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Permanent Life Insurance Cash Value Calculator – You probably know by now that the Bank On Yourself method is based on a specially designed dividend-paying whole life insurance policy, issued by a company that is financially very strong and has an unblemished track record of paying dividends for 100 years or more. But you may be wondering about the mysterious riders (or options) that are added that increase your cash value significantly faster than the whole life policies that most financial experts talk about.
. And you can potentially use equity as a powerful financial management tool right from the start. (For the record, the policies described by Suze Orman, Dave Ramsey and most other experts pay no dividends and usually have no cash value at all in the first year.)
Permanent Life Insurance Cash Value Calculator
So let’s take a look under the hood and see exactly what these riders are and how they make your cash value grow that much faster.
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A key objective of the Bank On Yourself strategy is to maximize the growth of your cash value without increasing your premium. Cash value is the store of money you will use to bypass banks, credit card and finance companies to become your own source of financing. Use that money wisely, and you may eventually be able to finance most or all of your lifestyle from it!
Table A below compares three different dividend-paying whole life policies, all created for the same 35-year-old man. The annual premium in each policy is set at $12,000, but how the premium is distributed varies. (Don’t get hung up on this specific premium or starting age. This is just an example. Your policy is tailored to your personal situation, so you can start at whatever level works for you. Plans can be effectively designed for newborns through 85 year.)
Polis 1 is a traditional dividend-paying whole life insurance for a healthy 35-year-old who we have called Martin for no particular reason. Martin’s entire premium is allocated to the base policy and no riders are added. An all-base policy has a greater death benefit to boot, but it comes at the expense of the increase in cash value.
Do you see the circled amount on the policy year 7 line? This is important because the annual cash value increase starting this year is more than the premium Martin pays each year. (His increase in value of $12,405 is greater than his premium of $12,000.) This makes Martin a happy camper.
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In policy 2, only 40% of each year’s premium goes towards building the basic policy. The rest buy paid add-ons. Paid-up supplements are the most effective way to build cash value because they channel most of the premium directly into the cash value portion of the policy, while buying a small death benefit. A paid-in supplement is like a mini-life insurance policy that requires a one-time premium.
Do you see the circled amount on the policy year 5 line? With much of the premium buying paid-in additions, the annual cash value increase begins to exceed the annual premium two years earlier than in Policy 1. (The $12,572 value increase is greater than the $12,000 premium.) Woohoo!
Well over 90% of every premium dollar paid for Rider Supplements goes directly to building cash value, very little goes to the cost of the death benefit, and only a minimal amount goes to the financial representative as a commission. A financial representative who wants to help you build your cash value by adding a significant paid add-on rider must be willing to take a huge cut of commissions. Learn how to find a Bank On Yourself Professional who knows how to properly structure these policies and is willing to forgo much of their commission.
Premium. You don’t have to pay to keep the policy in force. So in a pinch, you can cut it down, and some companies will even let you catch up some or all of it later, as your situation allows. It gives you more flexibility than a traditional no-frills whole life policy.
Protect My Family
In insurance 3, only 30% of Martin’s premium is used to pay for the basic insurance. The rest buy Paid-Up Supplements and a period insurance rider.
The IRS sets a limit on the percentage of the premium that can be channeled into the cash value of a life insurance policy—without jeopardizing its tax benefits. If the policy exceeds this limit, it becomes a MEC and loses an important tax benefit. The limit is based on a complicated formula that compares the cash value with the death benefit. The higher the death benefit, the more money can be channeled into the cash value.
Why add a term rider to a whole life policy? Didn’t Bank On Yourself say that term insurance is a bad idea? As a
For permanent life insurance, generally yes. But term cover has a valuable place as a rider to permanent insurance. Here, the rider term allows you to pay more into your PUAR, thereby building cash value faster, without going against the Modified Endowment Contract (MEC) guidelines.
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Because the term rider increases the death benefit, the IRS formula allows Martin to plow more money into his cash value without turning the policy into a MEC. The term rider is designed so that it can be waived sometime between the end of the seventh and the twentieth policy year. (The first seven years of a policy are the most critical years in determining whether or not a policy will become a MEC.)
It is not always possible to structure a policy so that only 30 percent goes to the basic policy.
Each policy is different based on many variables such as age, need for insurance, how soon you plan to withdraw retirement income, etc. However, when you work with a Bank On Yourself Professional, they will structure your policy to drive the lowest premium to your base policy that allows you to achieve the goals you set for your plan – without turning the policy into a MEC.
Coming back to policy 3, you will notice several interesting items. First, look at the circled amounts on the row for policy year 1. At the end of the very first year, policy 3 has almost eight times more cash value than policy 1 (the policy with no driver at all). A properly applied Paid-Up Additions Rider and term rider provides the powerful supercharge effect.
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Now check out the circled amount on the row for year 4. The PUAR and the term rider have caused Martin’s annual cash value increase to exceed his annual premium starting in year four—one year earlier than Policy 2 and three years earlier than Policy 1. (His increase in value of $12,337 is greater than his premium of $12,000.) Go, Martin!
Your reward for patience during the early years of your policy is a growth curve that gets steeper each year you keep the policy. Even the supercharged policies used for the Bank On Yourself concept grow more slowly in the early years. It takes a while for your cash value to equal the premiums you paid, but from day one your premiums are
Return to the chart and look at the line for year 20 in policy 3. Starting this year, Martin’s cash value increases by more than twice the premium he pays ($26,077 cash value increase, compared to $12,000 premium paid ). And starting in year 30, his cash value increases by more than three times his premium ($37,994 cash value increase, compared to $12,000 premium paid.) Martin is doing his happy dance now!
Even more exciting: Look at the line for year 40. That’s the last year Martin is scheduled to pay any premium at all, and the policy continues to grow, but without any premium payments. See the row for Policy Year 50? The premium paid was zero, but the cash value increased by $59,425 – no luck, skill or guesswork required.
What Is Cash Value?
Your policy for financing major purchases. That’s another reason why it’s important to work with a Bank On Yourself Professional who can show you ways to maximize the value of your plan.
Each policy is tailored – there are no cookie-cutter plans – so your plan won’t look like Martin’s. However, you can find out what a plan designed for your unique situation, goals and dreams might look like when you request a FREE Analysis. When you do, you’ll get a referral to one of the professionals.
But what about the death benefits of these policies? Do these policies build up much benefit on death? That’s a good question, and Table B below shows you the answer. As you can see in that table, all three policies create significant death benefits over time. But in the end, Policy 3 actually creates the biggest death benefit of them all. (FYI – the policies Suze, Dave and others are talking about have a death benefit level that never increases.) Let’s take a look:
In the early years of Policy 1, the cash value was relatively small, while
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