I want to cover several different ideas/topics on this subject so instead of having one very long post, were going to break it down into three parts.
Part 1 – Policy Design in the Most Important Thing
The internet is filled with people telling you that life insurance is a horrible investment, contrary to what a lot of life insurance sales people, myself included will tell you. The difference is, the way I talk about and design WL for CV, is not the norm in the insurance industry. Let me show you –
Let’s start with an example of a 40 Yr old Male, in good health, he wants to place $30,000 per year into a Whole Life Policy. Any typical agent would simply input the $30,000 premium into the software and solve for the death benefit, in the example I looked at, the initial death benefit is $1,722,159.
Let’s assume he retires at Age 65 and wants to start taking income from his whole life policy from Age 66 to Age 95. At Age 65, the assumed cash value based on the current dividend rate, is $1,358,213, which has a pretty good return, 4.31%. The income generated from Age 66 to 95, is $62,052 ($750,000 of Premium, $1,8161,560 of Tax-Free Income).
The death benefit at Age 65, has grown to $2,817,624, which if death were to occur, would provide a tax-free return on the death benefit of 9.11%.
All of this doesn’t sound so bad, but this can be designed better.
Policy Blending
Policy blending is not used by all agents, for two basic reasons, the first is, it negatively impacts their commissions and two, most don’t know how to properly use it and haven’t spent the time understanding how valuable it is, refer to reason number one above to understand why they haven’t spent the time learning. Policy blending is essentially a process of combining term insurance with a whole life policy, to increase the Modified Endowment Contract (MEC) limit, so that more Paid-Up Additions (PUA’s) can go into the policy. In English, more of your money goes towards PUA’s which means higher cash value from Day 1. This is the unique design feature that should be present in any Whole Life policy that’s being used for cash accumulation purposes.
Modified Endowment Contract (MEC)
I mentioned MEC above, so I thought I should share a quick explanation. A modified endowment contract (MEC) is a tax qualification of a life insurance policy whose cumulative premiums exceed federal tax law limits. The taxation structure and IRS policy classification changes after becoming a modified endowment policy. There are rare instances, where it’s okay for a policy to become a MEC, but generally, it should be avoided. We’ll do a full post on MEC’s in the future.
When you incorporate blending into our original example, we get a similar starting death benefit of $2,078,494 (Base DB of $519,624, Term Rider DB of $1,558,870), with better cash accumulation.
At Age 65, the assumed cash value based on current dividend rate, is $1,477,557, which gives us an even better return of 4.88%. The blended design provides an income of $70,187, or 13.11% Increase from the original non-blended design ($750,000 of Premium, $2,105,610 of Tax-Free Income). Below is a quick summary chart, which one would you rather have???
We haven’t even talked about the guaranteed cash value but it’s obvious which one I would choose to have at Age 65. The guaranteed numbers assume that no dividends are paid to policy holders, which hasn’t happened since the top mutual companies started paying dividends, which is over 100 years ago.
Most advisors don’t want to talk about policy blending but if they truly want to maximize the potential results for their clients, blending should be talked about and incorporated into the design. If you want help analyzing your current policy or want to learn more, please send us a message. Now onto Part 2.
