Equity Indexed Universal Life Insurance EIUL

17 Replies

Hey Everybody,

I was listening to podcast #17 with Jeff Brown and he talked about how EIUL's are a really great way for young people to invest in their future.  In a nut shell, with this policy, part of your premium goes towards the cost of the death benefit (insurance costs) and the rest gets invested. The money in the “investment account” then grows and the policy owner can access these funds via a policy loan.  

If many of you young people (like most) are not thinking about your retirement because, well thats a hella long way off, you might want to look at the benefits of an EIUL because you can, after about 10 years or sooner, start taking loans (with interest) against the investment account portion and use that money to fund your Real-Estate ventures.  The great thing is that you are not taxed or penalized by the government for taking this money, and you don't even have to pay the money back.  If you don't pay the money back however, your death benefit is decreased.  I mean I am really excited about this and Im educating myself about this because to me, this is a no brainer.  

I had a meeting this morning with Dave Shafer who Jeff Brown recommended.  I went to Dave's website, emailed him and he immediately set up a call with me to discuss.  I did a little research on this policy so that I wouldn't sound like a complete idiot, because this stuff is very complicated and extremely intimidating which is why most people shy away.  Dave was very calm, and didn't make me feel like a complete idiot lol and explained things in a way I could understand.  For me, hes going to try to structure a policy that will make sense for me financially (ie a monthly premium I can afford) as well as choosing the right investment strategy.  

So, do yourself a favor and take 5 minutes to look online about this very beneficial financial planning tool.  If nothing else, you'll learn something and be encouraged to look to the future cuz life goes by really really fast, and you want to be ready.  At least I do and I want to share any knowledge I can with you guys.

Thanks for reading!

You’re right, life insurance is a great vehicle! I personally prefer participating  whole life, but they both have benefits. The goal is to try to overfund the account so the cash starts growing as quickly as possible. My co-workers and I enjoy this work and like trying to fit the most cash you can into the account  

It sounds like you have good advice, but feel free to reach out if you run into any questions.

For anyone else looking into this, understand the investment, over fund the policy (pay more than the minimum needed for coverage), and understand the terms of borrowing the money.

Congrats!



@Zachary Paschke

Oh, that's good to know Mr. Paschke, thank you!  Question:  Can you overfund the death benefit portion separate from the investment portion?

@Angelique A.

Its not an "investment portion". The cash value of a permanent life insurance is quite literally you saving up your own death benefit over your natural life expectancy. The insurance company takes on the risk of covering the gap between the savings and the death benefit. Over time, their risk is reduced as the cash value grows. Government rules define how much excess premium can be placed into the policy.

You'll know that your policy is properly designed when the end of year cash value on your illustration is about 85-90% of the premium that you paid in Year 1. Not the surrender value. look at the Accumulation Value.

Check out this blog post for a good explanation of how a permanent life insurance policy works...

https://www.biggerpockets.com/...

Hi Mr. Rutkowski,

Zachary wrote, "The goal is to try to overfund the account so the cash starts growing as quickly as possible."  

So I was asking if its possible to overfund just the death benefit portion when you overfund the EIUL, kinda like how you pay your mortgage and you apply the payment towards the interest vs the principal?

Or how is it determined in an EIUL as to how much goes towards the death benefit and how much towards the stock?

@Angelique A.

You’re right the payment is a lot like a mortgage payment. Part goes to the insurance payment, part goes to the cash value you’re building up. Where the illustration breakdown is here: if you pay your mortgage principal early, it just lowers your future interest. If you overfund your insurance policy the interest in the policy starts paying the itself  off.

The death benefit is directly tied to the amount of cash in the policy and the payment, so as you put more cash in the policy you need less to be paid for the death benefit. With a universal life policy the amount you pay is completely flexible. If you have enough cash in the policy that it will self fund you don’t have to pay anymore. Essentially the interest paying in to the account covers enough the payment of the death benefit.

As you fill the cash value you get closer to self-funding the account and paying off your death benefit just like you might pay off the principal in a house.

This policy is completely customizable. 

I hope that helps! If you’d like you can send me a message and I’ll walk you through a policy via screen share to help explain. I’m currently working on a video about this as we speak. 

About two and a half years ago I set up an overfunded whole life policy. Pretty much everything about the policy was customizable.

In about another year or so, my cash value will be big enough to support a loan for a down payment on a smaller Midwest property.

I first learned about the concept in the book bank on yourself. It provided a detailed analysis of how the policy works in an easy to understand format.

What do you make of this statement?:   

Not every life insurance agent carries or wants to carry a securities license. Which means the only solutions in their arsenal they can present to someone who wants to put a lot of money aside for the future involves overfunding whole life, universal life, variable universal life or equity-index universal life policies. When all they have is a hammer, the danger is that everything might start looking like a nail.

Originally posted by @Angelique A.:

Hi Mr. Rutkowski,

Zachary wrote, "The goal is to try to overfund the account so the cash starts growing as quickly as possible."  

So I was asking if its possible to overfund just the death benefit portion when you overfund the EIUL, kinda like how you pay your mortgage and you apply the payment towards the interest vs the principal?

Or how is it determined in an EIUL as to how much goes towards the death benefit and how much towards the stock?

When an agent designs an overfunded policy, it is designed with you prepaying as much of your "mortgage payments" as you legally can. If you call up a random agent and ask for a quote on a $1M whole life, you are going to get the lowest possible premium that will give the insurance company enough money to keep the obligations of the policy. The cash value will slowly but surely accumulate over your lifetime. To use your analogy: this is the monthly payment that would pay off your policy over your expected lifetime.

An overfunded policy assumes massive prepayment in the early years.

 

"An overfunded policy assumes massive prepayment in the early years"

Can you break this statement down for me?  Does this mean that I would be expected to make massive prepayments in the years to follow?

@Angelique A. Read “Becoming Your Own Banker”. - Nelson Nash

Becoming Your Own Banker: Unlock the Infinite Banking Concept https://www.amazon.com/dp/B001NZO1DS/ref=cm_sw_r_cp_api_i_-iNsDbD1PE8YF

I have a similar policy, a whole life insurance policy through NY Life. The reason I like it is because the plan earns dividends from the cash value whether I've taken out a policy loan or not.

I realized early on, real estate investing is a series of downpayment savings ramp ups. I don't like the idea of my money sitting in a bank earning nothing while I save up for the next downpayment. It also has to be liquid and safe (can't lose value). With this policy it's growing at 5% and even if I take out a loan (at 5% although the rate can vary) I'm not having to pay interest like I would on my HELOC loan payments because the dividend payout happens on the total policy value regardless of any outstanding loan. Point is, being your own bank (for downpayments) is the only way to go.

Lots of people, Suze and Dave especially, will trash life insurance and it's not going to get you super rich quick or without any of your own contributions, but it's another vehicle, growing tax free and those are sure hard to find. I want to retire well before 59 and a half so a Roth IRA doesn't interest me much.

Originally posted by @Angelique A.:

"An overfunded policy assumes massive prepayment in the early years"

Can you break this statement down for me?  Does this mean that I would be expected to make massive prepayments in the years to follow?


While the excess premium is technically pre-paying the death benefit, you can still continue to make premium payments.

Life Insurance is not as mystical and esoteric as a lot of agents try to make it out to be. Its really very simple. Its the Rules that the government created that introduce some complexity.

To understand, we need to get away from your Mortgage analogy. Its not really accurate. Its a savings mechanism. From the insurance company's perspective, the premiums need to accomplish two things. First, the cash value is just a savings plan for you to save up your own death benefit over your expected lifetime. There's a little more to it, but let's keep it simple. Second, they need to be able to pay the $1M claim if you die before you reach your natural life expectancy. They do that by essentially taking from the cash value enough to buy a 1-year term inside the policy to cover the delta between the cash value and the death benefit. Each year as your cash value accumulates, the amount at risk to the insurance company goes down. 

So if you have a $1 Million policy, the cash value will start at zero and slowly but surely accumulate cash value over time. You can use any financial calculator to see how much you would have to save every month to accumulate $1M over n number of years. The insurance company does its planning using a very conservative, worst-case scenario interest rate assumption. This is the Guaranteed Rate. They hope the cash will grow faster, because the faster it grows, the faster their risk is eliminated.

This is your typical whole life. It is designed to give as much death benefit as possible for every premium dollar. This is the polar opposite of an overfunded policy design. A truly over-funded policy has the least possible death benefit for the premium paid. [All the people steering you toward infinite banking are not doing you a favor. While their policies may be overfunded, they are NOT funded to the maximum. They lie on the continuum between these two extremes. They typical IBC policy design still has way too much death benefit in it. This adds to the internal cost and is the reason their designs typically show only 65% cash value to premium in Year 1. A properly designed policy should show 85-90%.]

Now clearly, if you can double the savings rate, you can save up the death benefit quicker. And the rules do allow you to overfund policies. But what you can't do is put $100 Million into a $100 Million policy in order to bypass estate taxes. So the government created rules on how much you can overfund a policy and still meet the definition of life insurance. There always has to be some risk transfer. There always has to be some amount of death benefit over the cash value. 

If you want to geek out on the intricacies of the rules, just contact me privately. But the basic idea is this: the maximum premium allowed is that number that would make the policy fully funded in 7 years. A paid-up policy is when the cash value is sufficient to grow to become the death benefit by the time you reach your life expectancy AND it has enough cash to sustain the cost of insurance as well. Think of it as the present value of the future death benefit.

So to finally answer your question, while the excess premium is technically pre-paying the death benefit, you can still continue to make premium payments and still remain compliant with the government's rules. The death benefit will just keep rising so that the policy always meets the minimum definition of life insurance.

That said, many of the policies that I design are based on only 5 years of premiums. Someone who has $250,000 in savings, for example, might want to convert that into an overfunded policy once they realize how powerful it is. I would design that policy around only 5 annual premiums of $50,000. The policy owner could continue to make premium payments, but the policy will have enough cash value to run off of its own dividends/interest at that time.

In the case of an IUL, the death benefit is reduced to the Minimum Non-MEC level as soon as the premiums stop. This minimizes the internal costs of the policy (Lower DB = Lower mortality costs). In the case of a WL, we drop the term rider. Once you get out of the surrender charge period, the cost of insurance in a properly-designed policy should be around one-quarter of one percent (0.25%). It will stay at that ratio for life. 

I know this explanation is a bit of overkill, but sometimes its helpful to know the background. 

 

Originally posted by @Angelique A.:

What do you make of this statement?:   

Not every life insurance agent carries or wants to carry a securities license. Which means the only solutions in their arsenal they can present to someone who wants to put a lot of money aside for the future involves overfunding whole life, universal life, variable universal life or equity-index universal life policies. When all they have is a hammer, the danger is that everything might start looking like a nail.

This is an interesting statement. I did choose to not carry my securities license. It's something I considered. These were business decisions I made. I would never suggest that life insurance can replace well rounded financial planning and investments. Life insurance is much like the healthy balance to investments (I don't consider life insurance an investment. I consider it insurance - can you build a policy that can grow some interest, of course, but it doesn't replace other forms of investment).

With that said, many people haven't been properly taught how to fit life insurance into their financial world. One of the reasons I got into this line of business is because I got questionable life insurance advice from a financial planner. I wanted to specialize in something that is not well understood in the financial world.

No one would think that investing in an IRA is some kind of scam thought up by financial planners to stick it to the common man, but sometimes life insurance can get that rap.

I would take you back to your original post where you encourage young people to really consider their future. I talk with many people every day. Quite often when I get to the topic of whole life, they reiterate what they've heard from a talking head on TV. "Buy term and invest the difference." They'll usually preface it with, "What do you think, I'm stupid?" The answer is no. We've been told that term coverage is the answer when the truth is term coverage, just like all financial products is a tool. No one product is bad all of the time, you just have to know how to use them.

When you're young term is great! Right now $500k for 20 years for a 20 year old female with the best health class is $16/ month (the commercials always quote for women because they're cheaper). Maybe she chooses to buy a GUL (guaranteed universal life policy - offers long term coverage and most often does not build cash value) for $500k until age 121 and pays $110/ month. Maybe she buys a dividend earning whole life policy for a whopping $400/ month for 20 years (nothing fancy, just a 20 pay whole life) and will have guaranteed $500k for life in death benefit. If she does that she'll pay $96k total. after 20 years the estimated death benefit rises to $700k and she has an estimated $150k in cash value after dividends that you can borrow from. Can you make more money faster? Yes. Is it sweet that you have more coverage than the average person ever will? I think so. 

Even better, let's say my friend's parents buy her a $500k policy at age 2. Pay it off in 20 years (less than $300/ month or $70k total). At age 20 nothing else is owed into the policy. By age 40 she has an estimated $1 million policy with a $200k cash value. At age 60 an estimated $1.4 million death benefit and $600k in cash. Paying this same policy over the course of 100 years (instead of 20) means a $200 monthly premium. For an extra $24k (over the course of 20 years - $1,200/ year) you give your child a gift instead of a monthly payment. That's not even true over-funding. That's just paying a policy off in 20 years. Still, it's a huge savings. Same is more so true of truly over-funding your account.

Now, let's say our friend buys a 30 year term policy at age 20 for $25/ month (that's $9k lost). Let's say she hasn't saved and is age 50 looking for more coverage. Maybe she's gained some weight has a thyroid problem, or anxiety because she never saved money. Now her new 30 year term policy carrying her to age 80 (good enough the average person passes around age 82). At standard rates her coverage is $190/ month (this round will cost $68,400 total). She spends $77,400 with nothing to show for it. Of course, she retains the ability to invest the difference, but she spent it on quarter pounders and a Mazda lease. She dies at age 79 (conveniently enough) leaving $500k to her family tax free. Our whole life friend dies at the same age leaving $1.8 million tax free to family spending an extra $20k.

This is going to surprise you, but my average client is aged 60. The mode is around 65. Do you know how much a 30 year $500k term policy for a 65 year old in standard health is? You can't buy one (well, by traditional means). A 20 year policy? around $500/ month. Strangely enough, I still get people in their 60's calling me to buy coverage who still say to me that whole life is for suckers. It may be.

I don't care how you make your money for the future, just consider it. If you need help, there are worse things than participating whole life. I get people calling me in their 70's and 80's every single day who have not saved $10k to take care of their final expenses. Just know what your options are and do something. I know this was a long response. I hope it spoke to the heart of your question. Life insurance is about so much more than making money. It is one of the most basic forms of protection.

Not all of these examples are practical, but life insurance is scalable no matter where you enter. 

 * rates / accumulations in this example are realistic, but are not actual penny-for penny rates.

Can someone explain how this is better than buying 10 - 20 year level term and investing the rest yourself in an IRA? What are the costs and fees that are removed each month, quarter or year?