Whole Life Insurance Explained

many people are losing money because of typical financial planning this is why it's important to have a financial formula that works so that you can keep more of the money you make and have financial peace of mind today we're going to be talking about the financial formula and one of the key components to that formula which is life insurance but it's not just any type of life insurance it is whole life insurance also in this video I will be giving you a tip on how to maximize the cash value of your life insurance not just when it's in the policy but when it comes out of the policy so you can create perpetual wealth let's get started whole life insurance sometimes it's called straight life ordinary life or traditional life insurance what that means is that the policy will have a guaranteed death benefit for the life of the policy and it will also have a cash value that will build over time now at the maturity date of the policy the cash value and the death benefit will be equal and the death benefit and the cash value continue to grow as long as you continue making the premium requirements that the policy has or as long as you keep meeting your contractual obligations the insurance company will continue with theirs whole life insurance specifically pays a benefit on the death of the insured and accumulates a cash value here's what it looks like I have a chart here of the whole life insurance and this is just from an illustration so what we're going to do is to put this into graph format so that we can see how the policy works as a picture so here's the death benefit and notice that the death benefit starts out high and remains high for the life of the policy then we have premium requirements now premiums on whole life insurance policies are paid at a level rate for the life of the contract and with the premiums we have cash value now notice this cash value starts accumulating from the first and then grows to meet to that death benefit this is traditional of whole life insurance now notice on this policy that the premiums and the cash value the premiums are high but the cash value isn't really accumulating all that fast and that's because this is a traditional whole life policy so it takes this specific policy nine ten years in order for the amount that you've paid in premium to be less than the cash value accumulated so what if there was a way to expedite this well let's take a look at these components that are working inside the whole life insurance policy so that we can see what's happening and where we might be able to make adjustments to make this policy more efficient again we have this chart of the policy and now we have the premium we have a cash value the death benefit and then something called paid up insurance now notice when we first pay the first year's premium on this policy it's a $10,000 premium the cash value is zero because this is traditional whole life insurance the death benefit starts out pretty high at about $700,000 and the pain of insurance is zero now the pay up insurance part is part of the death benefit so when there is a value in the paid up insurance column you're not getting both the death benefit and the paid up insurance let me let me show you so here we have the second year and the premium is still $10,000 notice there's a cash value this year the death benefits stayed level and now we have some values on that paid up insurance it's because of this paid up insurance here that we have a cash value whole life insurance is like renting to own you make a payment and you can live in the house but you don't own it same with whole life insurance you make a payment the insurance company is willing to give you a death benefit but you don't own it as you pay more premiums you start building what's called paid up insurance and this portion of the policy is what you actually own so you own the paid up insurance this is the part of the death benefit that you personally have purchased now the death or the paid up insurance part is also it dictates how much cash buyer this policy can have since you own this portion of the policy the insurance companies will to loan you some of their money and hold this paid up insurance as reserve just like this now here are the rest of the years of the policy notice that the death benefit stays level but the paid up insurance is increasing and so is the cash value so now if we look at the paid up insurance column what if there was a way to accelerate this part of the policy and get this type of insurance faster so that the cash value could grow faster well there is a way to do that but to do that we have to take out some of the death benefit and when we take out some of the death benefit that we're renting it allows us to have more death benefit that we own and it looks somewhat something like this this is called single premium insurance and here's a chart of how it looks notice that this gentleman's paying a hundred thousand dollars in premium the first year he has a cash value of eighty six thousand almost eighty seven thousand dollars and the death benefit for that amount of premium is relatively small at three hundred seventy three thousand dollars this is because most of the death benefit is paid up insurance letting him have such a large cash value in year one here's the chart illustration the rest of the chart you can see he has no more premiums but the cash value continues to grow and the death benefit stays level now here is the way that this looks in graph format we have the death benefit we have one premium and that premium is quite large compared to the dust' benefit then we have a cash value which also starts out quite high and grows to reach the death benefit as any whole life policy will well this works so well that many people started doing this because it was a way to put a one-time payment and get a large amount of cash to work with and because of the nature of whole life policies the cash inside the policy is tax you can use it without tax penalties or fees it was so good that in 1998 1988 excuse me the IRS said this is too nice we are getting cut out of these taxes people are putting their money in these types of policies and we don't get to tax it the way that we should and so the IRS labeled these policies mech policies in 1988 and what this did to the policy is it made anything that was above what these people had paid in premiums any growth above that became taxable so here's that depiction so the insurance companies now needed to find a way to take this single premium concept and try to blend it with a regular whole life policy to see if they could make something that was still tax favorable for their customers but not start all over just with the traditional whole life policy because people liked this type of growth that's when the paid up editions Rider was born so here's the chart of a policy that has a paid-up Editions Rider and I'm going to put up the graph again of the traditional whole life policy with a death benefit premiums for life and the cash value what the writer the petah petitions writer did was purchase a single premium life insurance policy on top of a whole life policy that's the concept so here we have the death benefit purchased by the paid up editions writer and we had some premiums for the paid up editions writer and the cash value on the paid up editions portion starts out high and grows very quickly when we blend it all together it looks something like this death benefit premiums and cash value and this was a very favorable wait for a policy to be written it's still tax favorable and you can have your cash value working right away year one notice that this policy only takes eight years for the cash value to be greater than what you've paid in premiums this is a sign of an efficient policy this is a good thing now let's take a look at some other options dividends when we talk about whole life insurance at life benefits we're specifically talking about participating whole life insurance and when we say participating we're referring to the fact that the policy is eligible to receive dividends now insurance companies make profits and when they make a profit they they split it up and share it with their stockholders and so when we work with mutual companies that have participating policies instead of the profits going to the stockholders of the shareholders those profits get shared with the policyholders which is us and you if you own a participating home life insurance policy so the first dividend option that we that we can elect when we purchase a participating whole life insurance policy is the dividend option to increase your death benefit now you can keep you can increase the death benefit like this and what happens is when the dividend comes in and the insurance company shares it with you they just buy some more life insurance so that your death benefit increases obviously since the death benefit and the cash value are tied at maturity that will increase your cash value also another way that you can have the dividend paid to you is in the form of a check the insurance company will write a check out and send it to you when you choose this option your it's like getting extra cash out of the policy without affecting the growth of the policy another dividend option that you have is for the dividend to go towards paying premiums so your dividend can be applied towards your premium next year and help lower it and as your policy becomes more efficient chances are the dividends could actually pay for the premium it doesn't start out that way but it can end up that way in future years another dividend option is to have the funds the dividend funds accumulate an account bearing interest you'll pay taxes on the interest of that account earns but the dividend can be earning in that account our favorite way at life benefits to have your dividend allocated is debated petitions so when we purchase pay to petitions with the dividend this is what it looks like this is the traditional whole life policy with a paid-up Editions writer on it and now we're allocating these dividends because it's a participating whole life insurance policy we're allocating the dividends toward paid up insurance when we do that the death benefit grows because the dividend is perching paid up insurance which has to buy a little bit of insurance and a lot of cash value so now we have the death benefit increase and when a death benefit increases on a policy cash value also has to increase because the two have to equal each other when the policy matures so with that now we have some extra cash value in the policy that we wouldn't have had before and once the dividend is paid it cannot be taken away from you so this is like being able to buy more insurance even if your uninsurable in the future and have more cash value that you can work with so that's why we like the paid up additions options so much when it comes to dividends here's an actual dividend statement and I want to take a look at these numbers so that you can see firsthand what's happening when the insurance company pays the dividend so this particular policy is about 7 years old and in 2019 it received a dividend of about $24,000 that dividend was purchasing paid up additions and so this gentleman got an extra cash value in the policy of 28,000 299 the death benefit also increased and the death benefit increased by over sixty one thousand dollars over the years this policy's about 7 years old dee this gentleman has seen an increase in cash value of about one hundred fifty nine thousand dollars because the dividends are buying paid up additions he's also seen an increase in death benefit of about four hundred eight thousand due to the dividends since this policy is still considered a baby policy since it's only seven years old can you imagine what this these dividends are going to look like in the future because dividends increase over time as you own more and more paid up insurance this is a good thing this is very neat and this is why we like that paid up additions dividend option now let's talk about accessing money in the policy so let's say you've had this policy for five years so you see there's forty six thousand dollars of cash value there now suppose you need to borrow twenty three thousand dollars you need to use twenty three thousand dollars for something so you want to access the cash value as a policy via alone there's forty six thousand here so the insurance company knows they can loan you twenty three thousand you submit the loan paperwork and the insurance company takes that twenty three thousand and sends it over to you via check or via direct deposit or wire transfer or however you prefer then on the insurance company side they subtract the loan from your available balance to tell you if you wish for another loan then you'll only have twenty three 6:53 available now what happens though if you were to die while the loan was out we get this question some people wonder will the insurance company pay the death benefit because I have a loan barb the short answer to that is yesterday well and here's how they calculate how much to pay they look at the death benefit they translate that over on to their death benefit claim form then they take a look at the outstanding loans on the policy they see oh there's twenty three thousand dollars that this person has borrowed so we subtract that twenty three thousand dollars from the death benefit this is going to leave about three hundred seventy-one thousand dollars in this policy they take that money and they send that to your beneficiaries but because you've already borrowed the twenty three thousand dollars and maybe you've used it for something that your beneficiaries will have or maybe it was just something that you had to borrow it out and then had it had a chance to use yet the beneficiaries have that capital too and so your beneficiary really needs to add the two of those together $23,000 and the benefit that they received from the insurance company and that creates the death benefit which you can see matches what's in the policy now all insurance companies charge interest when you take a loan so depending on how long you've had the loan out the insurance company is also going to subtract the interest that is due to them if you were to pass when you have an outstanding one so that part has not been figured into this equation just remember there will be a interest charge and it's dependent on how long you've had the money how long you've had the money out of the policy for you to use earlier on in this video I said there I would give you a tip for another component of the formula that we're talking about prescription for wealth was written to detail how you can use the loans from the policy efficiently to create perpetual wealth outside of the policy in addition to having the growth of the policy working for you on your side so if highly encourage you to get this book you can find it on Amazon or you can get it as a free download on our website I'll have the link in the description box for you now let's talk about withdrawals from a policy so instead of the loan let's suppose that you needed to withdraw the money you might need twenty six thousand dollars and in year three there is twenty six thousand dollars of cash value so let's take that twenty six thousand dollars that you need and instead of lending it from the policy we're actually going to withdraw it so we take the money the insurance company will subtract twenty six thousand dollars from what's available yes and that to you either in a check direct deposit wire transfer however you want to receive it and then the amount that's left in your policy after this transaction would be five dollars but because this is a withdrawal and not alone your money is actually being pulled out of the policy not leveraged in the policies so you're going to lose the growth of this money working in the policy when you withdraw from the policy so in order to figure out just how this affected the policy we have to look at the paid up insurance that is attached to this cash value that you just withdrew on this particular policy we take the in paid up insurance that matches the same year that that you withdrew from and the paid up insurance that was tied to the 26,000 dollars that you needed was a hundred five thousand dollars so we're going to subtract that from the amount of paid up additions that you started with this year this leaves about twenty dollars left in the policy of paid up insurance which is going to affect the way the policy performs in the future years now here's the death benefit on this policy because the paid up insurance is part of the death benefit we also have to subtract from that to figure out what the new death benefit will be so we're going to take the same paid up additions or paid up insurance figure subtract it from the death benefit and here's our new death benefit now we'll complete the chart for the remaining a couple years of the policy and you can see the cash values extremely low the year that you withdrew because you actually took those funds out of the policy the death benefit decreased the paid up insurance decreased and now the next year it has to kind of essentially start over creating paid up insurance and cash value for you so in some situations a withdrawal can be necessary but it's not our first option to choose from by borrowing from the policy instead of withdrawing from it you're keeping options open in case you do need to withdraw from the policy later but you're also not killing the growth of the policy prematurely now let's talk about some non forfeiture options now in forfeiture options came about because the insurance company wanted to they want to protect a way to keep the policy alive as long as possible if premiums were not received so the first option that we're going to talk about is the reduced paid up option the reduced paid up option works on the paid up insurance that you have in the policy so let's assume you want that this policy is going to RP you reduce pay up in year six so here we are in year five and we see that the paid of insurance is one hundred seventy six thousand dollars when the policy becomes a reduced paid up policy this amount of paid up insurance the part you own becomes your new death benefit the insurance company just transfers this value over to your death benefit cone and fills in the columns from there on out the paid up insurance column is going to stay identical to the death benefit because this is all the insurance that you own in the policy and because that's now the death benefit the columns are identical the premium column is going to zero because when a reduced paid up option is elected the policy can no longer accept premiums so you just have what you own at that point the cash value notice continues to grow why because the cash value has to equal the death benefit at maturity this policy is not a mature policy it's just a reduced paid up policy so the cash value continues to have to grow at a reduced rate of course until it reaches that death benefit down maturity there are three ways that you can elect the paid up in our three ways you can get to reduce paid up status one through non forfeiture meaning if you don't pay the premium in one year and you have elected the non forfeiture option is reduced paid up the insurance company will automatically do this in order to keep the policy from lapsing the other way that you can get a reduced paid up status is by electing it you can contact the insurance company and say hey I'd like to stop paying premiums make my policy a reduced paid up policy and they will third way to get to reduce paid-up status it's to let the policy get there naturally on its own all policies will all whole life policy as well some get there at age 75 summon age 95 summon age 100 and summon age 121 so it just depends but all policies will get to this status on their own if you let them one thing that you will want to be aware of is anytime that you either elect the reduced paid-up option or the insurance company makes the policy or reduce payment policy as a non forfeiture option anytime that that happens if the policy is not at least 7 years old it will change its tax status so instead of having favorable tax status it will become a modified endowment contract and have a MEC status a taxable status so just keep that in mind if the the reduced paid up option is elected or happens to the policy any time within the first seven years it is changing tax status as well the next not for crops and that we want to look at is the automatic premium look the way that the automatic premium loan works is the insurance company says okay here we are in year three the cash value in this policy is about twenty six thousand dollars and we haven't received any premium on this case and it's about to lapse so instead of lapsing the policy or putting it to reduce paid up insurance what they're going to do first is take a look at the cash value now the premium on this policy is only ten thousand dollars we can see that right here the cash value is twenty-six thousand dollars so is there enough for the insurance company to borrow from the cash value to pay that premium well yes there is so they take the cash value and they look at the premium and they subtract and they pay the $10,000 premium from the cash value now this creates a loan on the policy this is not a withdrawal they alone so this loan is going to be an interest loan it's an interest-only loan and if you don't pay the interest on the loan it will compound over time like any loan does are a couple ways that you can get to the reduced petah are the automatic premium loan number one it can be a non forfeiture option whereas if you don't pay the premium the insurance company is automatically going to check the policy for a loan or you can elect the automatic premium loan by calling the insurance company and saying please take my premium for this year from the policies available cash value another non corporate your option that we have to look at is the extended term insurance now this is default on all whole life policies so this is the default option so you should understand how it works when extended term insurance the insurance company is going to look at the cash value of the policy and they're going to take this cash value and they're going to buy death benefit with it in a term insurance policy for as long as possible so in this particular policy the death benefit is almost four hundred thousand dollars so they're going to use this forty six thousand dollars of cash value to buy that death benefit for as long as possible death benefit and they extended what happens to the rest of the policy now because now it has been essentially converted from a whole life policy to a term policy well the premium of course goes to zero the cash value is used up so it goes to zero to the pain of insurance goes to zero now you don't own any of this policy you're just renting death benefit with the extended term insurance the policy will lapse at some point in this particular policy it will lapse between year 15 and 16 kind of like buying a 15-year term policy this extended term insurance is like I said the default option for most whole life insurance policies as a non corporate your option so you can have extended term with a non forfeiture option if you don't pay the premium or you can elect it you can call the insurance company and say hey I don't want my cash value anymore don't want to pay premiums make my policy an extended term policy and they will at life benefits we have seven guidelines when it comes to designing policies number one we want the policy to be comfortable and affordable for you if it's not comfortable you won't do it and if it's not affordable you can't do it and so we don't want to ever put you in a position where you can't afford the premiums or you don't want to afford the premiums because of comfort and affordability issues we always include a paid-up Editions writer on our policies now in some cases the underwriter at the insurance company will not allow the PIP additions writer but that rarely happens so as default when we go into underwriting we're always designing that policy with a paid-up Editions writer to maximize the cash value inside the policy we also are designing policies that are not mechs we don't want modified endowment contracts because we want your money to be able to grow inside the policy without having a taxable status some people come to us requesting modified endowment contracts because they have a little different way that they plan to use the policy that's fine we have sold a few modified endowment contracts but it is not the way that we designed the majority of our policies so we always want to have that favorable tax status unless someone specifically requests for something else we also want to have the policy have an automatic premium loan feature so that if for some reason you miss a payment either it's late in the mail or something happens the insurance company is going to check your cash value to see if they can borrow money for the premium from the cash value before they put it into the non forfeiture status if the policy does go to non forfeiture status we want to elect that reduce paid up option so instead of keeping the default option on our policies we change that to the reduced paid up option six we always have the dividends purchase paid up additions for obvious reasons as you saw the dividends can be quite large and powerful especially during later years we want to maximize that efficiency there are other and options and you can choose them or elect them at anytime you own the policy but to start out we're going to select purchase paid up additions for efficiency and then finally we encourage all our clients to take loans from their policies as opposed to withdrawals in the future you may need or want to withdraw money from the policy but let's not hinder the growth by withdrawing from it first first thing or write-off because when you withdraw you're pulling money out of the policy and keeping it from working to create more value inside the policy when you loan you're accessing the insurance companies money leaving your money inside the policy to do its thing if you've enjoyed this video I really hope you'll pick up a copy of prescription for wealth you can get this book on Amazon or you can go to our website and get a complimentary audio or a copy of this book this is the book that has the tip about how to use the life insurance cash value outside the policy to create perpetual wealth the links are in the description box below

Channel: McFie Insurance

Views: 66,877

Keywords: how does a whole life insurance plan work, whole life insurance plan meaning, how whole life insurance works, how does a whole life insurance policy work, permanent cash value whole life insurance, dividend paying whole life insurance, how to design whole life insurance policy, bank on yourself whole life insurance, bank on yourself policy, infinite banking policy, how to take out a loan from whole life insurance, Modified Endowment Contract Policy

Id: CX6Of9Gy20o

Length: 29min 31sec (1771 seconds)

Published: Mon Apr 13 2020