Hey everyone, it's Justin Gartman, a wealth coach here at Better Wealth, and today we're going to tackle a topic about a time when a higher base policy actually makes sense. I know you may be thinking, what are you talking about? Every single time y'all talk about policies, it's always minimize the base, maximize the PUA, and cash value. But this is going to be a little bit different of a situation and one that goes to show why real planning is very important to get aligned with the goals that you specifically have, what you have going on, not only in the short term, but also the future and how we can develop a plan to give you the potentially best outcomes that you want. So what we'll look at today is the example of a client that came to us, 34 years old. So he's young. He's currently making good income. but also is anticipating that income growing over the next few years. Specifically, he knew that he was going to be getting an increase in what he was going to make in five years. That was the time frame that he knew he was finishing up some certifications and also knew that with his job, he was going to get a significant increase at that five year mark due to how long he would potentially have been at the company then. Bye. He was also starting to do some investing, do some other stuff on the side. So he was hopeful that his income was going to go up in the short term anyways, but knew with a pretty high degree of certainty in five years, he was going to get a nice jump there. For the moment, he was very comfortable funding $20,000 a year. He was already saving more than that, already doing some other investments in $20,000 was what he came saying, hey, here's what I can do. But light the idea. of increasing that due to he had already planned out his budget and already knew we do get an increase. I could do $36,000 a year, but was hesitant at the beginning to even look at that. He was thinking, do a 20,000 now, come back later, get another policy at that time. But he also wanted a high death benefit right now. And so he had all of these things going on, had launched lots of videos from us and other people. and came in saying hey i want to maximize this twenty thousand dollars that i can put in had talked about how he wanted the lowest base possible because that's what he had heard was best that even from us sometimes we i know we talked about that and talked about how that is exactly what he wanted and so through some conversations and talking through this we came up with two options for him and a plan to see what would make the most sense for him so before we dive into more about that, a quick refresher on how policy design works. So typically you're going to have three parts in your whole life policy. You're going to have the base. So you're going to have the base amount of insurance. You're going to have the term rider and you're going to have the paid up addition. So remember the base, that's the just pure whole life. What you see out there that gives life insurance a bad rap because you don't get any cash value early on. It gives you a higher immediate death benefit. and over time will grow and give you some cash value. Now for someone wanting immediate cash value, a big base amount is not going to be great for you. Then you also have the term rider that is going to be a way to bump up the death benefit because we have to buy enough death benefits so that we keep all of the tax advantages. And then you're going to have the paid up additions. That is The good stuff is also the optional amount. It gives you the flexibility, but also is what is giving you the immediate cash value. So that's why we want to maximize that. And so what we were looking at was we knew he wanted to do $20,000. So we could look at a $20,000 maximum design. So think of that as that's the ceiling of the policy. We can go up to $20,000, but we can't go higher. We're buying just enough death benefit to get to that $20,000. So we're maximizing. the amount of paid up additions that can go in maximizing the amount of cash value that he's going to get in that policy or we can look at a 36 000 design so giving him you want to go up to 36 eventually with a pretty high degree of certainty but we would only be able to fund possibly a 20 000 for maybe five five years and so if we look at the base amount of insurance on both of those Both of these are going to be. just over 10% round up to 11% there. So you're going to have 11% base amount of insurance on both of those. So both of them are maximized for cash value. We're minimizing the base to get what we want. It's just a matter of what is that ceiling that we can go up to higher the ceiling. That means we have to buy enough room in the policy, enough death benefit so that we can find all of those paid up additions if we wanted to. So remember, it's always optional. those paid up additions that you can go you can find part of them all of them none of them now there's different rules to how that would work and they're different at each company but that is how it would go so we would look at that right there and take a look at how it actually works. And so a little bit why we typically have the lowest base possible and this higher design, we're not giving a $36,000 base. It's still a lower base than what you would really get if you had 100% base policy, because that's not going to be right for high, high majority of people, but it's just giving a little bit of room to grow there. And why that base is usually recommended as it should be is because it's going to maximize the cash value growth like we just talked about. We minimize the base. So we're buying just enough death benefit to be able to put in the maximum amount of paid up additions. So for the same dollars going in, the majority of them being paid up additions, that's going to give you a higher degree of immediate cash value, as well as a lot of flexibility downward. And every year that would start to compound with the paid up additions and give you the highest and most efficient. growth there. So that's why we usually do it. Most people come to us already have the ideas of what they can fund, or maybe we decide, hey, based on where you are right now, here's what makes sense on a policy. That's what we want to do. And that's technically still what we are doing. It's just a matter of how much do you want to go up to? Is it a $36,000 policy? Well, it's maximized for cash value at the ceiling of $36,000. Or is a $20,000 policy that's maximized any ceiling. of $20,000. Both of them still efficient. It's just a matter of how much you were actually funding it with. And I think that's what a lot of times can be. People talk about a higher base policy. And if you have a higher base policy, but no room to the upside. And so I know Alden just did a video over on the Better Wealth channel. And that was the case. It's a policy with no upside. If you have a higher base, that means you're buying more insurance. and we should have a higher ceiling so that you can put more paid up additions in and so if you have that you want the the ability to have that upside and that's what we'll look at here so now to the numbers to the comparison here you see on the left we have a twenty thousand dollar maximum design and remember this space with about two thousand two hundred overall the minimum here was about four thousand the thirty six thousand dollar maximum design the minimum was just over $6,000 with that base being $3,866. So you see the comparison still have a good degree of flexibility downward. That is very important. You want to fund up to $100,000? Great, let's do it. If that's going to put that minimum too high, that is not going to be comfortable for you. And that can affect the efficiency as well. We don't want to have too far of a spread there. But here we have $20,000 going in immediate cash value. You'll notice here in the first year. Is you're going to have $16,000 a little over that of cash value over here. You're going to have $14,000. So just quick look at that. You're going to say, wow, the one on the left is definitely better. And it is in that first year of cash value. So if. Year one is most important to you and you need that cash value early on, then the policy on the left and maximizing what you can put in right now, it's going to make the most sense if. you're okay with missing out on a little bit of opportunity cost early on because you put in 20 you have access to 16.6 so there is a difference there and that difference over time and you can see the differences here of 10 10 8 6 it starts to minimize over time but if that opportunity cost early on is a deal breaker then this definitely does not make sense for you this person also liked the idea of a higher death benefit initially. So starting off at 500,000, yes, it's going to grow over time. He liked the idea of if I can start off with almost a million for the same dollars going in, and yes, a little less cash value. He thought that that made sense to him to do that. And so cash value wise, though, I know that's what a lot of people you're watching this for. You need to see the value of the death benefit as well. And that's where he saw that now over time. This policy will beat this death benefit because it is more efficient. So we funded the exact same for these all of these years. And you see here I have us funding for 21 years and then stopping over time. The policy on the left will surpass the policy on the right death benefit wise. It's just going to be about 30 years in the future before that happens there, which ideally that's where you're closer to the time of death. That's where we're going to need a higher death benefit. And that's why. the twenty thousand dollars makes the most sense for most people. So over time here, I mean, you see the numbers that we get out here to 22 years in the future, you're going to see $768,000 of cash value over here and $751,000 of cash value over there. So if you did the option to be able to put more money into the policy, but never took advantage of it. So funded $20,000, $20,000 every single year. will you see over here that you end up being about $17,000 behind. So over that time, you're $17,000 behind on cash value. That's a 2.2% difference in cash value. So you can look at that and say, well, that's really not that much. And a lot of times it ends up being not as much as you would think. You start off at 16 and you're like, hey, that's just going to grow and grow and grow. And in reality, it doesn't end up being as drastic of a difference as you might think. And that's what he looked at. He said, I'm looking at possibly having $17,000 more of cash value later on. Is that going to outweigh the ability that I can add an extra $16,000 into the policy when I get to that point, rather than having to come back and start a new policy or do something else with that money? And so if we never did it, just quick look at the numbers here. You see we have a 2.2% difference over time in just the cash value at age 55 if we continue on. And that's, again, stopping funding at that age, too. It would be different if you kept funding, but just to keep it the same $20,000 there, you would have a 7. Nearly 8% difference higher death benefit in the $36,000 maximum design. But then at age 70, now you have $1.7 million versus $1.6 million of cash value. So that's a 2.93% difference. So again, that's nearly a 3% difference. over that 35 year timeframe. And also now the death benefit, like I said, that one would eventually surpass it. So now it's about 2% higher once you get to age 70. So if you never actually did it, yes, the $20,000 max makes sense. But now we're going to look at just if you funded one year to the maximum possible. And I'll say ideally, yes, you're going to be funding at more the one time. in a policy. And that's what he plans to do is he's probably going to at year five, do 36 and then continue doing $36,000 every year. Because if it's just one year in reality, in this policy, you can make up the paid up additions from the previous year. So if it was just one year, you were looking at doing this. Yeah, maybe this still the one on the left would make the most sense. But just to show you in reality of a bare minimum, if you just did one year, what difference does. that make. As soon as we fund that extra $16,000, now we're ahead cash value wise. So we immediately become ahead cash value wise there. Our death benefit is still higher. And then if we continue that out, never funded again, we just did it one time, continue all the way out. Now, even at the end, our cash value stays the same with 768. Now we're all the way up to $790,000 of cash value. So you see that one year funding immediately makes the difference. And you could say hey that's That's worth it now because I put it in and it ended up better for the same dollars going in. But this one had the upside. This one did not have the upside. And again, he's most likely going to fund this more than just one year. So if we look at just two years, let's see what that does. But he's probably funding it longer. And I'll say the earlier you fund that higher of amount, the more compounding that it's going to do. So the bigger difference it will make down the road. But let's say he did it twice. now you're looking at $208,000 of cash value versus $180,000 of cash value. So right there, you're $28,000 ahead or 15.6% ahead of where you would have been as well as your death benefit is 43.3% higher than what it would be if you had the smaller design of a policy there. So while this one is more efficient, sometimes maximizing the efficiency actually isn't the best option because we would have to get a new policy long-term, the efficiency actually wouldn't be more efficient. So I know, does that make sense? But over here, just knowing and planning and why it's important to talk to whenever you call us in about what the future looks like, what are your short-term goals? It's absolutely most likely going to be highest cash value. But what does five years from now look like? Because we can plan out and give you the best design possible for that. And then long-term, when we stop funding, You're at 7 to 68 still. Now you're at 825 and you see the difference that just an extra $32,000 makes in that policy as it compounds over time. And so that is where. Again, the biggest difference can make there and you see, okay, worst case, I funded $20,000 in this policy and I never utilize the extra room, the upside that was designed there. And you end up being about that $17,000 behind, or let's say I fund just twice. Again, that's not even best case because again, he wants to fund this consistently after he gets to that five-year mark or even before, but even just two years now. rather than you missing out on $17,000, you see the difference here that it makes. And you're not just talking $17,000. You're really looking at about 50,000, a little over $50,000 at that point. So it's a matter of, you're going to see those bigger numbers later on. It can make a much bigger difference than just that missed ability and by maximizing the efficiency or that opportunity cost early on, especially if we fund this a lot more, because again, then you're just putting in a lot more money. But it's a matter of designing it the best from the beginning, because I know the option is start a new policy at year five. You can absolutely do that. We've ran illustrations. I've done a video of showing how multiple policies most of the time don't end up as efficient or the best benefit for you as if you had just done it right the first time. And you see the difference between the two of yes. If you never funded it, you're better off getting the one on the left. but i know your income is going to go up and like this guy was pretty positive of that then it can make more sense for the policy on the right here so highlight the differences there because i know there's a lot of numbers there's 20 000 one doesn't change because it is what it is we've maximized it to the greatest degree here we go from 751 000 if we just funded 20 000 remember but now if we fund two years we bump it up to 825 000 so that shows you power of compounding that's a difference of just two thousand dollars because we funded an extra 16 two years but that ends up actually being about 75 000 more of growth over that time so now you're 7.4 higher when we stop funding that policy at age 55 as well as you also have a 16.46 percent higher of a death benefit so better all around with that policy and then continues even more at age 70. Now you see that difference of $16,000 goes from 1.655 to 1.8, that drastic of a difference. And now you see that right there. And I have it minus here because minus for the $20,000 max. Now you're just minus about 6.8% there. So you end up higher with the $36,000 maximum and your death benefit is also 7.65% behind if you had done the $20,000 maximum policy. So all goes to show that you want to have a policy that is designed around your goals, not necessarily a cookie cutter of, hey, yeah, you come in. Here's how much you want to do. Great. I can spit out a policy. Here you go. But I want to have it be the best option for you. Sometimes that means we have to have multiple conversations, figure out what's going to what are your goals? What are you looking for? Where are you at right now? Where do you want to be in five years, 10 years and give you the best option for that? So it should definitely fit those financial goals and that higher base can give you a potential advantage if the funding, the strategy align. But it only makes sense in certain situations. Definitely not something you want to do for everybody. It's not a rule of, hey, you come in, let's do a bigger policy, but it's only a tool for the right situation. And so we want to we want to plan that smart and design it intentionally around your goals so that you can live more intentionally with everything. else that you have have going on is that's what we want to do here at Better Wealth. And so if that is something that resonates with you, like, hey, I have this policy. My base seems a little bit high. Maybe you already have some upside in your policy. You just don't know it and you want to fund some more into that policy, then give us a call. We can review that policy. Or if you are looking at a policy right now and you want to talk to someone, they can look at. what you have going on, what your goals are, and design something that's going to be the best for you. Sit down, look at some options with you, give us a call, and we'd be happy to talk through your specific situation and help you decide with our expertise what can actually make the most sense for you. So at the end of the day, it's all about what is going to get you closer to your goals, what is going to help you live a more intentional life. Is that going to be something that, hey, traditional, we want to maximize that early cost? cash value. Don't want to miss out on any opportunity cost or do you want some room to the upside, some room to grow there? All of that can be a consideration. No two people, no two clients are going to be alike. And so give us a call today. We'd be happy to walk through any of your situation and options with you. See ya. 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 clarity 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 advantage foundation for your wealth. No pressure or fluff, just real clarity on whether the 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.
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