
when it comes to
a whole life insurance policy
I can make payments to the policy
what happens
I have a death benefit
that'll gradually increase over time
and then the cash value piece
will go nowhere but up
again regardless of what occurs
in the stock market and economy
that cash value
just continues to appreciate over time.
The question is
how do I make it appreciate
at the fastest rate possible
and give myself more money to access?
So most important thing here
with a high cash value
life insurance policy
what that means
is that the policy is designed in a manner
with minimum expenses
and maximum cash value from day 1
and then the 2nd piece
is the company selection
there's a lot of insurance companies out there
which you don't need me to tell you that
among all the insurance companies out there
when it comes to high cash value products
and companies we've seen
consistently deliver
the strongest cash values
to policyholders
both on the corporate level
and also individuals
so big banks and corporations
and individuals
we've seen the 4 major mutual companies
consistently deliver.
Those companies being
MassMutual
Guardian
New York Life
and Northwestern Mutual.
Now when it comes to the
cash value of a product
some awareness here
specifically in the taxes I want to touch on
payments that we make to a policy
are made with after-tax dollars
so whenever I make a payment
I cannot deduct it
like I could with a 401(k) or IRA
so any payments I make
are with after-tax dollars.
Now did you know
that when you pay any amount of money
into a life insurance policy
you can actually choose
where your money goes
it can go toward the premium piece
or toward the PUA piece
this has a direct relationship
to this piece right here
if the policy will produce
between a 3% to 5%
net growth rate
or between 1% to 3% net growth rate.
A basic life insurance policy
will be a policy where you say hey
I want to get a $1,000,000 policy
it's going to cost me
X amount of dollars in premium
and typically has 0 in cash value
right off the bat
so instead of doing that
really what we want to do
is minimize this premium
as low as we can possibly go
call it 10% of our total desired payment
and then plow everything else
toward this PUA Rider
which stands for paid-up additions Rider
I'll often refer to this
as a cash dump in.
And we've got videos
that really go into detail on this point
under our policy design videos
if you search that in our YouTube channel
you'll see that
but really to maximize the cash value
I want to minimize
any amount of money
that I'm paying toward the premium piece
and maximizing the PUA piece
that is what ensures
you have the maximum cash value
from start to finish
especially when you look at the guarantees.
But regardless of where I pay that money
it is always paid with after-tax dollars
so I cannot deduct the payments.
The growth
is technically tax-deferred
so as my value grows over time
I do not pay any type of capital gains tax
any type of income tax
nothing like that
and then 3rd
I can access it
completely tax-free
but back to this guy
if I do so properly
that's a big if there.
So here's what I want to touch on here
if I'm you my question would be this
okay so when it comes to the cash value
safe, liquid,
tax-free area to position money
will continue to grow
I like that idea
where I can borrow against it
and my money continues
to compound over time
but this Steve
like you're leaving me hanging here.
How does that work specifically?
What do you mean tax-free
if I do things properly?
So when it comes to the taxation
on a life insurance policy
there are a couple of things that can occur
which would result in me having to pay
typically ordinary income tax
on the cash value.
The first thing
is if my life insurance policy
becomes classified as a MEC
which stands for
modified endowment contract
if this happens
my cash value
continues to grow tax-deferred
but anything I access
if my policy is classified as a MEC
any cash value I access
with respect to the gains only
I have to pay ordinary income tax
and on top of that
I have to pay a 10% penalty tax
if I'm under the age of 59 and 1/2
a way to sum it up is
I do not want my life insurance policy
to become classified
as a modified endowment contract.
So the fun part is
we can easily prevent that
as every policy has a MEC limit
and we can actually set that MEC limit
wherever we want
on a life insurance policy
and we reference that
in our policy design videos as well.
So if a policy
becomes classified as a MEC
the gains will be taxable
when I access the cash value
if I don't MEC out
I don't have to worry about that.
If a policy lapses
the gains can be taxable
now there's a bit more to that as well
if I'm taking excessive loans
and a policy lapses
I can be liable for any of the gains
where I have to pay ordinary income tax
and any loan interest
that has accumulated over time
we've got other videos on that as well
but it is definitely important to be aware of
what could happen
if I have a large loan balance
on a life insurance policy
and it lapses.
Back in the 80s and early 90s
when universal life insurance policies
were very very popular
a lot of people purchased them
and got into trouble later
where they had these large loan balances
then the policies lapsed
they got these big tax bills
caused a lot of lawsuits
a lot of issues
we don't want that.
Another way
we could run it to taxes
is if I cash the policy out
if I surrender it
so for example
if I have a policy
where I have paid in
call it $100,000
just to make the math simple
so I've paid $100,000
and I have a cash value
of $300,000
that is what with respect to a gain?
$200,000 gain
that means I've seen growth
of $200,000.
So in this particular example
if I elected just to cash out the policy
which would be
termed as a surrender
by the insurance company
what would happen is the gains
the year I cashed the policy out
would be taxable as ordinary income.
So it is very important
to have awareness on this
or working with an agent
who's always keeping you up to date
on this kind of stuff.
So those are a couple examples
of what could trigger a taxable event
with the cash value
in a life insurance policy
then we've got the tax-free piece.
So tax-free
if we do so properly again
this is the point of attraction
to so many people
when you look at corporations
that just stuff boatloads of money
into the cash value
of their life insurance policies
they're typically doing it
in order to draw out an income tax-free
or draw money out
income-tax-free down the road
typically for their executives
and employees
so how can be accessed tax-free
is (1) pre-retirement
during our working years
is through loans
so unless we trigger
a modified endowment contract
which is easy to prevent
we never want that
almost never want that
but if we don't have that
I can take out loans
up to my cost basis
and also beyond my cost basis
so any of the gains
I can take out via a loan
and it's income tax-free
that's a huge
a huge point of attraction
to cash value life insurance.
So I can take out loans anytime
now that's during my working years
remember that unique feature
where I can access the money anytime
and it continues to compound for me
a lot of people we work with do that
really to invest heavily into real estate
that's where I see it the most
and business owners
with their business.
But loans
are taken out tax-free
and then down here
in retirement.
So there are 2 transactions
in which I can actually pull money
from a life insurance policy
(1) I can take a withdrawal
which is exactly what it sounds like
if you're going to take a withdrawal
from your bank account
you're pulling money out
it can no longer earn interest
because it's gone
or I can borrow against it
I can take a loan against the policy.
When it comes to retirement
typically the most effective strategy
to get the most income out
without ever having to deal with taxes
is to first withdraw up to your cost basis.
So if we go back to that example
where I paid in $100,000
and I have a value of $300,000
that $200,000 gain
over any period of time
what this would look like
is first I would withdraw
the $100,000 my cost basis.
If I withdraw
more money than what I paid in
meaning if I withdraw $100,000
and then another $10,000
everything above the $100,000
will be taxable as ordinary income
so I don't want that
it kind of ruins the whole purpose.
First I want to withdraw
up to my cost basis
and then begin to loan out the rest
of course making sure
that we never run into a lapse situation
which could trigger a taxable event.
So we monitor it
or if you have an agent or advisor
that can monitor it for you as well
but those are just some bullet points
and an overview to
how the cash value works
in a life insurance policy.
I hope this helps
please feel free to reach out
if you have any questions
and we'll talk to you soon.
Thanks so much.
Hey guys Steve Parisi here
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