If you’ve ever wondered why there is so much debate around using life insurance as an asset, you’re not alone. In this video, Caleb Guilliams and Dom set out to “set the record straight” on policy design—explaining when a policy’s structure makes sense and when it might not. They compare four types of whole life insurance designs:
- Fully Based (100% Base)
- 30/70 (30% Base / 70% Paid-Up Additions)
- 17/83 (Approximately 17% Base with an 83% allocation via PUA and term Rider)
- 10/90 (10% Base / 90% Allocation to Term and PUA)
Each design has different implications for cash value accumulation, death benefit levels, break-even points, and overall flexibility. While some critics dismiss life insurance as a poor place to park your money, Caleb and Dom explain that every design has its intended purpose. The key is matching the design to your unique financial objectives—whether that means maximizing a tax-free death benefit for estate planning or generating early liquidity for living intentionally and building wealth while you’re still alive.
Understanding the Building Blocks of Whole Life Policy Design
Before diving into the four designs, it’s important to understand the core components that shape a whole life policy:
- Base Component:
This is the foundation of your policy. It covers the cost of insurance and forms the basis of your death benefit. In a “fully based” policy, 100% of your premium goes toward this base.
- Paid-Up Additions (PUA):
PUAs are additional amounts you can pay over your base premium that directly increase the cash value—and, ultimately, the death benefit—of your policy. They are typically more flexible and provide early cash value accumulation.
- Term Rider:
Some policy designs include a term rider, which allows you to add extra PUAs in a structured way without making the contract taxable (avoiding a Modified Endowment Contract, or MEC).
The interplay of these elements determines not only how much death benefit you receive but also how quickly your cash value grows. This growth, in turn, is essential if you plan to use your policy as an “And Asset” to borrow against or otherwise leverage in your financial strategy.
Comparing the Four Policy Designs
1. Fully Based (100% Base)
Overview:
- Design: 100% of your premium is allocated to the base component.
- Initial Results: For example, with a $50,000 premium, the first year shows zero cash value and a death benefit of approximately $3.9 million.
- Long-Term Outcome: By year 3, after contributing $150,000 in total, you may see around $25,000 in cash value. The break-even point—where cash value equals total contributions—occurs around year 12, with cash value reaching approximately $624,000 and a slightly higher death benefit of around $4.3 million.
Pros & Cons:
- Pros:
- Maximizes the death benefit, making it attractive for estate planning.
- Offers a high, guaranteed death benefit that is passed on tax-free.
- Cons:
- Minimal early cash value; if your goal is to access funds during your lifetime, this design may be less attractive.
- Critics often say that you’re “putting money away” without immediate benefit.
Key Takeaway:
A fully based policy is ideal if your primary focus is a large, permanent death benefit. However, if you desire early liquidity to support an intentional lifestyle or other investments, you might look elsewhere.
2. The 30/70 Design (30% Base / 70% PUA)
Overview:
- Design: In this structure, 30% of your premium is allocated to the base (cost of insurance), while 70% goes directly toward PUAs, boosting early cash value.
- Initial Results: With a $50,000 premium, the first-year cash value can be around $33,000, though the initial death benefit is lower (around $1.2 million) compared to the fully based policy.
- Performance Over Time:
- Break-Even: Occurs around year 7 (approximately $350,000 total contributions).
- Year 10: An illustration might show a death benefit of roughly $2.4 million and growing cash value.
- Year 20: You might contribute around $1 million to see about $1.6 million in cash value with a death benefit near $4 million.
Pros & Cons:
- Pros:
- Provides substantial early cash value, enhancing liquidity.
- Offers greater flexibility for those who wish to use their cash value actively while still maintaining a growing death benefit.
- Cons:
- The initial death benefit is significantly lower, which might not suit clients whose primary goal is estate planning.
- Requires a trade-off: early liquidity versus a higher death benefit later.
Key Takeaway:
The 30/70 design is a strong option if you value early access to cash. It gives you the ability to live intentionally by using the cash value for investments, debt reduction, or other purposes without waiting over a decade for the policy to “capitalize.”
3. The 17/83 Design (Approximately 17% Base / 83% Allocation with Term Writer)
Overview:
- Design: In this policy, only about 17% of the premium goes to the base, while roughly 83% is directed toward PUAs (often with a term rider included).
- Initial Results: This design is engineered for very aggressive early cash value accumulation. For example, after a $50,000 premium in year one, you might see close to $40,000 in cash value.
- Performance:
- Break-Even: Reached around year 5—significantly earlier than the fully based or 30/70 designs.
- Long-Term: Over time, even though the death benefit starts lower, the enhanced cash value can be used to leverage further growth or be converted via additional strategies.
Pros & Cons:
- Pros:
- Extremely efficient for those who need early cash value.
- Offers flexibility for clients with variable cash flow or immediate liquidity needs.
- Cons:
- The initial death benefit is much lower compared to a fully based policy.
- May require additional strategies (such as pairing with a term rider) if a larger death benefit is desired later.
Key Takeaway:
If you’re looking for the fastest route to significant cash value—perhaps to fund short-term needs or leverage for additional investments—the 17/83 design offers compelling early results. However, be prepared for a lower initial death benefit and a need to balance this with your long-term goals.
4. The 10/90 Design (10% Base / 90% Allocation to Term and PUA)
Overview:
- Design: This aggressive structure allocates only 10% of your premium to the base, with the remaining 90% going to term components and PUAs.
- Initial Results: For a $50,000 premium, this design yields the highest early cash value (e.g., up to $45,000 in year one), although the death benefit might be modest (under $1 million initially).
- Performance Over Time:
- Early Break-Even: May break even around year 4 or 5.
- Year 10 & 20: Illustrations show rapid early growth in cash value, with eventual convergence toward competitive death benefit levels—though differences persist based on company guidelines and individual structuring.
Pros & Cons:
- Pros:
- Provides the most aggressive early cash value, maximizing liquidity.
- Ideal for clients who need immediate access to funds and value short-term flexibility.
- Cons:
- The initial death benefit is lower, which might be a disadvantage for clients focused on long-term estate planning.
- Depending on the insurer, a 10/90 design might be subject to additional restrictions or create challenges with meeting MEC (Modified Endowment Contract) limits.
Key Takeaway:
The 10/90 design is best for clients who prioritize early cash value and liquidity over a high death benefit. It is particularly useful if you plan to actively use your policy’s cash value for other investments or financial needs early in your life.
Choosing the Right Design: Aligning Policy Structure with Your Goals
Caleb and Dom emphasize that there is no one-size-fits-all approach to life insurance policy design. The ideal structure depends on your specific financial objectives:
- If your primary goal is a large, permanent death benefit for estate planning, a fully based (100% base) policy might be best.
- If you need liquidity and early cash value to live intentionally or seize opportunities, designs like the 30/70, 17/83, or 10/90 offer compelling advantages.
- Break-Even Is Not the Whole Story:
While break-even points (when cash value equals total contributions) are important, you must also consider long-term growth, flexibility, and the ability to leverage your policy without sacrificing future borrowing capacity.
Caleb also notes that external factors—such as changing interest rate environments and company-specific dividend rates—can influence long-term projections. It’s important not to rely solely on illustrations, especially over very long time horizons (like 50 years), as these projections may differ significantly from actual performance.
Conclusion: Become a More Intentional Life Insurance User
By comparing these four policy designs, Caleb Guilliams and Dom show that understanding the nuances of whole life insurance can transform the way you view it. Rather than dismissing life insurance as a poor place to “put your money,” you can choose a design that aligns with your financial goals—whether that means maximizing a tax-free death benefit for your heirs or generating early liquidity to build wealth while you’re alive.
Key takeaways include:
- Different designs offer trade-offs: Fully based policies offer high death benefits but little early cash value, while designs like 30/70, 17/83, and 10/90 prioritize early liquidity at the expense of initial death benefit.
- Your goals matter: Determine whether you need immediate cash value to live intentionally and invest further, or if your primary focus is long-term estate planning.
- Flexibility is crucial: The right design can provide a window of flexible premium contributions, enabling you to adjust based on your cash flow and life circumstances.
- Focus on the big picture: Break-even analysis is just one metric—true efficiency lies in how well your policy supports your overall financial strategy.
If you’re considering a whole life policy or already have one in place, use these insights to ask the right questions. Work closely with knowledgeable advisors who understand the intricacies of these designs. In doing so, you’ll be better positioned to make your dollars work multiple jobs—growing tax-advantaged while providing both immediate liquidity and a lasting legacy.
Whether you’re an advisor, an agent, or an informed policyholder, this discussion is designed to help you become a true life insurance guru.
By understanding the trade-offs between various policy designs, you can tailor your life insurance to not only protect your loved ones but also to serve as a powerful, flexible asset that enhances your financial efficiency over the long term.