How Do You Pick the Right Whole Life Policy Design?

Hey everybody, welcome to The BetterWealth Channel. I'm here with Dom. It's been a while. This has been a highly requested video. We're going to be looking at four policies. The first policy is going to be fully base. There's a lot of people out there that say life insurance is a terrible place to put your money, and we will show you why they are 100% right.

Then we're going to show you a 30/70. We're going to explain what that means in a second. Then we're going to show you a 17/83, we'll explain that in a second. And then we're going to do a 10/90, which a lot of people on the internet are like, 10/90s are the best. And we're going to look at the pros and cons of every design, and you will be a life insurance guru at the end of this video. And whether you're an advisor, an agent, or whether you're in the space seeing, is this policy right for me, hopefully this video is very educational. And this video would not be possible without the AND Asset and my partner here, Dom. So thank you for being here, man.

Yeah, and I can't wait to be a guru after this video myself, because I learned something new every day, and so this is going to be another one of those deals. I'll also say that we did a video like this a couple years ago in what we call now the dungeon. It was literally like a closet that we put some lights in. And so hopefully you can appreciate the backdrop. And with that, we're going to jump right in to the numbers.

So when we talk about 100% base, a life insurance policy is built using really three type of components, if I'm going to simplify it. Component number one is the base. This is what is like the foundational aspect when you look at life insurance. And when you look at PUA, that's when you get early cash value, and also in most cases PUA is totally flexible. And so you get flexibility, early cash value, and better long term growth. And then you could add a term rider, which just allows you to fit in more PUA to not MEC and make the contract taxable.

In this scenario, we're just looking at a hundred percent base. We're not looking at PUA or term. And as you can see, we're showing 50,000 going in. So $50,000 going in and a cash value of zero with a $3.9 million death benefit. So first year we put 50,000 in and we have 3.9 million dollars of death benefit to show for it, but we have absolutely zero cash value to show for it. On year three, you've put a total of a hundred and fifty thousand dollars and now you finally have twenty five thousand dollars of cash value to show for it. You can see the death benefit pretty much stays level, you can see that it continues to grow.

This break even is year 12, meaning that we have more cash value. You can see here, you have more cash value, 624,000 of cash value, and you've put in 600,000. And so it takes 12 years to do what we call capitalize. Your death benefit is a little bit higher, it's 4.3 million dollars. And you can see, Dom, why a lot of people are like, life insurance is a horrible place to put your money. You've put in a hundred thousand dollars, you have nothing to show for it. You have a death benefit that matters to some families more than others, but overall you can see why this is not very attractive, and very few people online would be like, yeah, I love that, that sounds amazing.

Yeah, I'm starting to become a little bit more mature in my walk, I would say, with life insurance. I say that from a faith standpoint, because I'm very strong relationship with Christ, but when it comes to my walk in the insurance industry, I've kind of flip-flopped back and forth in regards to how I want to talk and position about life insurance and the cash versus the death benefit. And I would have demonized something like this very, very, very heavily early on in my career. And now I'm from the camp and understand that this isn't necessarily good or bad, this just has a specific purpose. And this specific purpose potentially is focused on the death benefit for someone like an estate plan or that wants a permanent death benefit, for as much death benefit as possible.

But if you were on this channel and you were subscribed to the BetterWealth Channel, odds are you are not wanting to look at the death benefit as your number one priority and goal. Now, you understand that it's important and it's a value add to life passed down from a legacy perspective, but you are somebody that wants to live an intentional life today while you're alive and to use the cash value for other purposes to build wealth.

Yeah, I think that was well put. And also, while you're watching this, make sure to take notes, because we're going to be comparing year 20, because I think there's wisdom in looking long term, but not super long term. So like, never look at an illustration over 50 years, because at the end of the day, I can guarantee you, which is a dirty word in our space, but I can guarantee you that the illustration is not going to be anywhere close to the projection. Your cash and death benefit could be higher than what your illustration looks like, or it could be lower. But it's one of those things where there's wisdom in looking out, but there's also wisdom in not looking out too far, because a lot of times someone can suck you in by saying, oh, look at 40, 50 years, and there can be a lot that happens in the next 40, 50 years. And I would never do something for a 50 year outcome, and if that outcome didn't happen the way I think it was going to happen, it would ruin everything. And that's just something that we need to be careful when we're looking long term, to understand that time is a factor.

Yeah, I would say the main reasons why is the economic environment changes from year to year. Right, if you even just look a year ago, the interest rate environment was an extreme low, and we're going to talk about how the interest rate environment has impacted the overall whole life insurance industry and the insurance industry in general. And typically when the insurance industry is suffering from a lower interest rate environment, they can't produce as great results in their investment portfolios, so their dividends have

to be smaller, and therefore an interest rate environment is higher, they can produce greater results, which can produce higher dividend. And so if interest rates stay up high and go, keep going higher, that these actual performances will be better than future, right? And that's why if you actually look at a lot of the illustrations from way back in the day, they were showing a projected number and they're actually higher than they were actually projected, which is great. I think that could be a pro bono advantage.

And also insurance companies are going to change their investment portfolio and what they're investing in. Some will invest in more riskier things, some will invest in more bonds, and things will change based off of where they think that their dollars are best used, and that can change today as it could change 50 years from now, just like for you, what you're investing today is going to change 50 years from now as well. I think it's also fair to say that anything can change, but we're showing illustrations at a pretty low interest rate environment, and so overall these projections are conservative. It may be worse, but there's a good chance that they'll be close or better performance in the long run based on the time that we're running these illustrations.

Yeah. So what we also like about this in general, though, is there's a really good likelihood they'll at least be kind of close, because there's a guaranteed piece into it, that in whole life insurance that you don't get with other insurance products, and hence why we show a lot of examples with whole life. Because one of the killer elements that we talk about is life insurance shouldn't be your investment, and so if we're going to show numbers, let's show something that's going to be somewhat more accurate than a potential projection using arbitrage. And so that's a whole other video.

But you can see over your 20, because we're going to look at the four policies and look at year 20. We look at year 20, you've put in a million dollars and you have 1.4 million dollars of cash value with a total death benefit of 4.9 million dollars. So as you're watching this, make sure to take note: one million dollars contributed, 1.4 million of cash value, and 4.9 million of death benefit. To summarize this, this fully based policy is not something that we would sell a lot of. It's not what a lot of people would be raising their hands, but you can look out even after 20 years, you could make the argument that life insurance would be a benefit for your portfolio.

You have a permanent death benefit, almost five million dollars that would get passed on income tax free, and a non-volatile, non-correlated safe asset that has special tax advantages. You can see where even if someone sold this, they would say, okay, over long term this is a good policy. Anything else you want to say before we jump on? Yeah, I know, I think what you said at the very end is, like, it may not be the sexiest thing or the desired result, but it is a result that still can produce fantastical results.

Okay, now we're going to look at a 30/70, and now it's my understanding, Dom, that we're not using the term rider here, but we are using PUA and base, correct? Okay. And so when I say 30, we're saying that 30 is the base and 70 is what's going to the PUA. And you'll see in this example, you'll see a couple differences. And so instead of first year having a total goose egg, you have 33,000 of cash value versus zero, and you have a total death benefit, instead of, you know, 3.9 million, you have a death benefit of 1.2.

So the big difference is the trade-off of permanent death benefit versus early cash value. And that really comes down to when you're buying, when you're using paid up additions, you're going to see that the death benefit is going to increase more significantly long term, but early on the initial death benefit is a lot smaller. Yeah, and of your 50,000 premium, just think of it, it's got to go somewhere, right? And that's just saying a percentage of it: 30 is going to the base, which is cost of insurance essentially, the other 70 is going directly to cash. That's why you can see that the 33,431 is close to about 70,000.

Now there's a PUA charge up front as well that actually gets smaller as time goes on after year one. But you can see if you did the math, 33,431 divided by 50,000, it'll get you probably right under seventy percent, right? And this has a break even of year seven, which again, break even means we've put in 350,000 and we actually have more cash value to show for it. We're going to see, but at the end of this video, that break even is not the only factor that you should care about. We're going to show you at the end a policy that breaks even earlier and a lot of you would choose a different policy. It's kind of like the hook to stay around.

Because a lot of times people come to us and they'll be like, this is all I care about, break even, because that's what they see on the internet. And again, break even matters. If you cancel this policy, you actually have more money than what you've put in, that's awesome. But break even doesn't necessarily tell whole story. So in year 10, we've put in half a million, we have 580 of cash value with a death benefit of 2.4. You can see that it's grown.

And then when you look at year 20, you have put that million in and you have 1.6 million of cash value and a death benefit of 4 million. So if you compare that to the base, we had 1.4 million of cash value in the fully based contract with a death benefit of still 4.9. So in the fully base contract you have a higher death benefit still, which is a value, that's an asset, but overall the cash value is more than 200,000. You have way more flexibility, meaning you don't have to, in the fully base contract you have to pay the base contribution until your policy is capitalized to give you options. Here the base is 30 of 50, which creates more flexibility, and you can see that you have early cash value where after year one or two you could very much pay the base in different type of ways. Yeah, and a really smart play is even though the base is 370 versus the other 100 base, and the death benefit here is, you know, a third less than the other one

A really savvy strategy that we can do is we can put a 30-year term insurance on yourself to cover yourself for the separate death benefit and capitalize on our cash value a whole lot sooner. And then when that 30-year term essentially is non-existent, your death benefits will be pretty close to the 100 base policy and this type of policy. That's a really good ninja trick.

All right, now we're going to get into 17/83. And if you are OCD, this really bothers you, why couldn't we do it 20/80, dog? Why couldn't we do that? Companies, sometimes the companies be like that. The reason is, for this company, the most efficient design that we could do for this age is 17/83. So 17 is going to base, 83 is going to Pua and some type of term rider.

Yeah, well with this policy, the 17 is actually going to the base and the term rider, which is why the is so funky. Is essentially the term rider's in there and then the term rider component makes the, in the previous one there was no term rider, so we're able to get a cleaner number. Right, and so what this is really representing is the actual contribution that you have to make early on. Correct. So it's one of those, I appreciate you mentioning that, it's a combination of base and term. But what we're saying is those have to be paid early on to make sure that the policy is in good order, and you'll find that after year one you could easily do that even if you couldn't do out of pocket because you have enough cash value in the policy.

So we're looking at fifty thousand dollars going in. You have a cash value of 40,000 in the first year, which is awesome, and with a total death benefit of 1.2 million. And you can see that this looks slightly different and it's because of the term rider. You can see that this breaks even in year five, making this break even two years earlier than the 30/70. The year 10 death benefit is 2.5 million with a cash value of 600,000, which overall the cash value in both, this, the 600,000 is twenty thousand dollars more than the year 10 example for the 30/70. And if you look out over year 20, you've put in a million dollars, you have 1.6 million dollars of cash value with a death benefit of 4.1.

And so overall this is more attractive from a flexibility standpoint, it's more attractive from an end cash value standpoint, but it's not as extreme from the 30/70 to 17/83. But there's a little bit of flexibility in for people that are looking at this. You can see a theme, it's like, hey, if death benefit is not up there from a standpoint of like, hey, permanent is really important and you want flexibility, you want long-term growth, usually in many cases, if we're sticking with the same company that you like, lowering the base creates more flexibility and long-term growth.

Yeah, and Caleb says the word flexibility. I want to just kind of read right in the basic formality of it. You have a total amount of premium that you have the ability to contribute, which is fifty thousand dollars based off of the IRS. The IRS will say, okay, this much death benefit, you can put in this much money at your ceiling. And then based off of the insurance company, they'll say you have a minimum amount that you're required to contribute. And in that very, very, very minimal base policy, it was about eight thousand dollars was the minimum that you had to contribute year after year, and then the maximum was 50.

So we essentially have a window, a flexible window, of contributing eighty thousand dollars all the way up to 50, which is great for entrepreneurs and business owners and people that cash flow varies, because you may have a great year one year and not a great year another year, and it gives you that ability to contribute in that window. Yeah, and I think that's really, really important because life happens and we want to make sure that we can maximize our ability to save, to compound and control our money, but we're not creating something that's actually going to be a pain in our side in the future. Yeah, and then in the 100 base policy, there is no flexibility at all. There's no window at all. It's just you just have a floor and a ceiling that are the same, which essentially was fifty thousand dollars. Yep.

All right, now we're going to look at a 10/90, meaning we're looking at 10 percent base and term. In this scenario it is a 10 base with a 90 that's going to the term and the Pua. This is why he's the expert and I'm the co-pilot. And so in this example, you're gonna see you're gonna have earlier cash value, but you're gonna also see that it looks a little bit different than the examples earlier on, and it's because the company that we showed originally can't do a 10/90. Like, it's my understanding that it would create a MEC for their guidelines and as a result making the life insurance taxable.

And so we actually am switching different companies and you'll see the pros and cons. But I think the caveat is normally if you are with one company, the lower the base the better. But if you compare company to company, there may be other companies that outperform, as you'll see, even if they're not a 10/90. That's a great way to explain it.

Okay, so now we're jumping in. We're going to say okay, this is a 10/90, so you're going to put 50,000 of a premium in the first year and boom, you got 45,000 of cash value, which if you remember is way ahead of the other examples. And your death benefit doesn't even go above a million, which, and again, a lot of people, this makes sense, earlier cash value earlier on, death benefit is 000, we're all good. This break even is in year, whoa, it's almost in year four. Can someone donate a hundred and thirty dollars to this? It would be in year four, but this technically, this break even is year five with 256,000.

And so if you compare it to this policy up here, this also breaks even, the 10/90, it actually has a little bit more cash value early on. Okay, so it has a little bit more cash value early on. You can look at year 10, you've put in, you know, 500,000 of premium, you've put it, you have a total of 581 with a total death

Benefit of 1.88 million. So this is a great policy. Like, just want to point that out. Year 20, you have, you've put in a million dollars of premium and you have 1.4 million dollars of cash value and 3.2 million dollars of death benefit. So I want to point out a couple things.

You know, people will come to us and all they care about is, hey, I want break evens as soon as possible, or I want the earliest cash value early on. And you can see where the 1090, even at a different company, it does that. I mean, you have earlier cash value, you break even the same year as the 1783, you have six thousand dollars essentially more cash and it performs well. But I want you to remember, at year 10 you have 581,000 of cash value, and in year 20 you have 1.4 million dollars of cash value. At year 10 your death benefit's 1.8, and in year 20 your death benefit, it's 3.2.

And so we're just going to look at this other company that doesn't give you as early cash value. But if you look at year 10, you have 600,000 for cash value, which is, that's a difference, that's a twenty thousand dollar difference with a pretty different death benefit outlook, a 2.5 million dollar death benefit. And year 20, you have 1.6 million dollars of cash value with a permanent death benefit of 4.1. So the end result is, we're not saying that one design is better. I would never say that a 1783 is the best policy design for you, because we're going to have another video that we're going to show you what's called a front load. And if you are sitting on a bunch of cash, there might be some amazing examples for you to actually not even do a policy design like this but front load a policy, and there's a lot of benefits and pros and cons.

I think the key is whenever we work with people, we try to get really crystal clear in, like, what are you trying to accomplish? And know that life insurance is not the end solution, it's not the end investment. It's the place that you can store and use your capital and hopefully, as a tool, be able to help you get closer to the results, get closer to where you want to go. And in some cases people are like, early, that five thousand dollars of earlier cash value is actually better for me because I would rather have earlier cash value, lower growth long term, and because I can flip that money and that end result will be better. And then there's some people that are like, no way, like, I would much rather have the death benefit increase and the cash value increase and I don't necessarily care about the first couple years, that difference.

And that's really, it comes down to your situation. And we're just showing two examples of two companies, but there's multiple different companies that we could add into the mix and the same conversation goes. Get really clear in what you want, and then is the policy best designed to help you accomplish your goals?

Yeah, and you may be asking like, well, why is that the case? Like why are companies operating so differently? Like why is one cash value so different from the other and the base creations are different? Like why is that? Well, there's a ton of factors that come into place. These policies can have a guaranteed value of two to three point seven five percent, and that's a gross number, and so each company will price it differently. There's a different dividend rate, which currently they're around between five to six percent, and then those also have an expense and mortality cost to it as well.

So every company is going to operate differently, have different expenses, and on top of that they're going to invest in things that are also different. And when you look at some companies, they invest in more riskier assets or putting their money into higher potential returns, they can project higher values as well. And then on the other side, people are more conservative, and so people are more guaranteed focused, or companies are more dividend focused. Some companies have stronger financials. There's just so many different factors that come involved in why companies operate the way they operate.

And another thing is, some companies are advocating for infinite banking, so therefore they're going to potentially push more cash value up front since that's kind of the way that infinite bankers look. And then some companies may be more on the retirement side, and they may want to not have people take cash value loans from against their policy, so therefore they're going to advocate for having longer term cash value versus having short-term cash value. So there's just so many differences per company, per company. That's why Caleb is saying it's important to figure out your goals and then kind of back it into it that way.

So we would love to hear from you if you have questions, thoughts, different examples that you want Dominic to explore. Please make the comment, like, tell us in the comments below. We appreciate everyone that subscribes and shares our content, and watch out for the next video on front load.