All Forum Posts by: Thomas Rutkowski

@Account Closed

It sounds like you have a Universal Life policy. They earned a bad rap for just this situation. The problem is that when they were first rolling out, interest rates were much higher than today. The insurance companies showed illustrations that were projecting the cash value growing at then current rates. 

Remember what I stated earlier, the cash value is quite literally you saving up your own death benefit over your lifetime. So they were projecting the cash value growth at outrageously high interest rates. The cash value in your policy simply didn't grow to be enough to cover the rising cost of insurance. That is the problem with minimally-funded policies. The insurance company is competing with other companies for the lowest price. They simply did not collect enough premium for the cash value to get to that sweet spot where the policy can run off of its own interest.

Worse, since the policy did not accumulate the projected cash value, the amount at risk to the insurance company is higher. They are responsible for the gap between the cash value and the death benefit. Since that gap is wider, the insurance company has more risk and the cost of insurance is higher.

By age 70 your cash value and your death benefit should be converging. You you should have saved up much of your death benefit already. What you can do is submit a policy change request to lower the death benefit. That will reduce the internal cost of the policy and will preserve the cash value that you have accumulated. Your policy can run off of its own interest, but you need to reduce the amount at risk to the insurance company to reduce the internal cost of the policy.

@Peter York and the other agents commenting here...

A 5% guarantee doesn't mean that the cash value will actually earn 5%. The cash value should never earn that return.

The guarantee is not a real number. It is simply the insurance company's worst-case scenario. The cash value of a policy is quite literally the client saving up their own death benefit over their lifetime. Since the insurance company wants to keep the premiums the lowest possible, they need to budget for the worst-case interest rate and the lowest amount of premium that will allow the cash value will grow reach the death benefit by the time the client reaches their natural life expectancy. This is a little over-simplified, but it is the essence of what is going on under the hood.

The insurance company has an incentive for the cash value to earn as high of a return as possible. Since the client is saving up their own death benefit, the faster the cash value grows, the quicker their risk is eliminated... since they are responsible for the difference.

Life Insurance 101: https://www.biggerpockets.com/...

@Peter York

You can do both. But you can't do it with your basic Whole Life policy... it will take many years to accumulate the cash value that you would want to leverage into real estate. Instead, you need a policy that is overfunded to the maximum. With these policies the focus is on the cash value, not the death benefit. Most of your premium goes straight to the cash value of the policy (~85% in a properly designed policy). You actually get very little death benefit for the money.

The money you save will be accomplishing 3 things simultaneously:

1. Death benefit protection for you and your future family.

2. Principal-protected steady growth for life. When your family is grown and your house paid off, the cash value can be used to generate tax-free retirement income. And cash value generates 2-3X the income of the same amount of money in a typical brokerage account.

3. Source of funds for real estate investments. Loans against the policies cash value will allow this cash to work in two places at once. Cash Value plus side investment net return.

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. 

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.

@Angelique F.

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/...

This sounds totally unethical and borderline criminal. Every life insurance application asks you to disclose the source of funds. If Mass Mutual, or any company for that matter, knew you were using borrowed funds, they would decline the application. You have to lie on the application to get this past the underwriters. That is insurance fraud.

@Erick Barraza

Some technical corrections...

1. The illustration that accompanies the policy will generally show 90% cash value relative to the premium that was paid. Keep in mind that the illustration is showing estimated values at the end of year 1, not at the beginning. The 1st year dividend is included in that value.

2. That said, the insurance company takes the policy issue charges and cost of insurance monthly. This means that you start with a high cash value balance and it is reduced as the first year progresses. If you take a policy loan for 90%, you may find yourself having to put cash in the policy late in the year because there is not enough unsecured cash value to cover the policy's costs and your loan.

3. Policy loans are not "unsecured loans". The cash value is the collateral securing the loan. If you get a cash value line of credit from a 3d party bank, they'll want an assignment of collateral against your policy's cash value.

4. Only the cash value is "earning". The entire premium does not grow at 5-6% as you state. I have a "life insurance 101" that gets into the mechanics of life insurance policies...

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

@Parius Futch

The topic of leveraging the cash value of properly-designed permanent life insurance was thoroughly covered here...

https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

Coupling a monetization loan with an installment sale is one way to get the tax deferral on the capital gains tax and have money that you can deploy in another asset class.

You can learn more here...

https://www.biggerpockets.com/forums/51/topics/569293-can-i-use-100-bonus-depreciation-as-alternative-to-1031-exchange?highlight_post=3455810&page=1#p3455810