All Forum Posts by: Thomas Rutkowski

@Albert Bui

1. Any maximum over-funded policy design should utilize an increasing death benefit. But since we are solving for the lowest possible death benefit for a given premium, there is NO room for any additional premium. That room for additional excess premium must be designed into it.

2. That's exactly how a maximum over-funded policy should be managed: increasing to level death benefit. Also reduce the face amount when you stop paying premiums. Drive the COI to the absolute minimum (~0.25% of total cash value).

3. The difference between Whole Life and IUL is that the IUL takes the dividend they would have otherwise paid you, and they go out to the index options market to hedge. The goal of the hedging is to capture as much movement in the market as possible given their budget. For this reason, I expect the cash value in an IUL to outperform the cash value in a whole life. They're all investing in the same underlying assets. While the IUL may have more year to year variability, it will earn a premium over what the whole life would return.

Well said Mike!

Patrick, You clearly don't understand how an IUL works under the hood. All life insurance policies function the same way whether they are IUL or WL. The cash value represents the policy owner saving up the death benefit for the insured over the insured's lifetime. The insurance company is on the hook for the delta between the death benefit and the cash value. This is called the Net Amount At Risk. The Net Amount at Risk goes down over time as the cash value increases. 

If we assume that the cash value is growing at the same rate in both types of policies, then the insurance company must set aside the exact same amount of money each year to cover the mortality costs. The mortality cost increase each year as the insured gets older and closer to their natural life expectancy. This occurs in both types of policies, only you don't see what is going on under the hood of a Whole Life. A Universal Life is nothing but an unbundled whole life. Only the crediting mechanism is different.

The rising mortality costs are offset by the decreased Net Amount at Risk. As Mike S correctly stated earlier, the cash value of an IUL is going to grow at a faster rate than the cash value of a Whole Life. This decreases the Net Amount at Risk in an IUL faster than in a WL. This makes IULs the safer product.

Also, for any type of leverage strategy like this, we use Maximum Over-funded life insurance policies. These policies are designed with the minimum allowable death benefits. You cannot buy less death benefit and still meet the statutory definition of a life insurance policy. These are the polar opposites of minimally-funded life insurance policies: they type that 99% of people buy when they buy a permanent life insurance policy.

Only minimally-funded policies run the risk of lapsing from insufficient cash value to cover the rising cost of mortality. Think about it: if your goal is to get the most death benefit for your money, you are going to pick a policy that has the lowest premiums. The insurance company is collecting just enough premium for the policy to perform according to their assumptions on the growth of their reserves over time. THAT policy would be at risk if interest rates decline and the cash value didn't grow enough to cover the rising cost of insurance. 

A Maximum Over-funded policy is Maximum over-funded. Its not going to lapse. And no matter how high the unit cost of insurance gets, only a specified percentage of the cash value has to be spent on death benefit protection in order to meet the minimum definition of life insurance.

Tony,

You are not limited to $10,000. That is just an example. Everything in life insurance is scaleable. You can add a zero to the premium or take one off. You can double it or halve it. The ratio of cash value to premium will remain constant.

 I don't think you are looking at it right. When you leverage your life insurance cash value, YOU HAVE BOTH YOU CASH VALUE AND YOUR REAL ESTATE. When you add the two together, they will provide more after-tax income at retirement than just having the Roth.

The "White Coat Invester" holds a strong bias against life insurance. He deletes any posts on his blogs that prove he's wrong. 

If you look around here on BP, you'll find my posts showing the real numbers. I explain WHY a maximum over-funded policy can deliver more after-tax income than money in a brokerage account, Roth, or Traditional IRA/401(k).

All the WCI does is restate all the old stale arguments against life insurance. None of this is backed up by any real numbers. Nobody seems to understand that not all life insurance policies are the same. A maximum over-funded policy is not the same as a typical Whole Life. These are cash-rich policies with low fees and expenses.

There are two rules that a policy needs to conform to. One is the MEC, 7-pay test. The other is that the entire contract must still meet the definition of life insurance. I usually use the Guideline Premium Test. The guideline premium is the maximum premium that you can pay for a defined death benefit and still meet the definition of life insurance. Usually people under 45 will run into the guideline premium before they run into the 7-pay limit. A MEC is still life insurance. It gets poor tax treatment, but its still life insurance. The policy should be optimized by funding it up to the first of these two that you bump into.

I'm surprised your policy has any room for more excess premium.

@Albert Bui - Its a much more complicated sale, but if an elderly client is healthy and capable of qualifying for life insurance, then a maximum over-funded MEC will provide more retirement income than the same amount of money going into an annuity. Plus it has the death benefit protection... very little, but better than nothing.

Albert - You cannot build up the policy further by paying a higher rate. Anything beyond the interest owed is simply applied to the loan balance. Reducing the loan balance does not build cash value, since the cash value is simply the collateral for the loan. And if your policy was designed for maximum cash value, there should not be any room for "Excess Premium". That would either violate the Guideline Premium Rule or create a MEC.

@Antuan C.

That policy is designed very well. The ration of cash value to premium is very high. Your expenses and fees are minimized.

You are making a mistake trying to calculate a return on the life insurance premium. You need to consider the real estate investing you are doing at the same time with the same money. Policy dividends represent the return on the cash value portion of the policy. And the guaranteed cash value portion at that. So a 6% dividend, for example, is credited toward the guaranteed cash value. So by maximizing the cash value to premium, you are insuring the highest possible return for the entire policy.

There shouldn't be any reason why you can't use a policy loan to make a down payment. Life insurance cash value is a valid source of funds for a loan. 

Whatever returns you earn by investing with your policy loan is gravy over and above what the policy's cash value is earning at the very same time. The sum of those two components will exceed the return you'll achieve by simply sticking your $30K directly into real estate.

Keep the policy. Just use it properly.

Also, there is no reason you need to have a $500K net worth. Its all relative.

You also don't want to wait 3 years before borrowing against the policy. That's just foolish. You want your money working in two places at one time from day 1. There is no reason to forego returns.

I disagree with Zachary. You should have insurance on yourself for the benefit of your children. You want their college paid for in case something happens to you, for example.

@Troy Layne Pierce

The 8% assumes that you are dipping into your collateral. The goal is to spend your kid's death benefit while you are still alive ;) Otherwise the cash value is part of the death benefit and will pass to the beneficiary. 

Its kind of interesting to see. The collateral dips down to a safe minimum before compounding interest takes over and it starts moving the other way and building back up again. My projections include income for life even if life was up to age 120.