Have you ever tried to read a life insurance illustration? Often times they are so complicated that only a seasoned agent can understand them. They have all the disclaimers on them about returns and typically you will see at least two columns of projections.
One column will be the guaranteed column, which will be the worst case scenario. The other column is the assumption column. This is usually based on the companies current dividend scale or some type of hypothetical return. It is important to look at what guarantees are built in and to look at the companies historical results. If you have a dividend paying whole life product, the dividends will go up and down. The dividend is based on the companies success and the success will obviously fluctuate over a long period of time. Most good mutual companies have never missed a dividend, but the amount of the dividend is the key. If you are talking about a universal life, there is a bottom floor interest rate or return level in one column. Many plans might guarantee like 3 or 4 percent as a worst case scenario. The other side will be some hypothetical interest rate or market return. This like the dividend is a total guess based on some historical data and future projections.
The key to reading an illustration is that it will give you some rough parameters. Just remember that it will never play out exactly as illustrated.
Getting life insurance is a fairly simple and straight forward process. The first thing you will want to determine in getting life insurance is the amount of life insurance that you want to buy. The second thing to determine is the type of life insurance that you want to buy. Do you want to buy term, whole life, return of premium term, universal life or some combination of those? Based on the purpose of the insurance and your budget, that should help in the selection of the appropriate type. For example, if you want to accumulate money as a supplemental retirement benefit, then you will obviously be using either whole life or universal life.
After determining what you want to buy, you need to select the carrier that will provide you the best option. The best option will depend on your criteria. If you want the cheapest term, than we shop the rates and select the cheapest term carrier. If you are looking at whole life insurance, then you want to look at companies that have are good dividend paying whole life carriers.
Now you have picked your face amount, product, and the carrier you want to apply with. It is time to fill out the application for that coverage. Once the application is completed a paramedical exam will be ordered. The paramedical exam is scheduled and can be completed at your home or business. After the application and the paramed are completed, you can expect about 4-6 weeks of underwriting to get approval. At the end of the underwriting process, the company will either approve you and assign an insurance rating or they will decline coverage. The insurance rating will determine the premium you pay for that policy. An example of an insurance rating would be preferred non-smoker.
Have you ever heard of “Infinite Banking”? It is a great strategy that is pioneered by Nelson Nash that uses the cash value of life insurance as your personal bank. In essence you buy big ticket items with the cash inside the dividend paying whole life insurance policy and finance the purchase with it. For example, you buy a new car with the buildup in your policy and then amortize the loan over a period of time and pay your policy back at a fair interest rate above the interest rate of the insurance company. Rather than make the bank or finance company rich, you are able to recapture a lot of the finance charges you would otherwise payout elsewhere. After paying back the loan to yourself, you have completely repaid the principal and made the interest spread yourself. This will turbocharge your policy.
Not only is the cash value used during your life for various purchases, investments, etc., but it can be used for retirement income as the money can be accessed at retirement tax-free. In order to create the “infinite Banking” concept you need to capitalize the bank. Just like Bank of America or the community bank, there was no money in the bank until it was capitalized. Once it is capitalized, the fund has been created to use for this purpose. It is important to set the policy up correctly with a good mutual company and to fund it the appropriate way. The structure of the policy is important for your long term success.
How can you take advantage of the advantages of dividend paying whole life insurance? Are you aware of the tremendous advantages that are available to you?
The bottom line is that most of the media and most of the people in the life insurance business have very little understanding or clue about how to use this product. The whole concept is to uniquely fund and structure a dividend paying whole life insurance contract. This concept was really developed by Nelson Nash and I highly recommend you read his book, “Becoming Your Own Banker”.
Once you have funded the policy and creating a liquid fund that you can borrow from, you start to loan yourself money to finance your big ticket purchases. Each whole life contract has a maximum amount of money that you can put in it before it loses its tax advantage. When I say tax advantage, I am referring to the cash value growing tax deferred and the ability to axcess the money on a tax-free basis if done correctly. Each contract has a MEC (Modified endowment contract) ceiling which is the maximum amount before the tax advantage goes away. If you go over the MEC level than the internal buildup of the policy is taxed the same as an annuity. This system allows you to recapture much of the interest that you would typically pay out to a finance company and make their bank grow. This way you can buy a new car and finance it yourself. For example, pull out 40,000 to buy that new car and then pay yourself back at an interest rate above the insurance companies interest rate. When you amortize these payments, like a bank would, you pay yourself back over a period of time. Let’s just say you loan yourself 40,ooo and amortize the loan over 4 years. The insurance company charges about 6 percent for the loan and you pay yourself back at 10 percent. The spread that goes back into your policy is similar to the spread that the bank would typically make. At the end of the 4 year period you own the vehicle outright, your bank has been paid back the full 40,000, and it will have grown with the 4 percent spread it has been making from each payment.
This concept tends to be a major paradigm shift for people, but it works if done properly. The key is that you set it up properly and try and raise the MEC ceiling as high as possible and then capitalize it so you have ample funds available to use. On top of being able to use these funds for loans to your self, it will create a great tax free retirement fund. The living benefits of this system is tremendous and it will also give you a great permanent life insurance benefit that will grow large over time.
With portfolios down 30 and 40% from a plunging stock market, it is nice to see steady growth in my permanent life insurance policy. The cash value in my dividend paying whole life insurance has a guaranteed interest rate in the cash value and it will never decline in value. While the internal rate of return may not be huge, it is good to know that it is positive every month. I will also receive the value of a dividend if it is declared by the insurance company. Usually good mutual life insurers will declare a dividend. It is not guaranteed, but if you have a policy with Mass Mutual, New York Life, Guardian, etc. they usually declare a nice dividend. A dividend is simply the return of an over collection of premium by the company. They meet their obligations and put enough away in reserves and then declare the dividend back to their policyholders.
On top of my cash value getting better every month, it grows tax deferred. When I access it I can get to it tax free through preferred policy loans. At retirement, I can use the cash value as a supplement to my retirement. First, I will withdraw money from the cash value up to my cost basis, and then use preferred policy loans. It is truly one of the most flexible and best tax shelters available. In fact, Walt Disney got cleaned out in the great depression with all of his stocks and only had his life insurance left. He took a policy loan out of his life policy to start Disneyland.
Like I said, it gets better no matter what.
Many of our clients at Paramount will use a blended approach when they buy life insurance. They have short term needs for life insurance and feel they have long term needs as well. The term will allow them to buy the face amount that they need during their years of highest need and the permanent will give them lifetime protection. For example, one client needed 5 million dollars of death benefit as that is what we calculated as her human life value. She has twins that are 2 years old and figures that she needs maximum coverage until they are out of college. She estimates that they will be done with college in about 20 years and can afford at that point to lessen her coverage. She would like to have some permanent coverage to have the option to leave that to her kids and grandkids potentially and possibly for supplemental retirement money. To make it fit within her budget, she got a 4.5 million dollar 20 year term and bought $500,000 of dividend paying whole life insurance. This will meet her needs as she sees them right now. Obviously, people’s needs change over time and she may decide she wants to convert some of that term over time to more permanent.
It is important to look at short term and long term needs when looking at your life insurance situation. Also, it is important to look at the life insurance company’s conversion options when you buy term. Make sure that they have good conversion options (universal life and/or whole life) as that will allow you to convert to permanent insurance with no extra underwriting. If the company doesn’t have a good conversion option you should apply with another company.
One of the rarely discussed aspects of dividend paying whole life insurance or universal life is how to use the cash value in the most effective way. Many times even agents don’t have a good answer for this question.
When funding and using the cash value it is important to understand some basic principles. If you use the cash value properly, it will allow you to re-capture much of the finance charges that you would be otherwise paying to a financial institution. Is there a way to finance these things yourself and reap some of the rewards of a finance company? Absolutely, through your cash value.
The key to being able to finance purchases through your cash value is putting enough money into your life insurance, so that there is enough in there for you to buy what you want. Like any bank, deposits must be made in order to be able to make loans to the customers. Once enough money is available in the cash value, you can pull the money out and buy your next car. When you buy the car, you must pay yourself back and with an honest interest rate. When I say honest interest rate, it means that you must pay yourself back at the interest rate that will help your financing center recoup all of the money and grow.
The life insurance company charges anywhere from 5-8% for a loan on your policy to handle all of the administrative aspects. Let’s say that your dream car is $40,000 and the insurance company is charging 6% for you to loan the money out. In turn, you can take the $40,000 out of the cash value and buy the car, and then amortize it out like the dealership would over 4 years. Since the loan costs 6%, you should pay your policy back at a rate above that like 10%. This way you will pay yourself back all of the principle over the four years, but also earn the spread on the financing charge. Another great aspect, is that if the money is in your policy, you don’t have to qualify for the loan. You just simply ask the administrative people from the insurance company to send you a check.
At the end of the 4 years, all of the money has been returned to you and your policy has grown on top of that. At retirement the money can be used for retirement income tax free if done correctly after using it all along the way for buying all the necessities of life.