Originally posted by @Mark S.:
@Mark Welp, @John Perrings, @Greg R.
Some common reasons I hear about why some people are not a fan of this are:
1.) High agent commissions up front means it takes even longer to build up cash value (even for max funded policies)
2.) Even though dividend rates can be reasonably higher than, say, savings accounts in this low interest rate environment and that they’re uncorrelated to the stock market, what about the cost of insurance offsetting these dividend rates?
3.) The fact that for every $1 you put into the policy, only a % of that (less than 100%) gets credited to your cash value (because you’re also paying for the commisssion, cost of insurance, etc.) and that you generally can only take a % (again, less than 100%) as a loan against the policy.
I understand the concept of money working in two places at the same time (because the loan is from the insurance company, not your cash value, which is only used as collateral and continues to receive compounding dividends) and that you're using the loan proceeds (the insurance company's money) to make other investments to generate a return (because now you're earning money on the cash value that is always compounding and the ROI from the new investment), but I'm having trouble digesting some actual, real numbers where this makes sense.
Specifically:
1.) How much is paid into the policy in premiums?
2.) How much cash value is built up in the early years and available to take a loan against?
3.) What percentage of that cash value can you take as a loan?
4.) What is the interest rate on the loan versus the dividend crediting rate? Maybe the spread matters less because of simple interest loan vs compounding dividend crediting.
5.) What does this look like over, say, 5-10 years?
I know it depends on the individual’s health, size of the policy, the insurance company, etc., but for the sake of illustration, let’s use some numbers from a “middle of the road,” actual client you’ve helped with this strategy and how that helped them accelerate their investments.
@Zachary Paschke posted some great info yesterday.
I'll add some answers as well:
1) *High commissions* -- Technically speaking, commissions are not paid directly out of the transaction like real estate deals. They are separate sales/marketing contracts between the carrier and agent. There are, of course, costs to have life insurance and sales/marketing costs are some of those, but agent commissions don't directly affect your insurance agreement.
I bring up the "technical" side because I think it's important to understand that it is NOT the agent commission that causes faster or slower cash value accumulation. It's the design of the policy, which is more about trade-offs.
Since this is life insurance and the cash value accumulation is controlled by IRS "MEC" rules, there is no getting around *some* period of "lag" time between how much you've paid in premiums and how much cash value you have.
In the Infinite Banking world, we refer to this as the time and "startup costs" of creating your own "bank."
Some agents on here will disagree with me on this, but the amount of lag time is a matter of tradeoffs, and those tradeoffs are very much based on the individual.
Two ends of the spectrum:
-- If you completely max-fund (sometimes called over-funding) upfront, up to the MEC limit, you have more cash value available sooner and the IRR on cash value is a little better. The tradeoff is that the initial death benefit is minimized as well as some other powerful benefits such as the disability rider.
-- If you go with straight life insurance, you will get a higher initial death benefit and the disability rider is much stronger. But the cash value will take much longer to accumulate.
There are very legitimate reasons to use either end of the spectrum and anything in between.
Now, practically speaking, an agent does get paid differently based on which side of the spectrum the policy design falls on. Straight whole life insurance (meaning the upfront death benefit is prioritized over speed of cash value accumulation) pays an agent more.
2) *Cost of insurance offsetting dividend rates* -- You may be getting the mechanics of a couple of products mixed up. Cost of insurance is usually broken out in UL-type policies. The returns of UL/IUL policies can be offset by the cost of insurance, most often when not properly funded and a down market year is experienced.
Whole life products that have dividends also have a cost of insurance that is baked into the illustrations and the guaranteed returns of that product are NET of *all* costs. This is what Zachary was referring to when he said that more risk is transferred to the insurance carrier with whole life products. Dividends are in addition to the guaranteed returns.
3) *% of premiums available in cash value* -- There are two "break even" points with a whole life policy:
-- The funding break even point - in the first few years, every $1 you put into the policy, your cash value grows by less than $1. Some time, around year 3, is where this corner is turned and every $1 you pay in premiums, more than $1 is added to the cash value of the policy for that year.
-- The cash value break even point - Sometime around 3-8 years in a correctly structured whole life policy, you will break even with the total amount of cash value. Meaning you will have as much total cash value as total premiums paid.
From that point forward, a whole life policy is guaranteed to have more cash value than what has been paid into it (assuming the policy funding stays under the MEC limit and not including loans)
Policy loan % differs w/ carriers. I've seen it go as high as 98% of cash value. Policy loans are available as early as $500 in cash value.
Hope this is helpful.
