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Modified Premium Whole Life Insurance – You may already know that the Bank on Yourself method relies on a specially designed dividend-paying whole life insurance policy that is financially very strong and has an unblemished track record of paying dividends for 100 years or more. But you might be surprised by the mysterious riders (or options) that can increase your cash value significantly more than the whole life policies that most financial experts talk about.
. You can use that equity as a powerful financial management tool right from the start. (For the record, the policies described by Suze Orman, Dave Ramsey and many other experts do not pay dividends and typically have no cash value in the first year.)
Modified Premium Whole Life Insurance
So let’s take a look at exactly what those riders are and how they make your cash value grow so fast.
What Are Paid Up Additions (pua) In Life Insurance
The main goal of the Bank on Yourself strategy is to maximize the growth of your cash value without increasing your premium. Cash value is the storehouse of money you use to turn banks, credit cards, and financial institutions into your own source of finance. Use that money wisely and you can eventually finance most or all of your lifestyle with it!
Table A below compares three different dividend-paying whole life insurance policies, all designed for the same 35-year-old male. Each policy has an annual premium set at $12,000, but how the premium is allocated varies. (Don’t worry about this specific premium or starting age. This is just an example. Your policy is customized to your individual situation, so you can start at whatever level works for you. Plans for newborns can be tailored efficiently. Age 85.)
Policy 1 is a traditional dividend paying whole life insurance policy for a healthy 35 year old. All of Martin’s premium is allocated to the base policy, and no riders are included. An all-in basis policy has a large mortality benefit to begin with, but it comes at the expense of growth in cash value.
Check the circled amount on line for policy year 7? This is significant because at the beginning of this year, the annual cash value increase is greater than the premium Martin pays each year. (His $12,405 increase in cash value exceeds his $12,000 premium.) This makes Martin a happy manager.
Modified Endowment Contract (mec)
In Policy 2, only 40% of the premium every year makes up the basic policy. The remaining purchases are paid additions. Paid inclusion is a very effective way to create monetary value. Like a mini-life insurance policy that only requires a one-time premium, a paid-up addition.
Check the circled amount on line for policy year 5? With most premium purchase charge additions, annual cash value increases begin to exceed the annual premium two years earlier than policy 1. (The $12,572 increase in cash value is more than the $12,000 premium.) Whoa!
More than 90% of each paid-up addition rider premium dollar goes directly to building cash value, with very little going to the cost of the death benefit, and only a small amount going to the financial representative’s commission. A financial representative who wants to help you build your cash value by adding a substantial fee add-on rider should be willing to take a big cut in commissions. Learn how to find yourself a professional banker who knows how to properly structure these policies and is willing to waive a large portion of his commission.
Premium. You don’t have to pay the policy to keep it in force. So in a pinch, you can cut it short, and some companies will let you catch some or all of it later when your situation allows. It offers more flexibility than a traditional whole life policy.
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In policy 3, only 30% of Martin’s premium is used to pay the base policy. The rest is paid extras and buys a term insurance rider.
The IRS places a limit on the percentage of the premium that can be paid on the cash value of a life insurance policy — without affecting its tax benefits. If the policy exceeds this limit, it becomes MEC and loses the key tax benefit. The limit is based on a complex formula that compares the cash value to the death benefit. The higher the death benefit, the more money can be paid out in cash value.
Why add a term rider to a whole life policy? Didn’t Bank on Yourself Say Term Insurance Is a Bad Idea? as
For permanent life insurance, generally yes. But term coverage has a valuable place as a rider for a permanent policy. Here, the term rider allows you to pay more into your PUAR and build cash value faster without exceeding Modified Endowment Contract (MEC) guidelines.
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Because the term rider increases the death benefit, the IRS formula allows more money to be plowed into Martin’s cash value without converting the policy to MEC. The term rider is designed to be deleted occasionally at the end of the seventh and twentieth policy years. (The first seven years of a policy are the most critical years in determining whether or not a policy is MEC.)
It is not always possible to formulate a policy in such a way that only 30 per cent goes towards the basic principle.
Each policy is different based on many variables such as age, coverage requirement, and how soon you plan to draw retirement income. But when you work with a bank, they will tailor your policy to pay a very low percentage of premium. Without turning the policy into a MEC – to your basic policy that allows you to achieve the goals you set for your project.
Returning to principle 3, you will notice several interesting things. First, look at the rounded amounts on the line for policy year 1. At the end of the first year, policy 3 has almost eight times the cash value of policy 1 (the policy without riders). Properly applied charge addition rider and term rider provide that powerful supercharging effect.
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Now look at the rounded amount on the 4th year tax. The PUAR and term riders cause Martin’s annual cash value increase to increase his annual premium starting in year four — one year earlier than policy 2 and three years earlier than policy 1. (His $12,337 cash value increase is greater than his $12,000 premium.) Go, Martin!
The reward for patience in the early years of your policy is a steeper growth curve with each year of policy ownership. Even supercharged policies used for the Bank on Yourself concept tend to grow very slowly in the early years. It will take some time for your cash value to equal the premiums you paid, however your premiums from day one
Go to the chart and see the tax for year 20 in policy 3. At the beginning of the year, Martin’s cash value doubles the premiums he pays ($26,077 cash value increase, compared to the $12,000 premium paid).Starting year 30, his cash value triples his premiums ($37,994 cash value increase). , compared to a $12,000 premium.) Martin is now doing the happy dance!
Even more exciting: Check out the line for the 40th year. That was the last year Martin was scheduled to pay any premium, and the policy continued to grow, but without paying any premium. See tax for policy year 50? The premium paid was zero, but the cash value increased by $59,425 – no luck, skill or guesswork required.
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Your policy for financing large purchases. This is another reason why it’s important to work with a bank that can show you ways to increase the value of your plan.
Each policy is customized – there are no cookie-cutter plans – so your plan may not be the same as Martin’s. However, when you request a free analysis you can find out what a plan might look like tailored to your unique situation, goals and dreams. When you do that, you’ll get a referral to one of the experts.
But what about the mortal benefits of these policies? Do these policies create higher death benefits? That’s a good question, and Table B below shows you the answer. As you can see in that chart, all three policies produce significant mortality benefits over time. But in the end, Principle 3 actually produces the biggest death benefit of them all. (FYI – the policies Suze, Dave and others are talking about have a level mortality benefit that never increases.) Let’s see:
In the early years of Policy 1, the monetary value was relatively small
Can I Convert My Term Life Insurance To Whole Life Insurance?
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