So we recently got the question how important is the IRR
Which is the internal rate of return and in short my answer is it is very important. It is really a reflection
Of the net cash value and net death. Excuse me, a net death benefit performance
think of it this way when I open a
Whole life insurance policy, what do I have with that policy? I have a guaranteed rate of 4%
I have a surplus in addition to it. Maybe the company pays a
Total gross dividend rate of call it 5 or 6% whatever the dividend rate is
Keep in mind I use the term gross when I see the guaranteed rate when I see a total dividend rate
That is always a gross rate that is applied to my cash value
But it's applied after the insurance company's
cost of insurance. Their mortality charges, any PUA fees, all that good stuff that actually supports
Call it my purchase of the life insurance policy the death benefit
So if I am interested in the cash value I'm looking at depositing premiums into a policy because I want to grow the cash value
I want to better understand that I say, okay
I see the dividend rate. But what's my net cash value grow too? Like what's the net return or net?
Internal rate of return. What is it actually growing by? Well, the IRR will tell you that it's a nice reflection to see
How early does the policy break even and what produces the strongest long-term cash value?
Now some things to look at when it comes to the internal rate of return is we have both annual IRR and average IRR
Why? I like to
Make a distinction between the two is annual IRR
Would reflect what I'm earning each year. For example if you have a mutual fund account
And you earned 8% in 2020
You're going to state I earned 8% this year or last year. I earned 8% of my investments
Now if over a 20-year span some years you earned 8%, some years you lost 100%
Whatever it might be you had negative hits ups and downs and such
You then
Over that 20-year span would like to look at or would want to look at the average
IRR so the annual IRR represents what I am earning on my policy cash value death benefit performance
on a specific year
whereas the average IRR
Takes collectively all year. So if I'm looking at a policy over five years say I've paid in
$100k and I have a hundred thousand dollars. Let's say I'm breaking even year five dollar for dollar
My average IRR would be 0% because over five years I get back what I pay in that's my break-even point
See what I'm saying? Whereas the annual IRR maybe
Year four to five I paid in 20,000 and it grew by t20,000 plus another 2,000 on top of that
So I'm getting money back in addition to what I'm paying in so that on that specific year
I've produced a positive annual IRR. It can be a little bit complex. We're going to break this down with visuals and
Such now a thing in this industry that's important to be aware of because not enough attention is given here
And if you're subscribed to our membership program you've seen
a lot of case studies that we've made available on actual historical policies breaking them down to see
Hey, here's what was illustrated but here's what actually happened
That's what I want to know, but when it comes to illustrated and actual IRR, this is important, you know an illustration
Whenever we look at a policy is based off of typically the present dividend rates
and I can decide to
Run a custom guaranteed report as well
If I just want to see the internal rate of return
And kind of call it a worst case scenario environment
But that will always be an illustration an illustration might project call it a 5
IRR that would be my after my tax-free net return on a policy
Yet
in reality
It may be more or less. I'll tell you this in the insurance industry
98 of cases the actual IRR
Is less
than the illustrated
If you're looking at the non-guaranteed values if you look at the guarantees
It's guaranteed to have to worry about that in that respect
typically, you'll see most companies perform a little bit stronger than the guarantees my point though is
Often when I look at a policy
I have illustrated and then I have actual performance and we always talk about right four major mutual companies properly designed policies
And the reason behind that
Is not because they show the best values on the illustration. There's other companies that project
much stronger cash values than the four major mutual companies
What I like to look at and I'll always ask insurance carriers for this is actual performance
Can I see some historical performance that validates that you've consistently delivered
Strong cash values to consumers some do, some elect not to disclose that information
But let's get into some some content here some
spreadsheets to kind of compare and contrast
So specifically we're going to focus on the internal rate of return here, let's make this a little bit bigger
Screen size good. Yeah, perfect. So we've got a 40 year old male and this is a
Illustration here just a basic illustration
We've got the full detailed illustration and all the nuts and bolts in our member membership program
but 40 year old male
10/90 split it's actually about a 9
91 with a term rider and then this one is actually a 41
61 or
41/69 split without a turn rider
So we optimized that policy each policy as much as we could with and without a term rider because there's often we hear
A lot of arguments as far as going with the higher base premium because it will potentially produce a stronger
Long-term IRR which we found in reality real performance not projections based on any period of time real performance
That's not true. The minimum premium policies always produce stronger net cash values, but here's what I want to look at
So I've got my average internal rate of return
On cash value and my average
Internal rate of return on death benefit, okay
I'm paying money in look at this
I'm negative
Up until year five
At that point in time I've paid in 20 times five is a hundred thousand dollars. I have a hundred and one thousand dollars
That's why I see just about half a percent as far as my average IRR I've broken even
Then I've got the internal rate of return on the death benefit as well
over here
average IRR
When I break even you see that go positive now, this is the exact same company health rating individual
Age all that good stuff and as time passes
This had a higher dividend or surplus payout yet this produced a higher net internal rate of return
That's what I'm really interested in. And again, this is the average over time. So I'm at about four and a half percent
With the higher base premium. I top out at 4.2 percent. It's interesting when you start to break policies down like this
So that's the average internal rate of return. Let's
Very quickly produce the annual here what I also want to do
Let's make this a little bit more transparent I should have done this in advance
There we go. So the annual IRR we've already got a formula for this created
So what we'll do here
Is plug it in
It's going to be interesting when you take a look at this
So again
Annual internal rate of return and average internal rate of return
Remember what the average represents?
the average represents
What I've earned over time, so I break even year five at that point my average
IRR has has a positive yield over ten years
I paid in a total of $200,000. I have 238 that's the average internal rate of return
Hey, what'd you earn over the past 10 years financial advisor? Might ask 3.15
What did you earn in year 10?
4.5
Right just like one states. Hey I earned
Five percent in my mutual fund account last year or in my five percent fantasy world bank account, whatever it might be
Well, here we go
What am I earning each year?
And what am I averaging out?
Good to be aware of those
I mean really what you could also look at if you're not into crunching the internal rates of return
And seeing how to maximize cash value is just look at the cash value columns
Which one produces more cash at the end of the day?
So it's good stuff to look at kind of as a preview if you are not subscribed to our membership program
Well, these are the guarantees where
More or less we see the exact same thing without the IRR study
But significantly more cash value on the minimum premium example, let's plug it in. Actually, this is not the
Treat I was just referring to but that's all right
Interesting how it works, isn't it?
But what I wanted to touch on here
Is a case study so where we talk about illustrated performance and then actual internal rate of return here we go
So here's a policy that was issued in 2014 started with a lump sum of money now just looking to pay the minimum premium
What he has in cash value how much he's growing each year, but the actual
internal rate of return
Based off of the company's present 2020 dividend rate. We did a guaranteed rate study on this
Point being we always like to look at both in any event
I hope you enjoyed this material more to come in the future and we will talk to you soon
Hey guys Steve Parisi here
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