What is Overfunded Whole Life Insurance? (Explaining with REAL Examples)

Hey everyone, it's Justin Garvin, a wealth coach here at Better Wealth. And today we're going to answer the question, what does overfunding actually mean? So if you've watched any of our videos or you've watched other videos in this space, you've probably heard the term an overfunded policy. And maybe you've wondered, okay, what's the difference between that and just a regular whole life policy. So today we're going to break that down clearly. show you visually what it looks like, why it matters, and what's really happening inside of a policy when you hear someone say it's an overfunded policy. So by the end, you'll understand not just what overfunding is, but why it can be such a powerful way to design life insurance for liquidity, growth, and a long-term strategy. So first, we'll start with what most people picture when they hear the words whole life insurance in a traditional design. the focus is on the death benefit. So we're going to maximize how much coverage that you can get per dollar of premium that's going in. So we want to get the biggest death benefit for each dollar that is going in. And by that, I mean the biggest death benefit from the very beginning. So that means most of the premium that you pay is going towards that just cost of insurance and you're not getting any immediate cash value or liquidity there. So. For example, if we look at a $100,000 per year example, you're going to see in year one, you're going to have zero cash value. In year two, you're also going to have zero cash value. And then it will be finally year three before we have any cash value at all. And then if we keep going out, it will be generally maybe 13, 14, 15 years before you actually hit that break-even in point, meaning. you have more cash value available than actual premium that you have put in. So you see here in this policy, it would be year 13. You've put in $1.3 million of a premium. Now, of course, not everyone's putting in $100,000 per year into a policy. Make that $10,000 per year, and you put in $130,000 and now have $133,000. cash value available either way it's going to work out the same if it's a traditional policy now that doesn't mean that this is a bad product and that whole life insurance is bad it just has a different purpose it's designed to give you the most insurance not the most efficient cash value not the most flexibility and it's really truly only right for probably very few people would want a policy like this but some people do and it's for good reason you have a hundred thousand going in you're immediately going to get a $8.8 million death benefit that's permanent. And you see it does grow as well. So there are advantages to a policy like this. It doesn't mean that this is a bad thing, but it can be a bad thing if it's not going to hit the goals that you have in mind. So if you wanted a policy that is going to give you cash value, that's where you need an overfunded policy or a properly designed policy for high early cash value. So now let's contrast the difference. in what that would look like. So you have a traditional design that's going to have a big death benefit. You're going to have flat cash value growth. It's going to still grow, but it's not going to be as fast. And then you're going to have an overfunded approach. So we're going to look here. This is at the same company here. You could put in a hundred thousand dollars premium, be able to get your total cash value of $81,000 there. You look out Kind of that same thing that we talked about, the break-even point you're going to see here. Year six, you've put in $600,000 of premium. You're going to have access to $624,000. So you have more liquidity than the dollars that you put in because your cash value is growing efficiently. Now, the big difference is rather than over almost $9 million of death benefit, you only have $2.5 million of death benefit. Now that does continue to grow and it grows faster, but you're not getting the immediate. high death benefit there. You can also look at another example of an overfunded type of policy. In this one, we're going to have $100,000 again going in. You're going to have $90,000 of cash value available in that year one. And you look at that break-even point here being year four, where now we're going to have access to more cash value than what we have put in in premium. So each one just compares. It's going to work differently at different companies. But this is here where the goal is no longer we're trying to maximize the insurance. We're actually trying to minimize the cost of insurance, the base amount and maximize the cash value. So instead of every dollar going to pure insurance costs, we are having some dollars go into different places so that we can maximize and give us immediate cash value growth. Now we can talk about what actually makes it. overfunded. And that's going to be the paid up addition. So that paid up premium that's going in, I know we have a video that dives deeper into specifically what that is, but that's going to be what makes it the overfunded policy. We're buying a low base premium. That's what's kind of setting the foundation. Then we're going to add a term rider because we need enough death benefit to keep it where we have all of the tax advantages. And then the rest, we want to max out the paid up additions. That's the overfunding part of the policy. So that's the part that's going to build immediate liquidity and growth. And so in a traditional policy, it's usually 100% base or close to 100% base. An overfunded policy, maybe only 10 to 20% is base. A small amount is going to be the term rider and then the rest. But the vast majority of that premium that can go into the policy is going to be the paid up additions. And that's how you would want it if the goal is cash value accumulation. So if your goal is. immediate permanent death benefit, then you're going to need a lot of base. If the goal is cash value accumulation, early liquidity, you're going to need a small base, have to add the term rider to make it where we can keep all the tax advantages, and then the rest can be paid up additions there. So that's where it's going to be important to do. And I'll say sometimes people can get confused on exactly how that goes. There's not just one way to overfund a policy. It can be different levels on how it's designed. Maybe you have a policy where you're not overfunding it to the max, but it is overfunded, a higher base so that you have more room to grow. But in general, you want your base to be low where you have enough paid up additions to be able to go in there. And so some companies also allow a little bit more flexibility or higher first year cash value than others. So you might see small differences across the companies, just like we looked at earlier. But one showing 85%, one year, another 90, both can both still be extremely efficient. I would have different reasons for that just because of the companies there. It's not necessarily the design because each company is allowed just to design them differently based on each product there. So now the question is, well, why overfund? That's great. You can overfund a policy. I see the differences between the two, but how does that give me any benefit? Why would someone do that? And really the main reason I'd say is going to be flexibility. A policy with a low base and high paid up additions can give you a very wide range of funding. So let's say your base plus your term rider ends up being about $20,000. So that's going to be the minimum required amount, but you have the ability to fund up to $100,000. So that's built into the design, built into the contract that you would be able to go all the way up to $100,000. just like we looked at earlier. So if we come back to this example, it would be in this policy, you have a hundred thousand total premium that you can put in. And you may look at that and say a hundred thousand dollars every year for 15 years. That's quite a commitment, but that's not what you have to find. The paid up additions are actually optional. So you don't have to pay all of them. You don't have to pay any of them. And that can mean that in a tight year, you just pay the minimum. So back over here, the minimum. is the base plus the term rider that's on the policy. You can pay that. And then in good years, pay the rest, pay the overfunded amount and build up that cash value, which can be perfect for maybe your business owner. You have variable income. Some years are good. Some years aren't as good. Your real estate investor, maybe some years you're building up, want to put away money. Other years you're deploying that and waiting for returns or really just anyone else that is a saver and seeking a place to store their capital, but you're not going to be on the hook. It has to be paid. every single year. So it can be a lot of flexibility there and strategically just gives you a place to store capital that is guaranteed to grow every year while staying liquid and accessible for any opportunities that they come up. So hey, everyone, it's Justin Gartman, a wealth coach here at Better Wealth. And if you are a high earning professional, an entrepreneur or someone who just wants more control over your money, we are offering something called a player to call. It's a one on one conversation with someone like myself. where we are able to walk you through exactly how overfunded whole life insurance could help you build a safe, liquid, tax-advantaged foundation for your wealth. No pressure or fluff, just real clarity on whether this strategy is right for you. So click the link in the description below or tag comment and we'll walk you through exactly how we can possibly help you. Now, back to the video. Here's kind of the bigger principle behind overfunding. It's really not just about building cash value. It's about creating. flexibility and control within what you have going on. So you're going to get an asset that does grow. every year guaranteed. Just going to be a matter of how fast with the dividends that are paid. It's going to stay liquid. So you can always have access to that through policy loans. So opportunity comes, you can get access there. And then it's clearly going to have a long-term protection with the death benefit there. While it may not be as big as it could be early on, that death benefit is going to grow each and every year there. So a lot of people When you first hear about whole life insurance or you're not sure, you may shy away because you've heard you're locked in, that you have to make that full premium payment every single year or you're going to lose the policy. And to be honest, in a policy like this, yes, that's the case. Your base premium is $100,000. You need to pay $100,000 every single year or you're going to have the policy lapse. And so you're going to lose the policy. But that is not how a high cash value policy. is going to work with an overfunded policy. The base portion plus the term rider, that is all that you are required to pay. Typically much smaller. Sometimes that may be 15%, maybe to 25% really depends on the overall goals design, but that's going to be a very small portion of it. And the rest is going to be optional. That means you can plan to pay the full amount. And yes, I'd say doing that is going to give you the strongest long-term growth, the best efficiency, and you want to be able to do that. as we know, sometimes life happens, maybe cashflow changes, business slows down, or you just want to pause what you're putting in for a year. And that flexibility can be the difference between losing a policy or simply not maximizing it a certain season there. So you're still keeping your foundation in place with the guarantees intact and your cash value is going to continue to grow. So I'd say if you're a natural saver, someone who's already stuffing. money away or putting money away for opportunities that can align perfectly with what you're already doing. You're already putting it away. Overfunding can just help make those dollars work a little more efficient without losing safety or access there. So I'd say quickly recap everything. Traditional policies focused on the death benefit. That can be good if for the right people, they're great for just pure insurance needs. However, overfunded policies, the focus is going to be on the cash value, which is great for liquidity. and long-term growth, but also flexibility in how you fund the policy. And a lot of that just has to do with the design. You want a low base, need to add the term rider, and then you're going to have the maximum paid up additions. And that's, what's going to make the difference. So over funding, it's not just some gimmick of a type of policy. It's really just a smarter, more intentional way to design a policy for the goal of cash value accumulation for the goal of flexibility as a way to use it in your long term. It's a tool that can be accessed for a variety of different reasons, a tool that can be right for certain people. And so I'd say, if you want to see how an overfunded design could look for you based on your situation, want to talk about the flexibility, maybe you're putting a certain amount of money away, but you can't commit to something. You want to look at the options and see what the flexibility would look like in your situation. Give us a call. I know any one of our coaches here would be happy to help do that. So thanks for watching. We'll see you.