Whole Life Insurance Riders and Growth Explained - YouTube

Ever been confused by exactly how whole life works?

Not to mention all the different riders needed to transform an

ordinary old whole life policy to act as your own private bank

or retirement vehicle.

Well my apologies in advance to any car enthusiasts out there as

I use this race car analogy to

explain the interplay between the different components of a whole life policy along

with the various riders bolted on when optimizing for cash value

performance.

For those of you who don't know me yet, I'm John Hutchinson -

effectually known as Hutch.

And my site BankingTruths.com has

loads of articles and videos on how to re-engineer and optimize

life insurance policies for wealth building.

Most people researching whole life soon learned that in addition

to the growth that's guaranteed inside your base whole life

policy, there are also dividends, a paid-up additions

rider, a term insurance rider, and of course none

of this works without your premium dollars or

a mutual life insurance company to put these premiums to work.

So let's drill deeper into these different parts of the vehicle.

It all starts with this dark gray, heavy engine block - your

base whole life policy.

This is the core nucleus of performance which all

the other components revolve around. Some of the other aspects

of a whole life policy or riders may seem more appealing to you.

But none can exist without the integral structure of

your base policy.

This other shiny silver souped-up engine over here is your

paid up additions rider.

Sure your whole life vehicle can move without this bolted on

addition, but it

won't be moving very fast. On the other hand, if you design your

car with only a standalone paid up additions rider or stack too

much of this rider onto your car you

will essentially be disqualified from certain races - mainly the

races dealing with favorable taxation.

Now there is a workaround if you want to add a

disproportionate amount of paid up additions rider bolted onto a

small base policy. Going back to our car analogy, you'll

need more overall support from the chassis in the form of a

death benefit to support the added performance components.

Now this can be accomplished two ways -

by adding more bulky based policy with its heavy metal support

or you can add in a streamlined titanium chassis

in the form of a term rider to accommodate a

lopsided amount of paid up additions.

Since the term rider provides this extra death benefit for

a fraction of the cost than adding more base policy would, we've

represented here as the lighter shinier silver

titanium chassis versus the dark gray heavy metal that come

stock with the base policy.

To be clear, the term rider or streamlined chassis

itself is not a performance factor other than the fact that it

provides the necessary support for more high performing PUAs

without the extra drag from adding more heavy base

policy.

Let's talk about dividends.

Since they are not guaranteed and both a base whole life policy

and a PUA Rider can function without dividends

it's best to describe them as a special additive.

This is especially true since the exact amount of dividends

you'll receive will fluctuate regularly throughout the life of

your policy.

It's no accident that there are three different colored beakers

represented here because a dividend is made up of

three distinct components. The interest component based on what

your mutual insurance company earns on its entire portfolio of

investments that year, the company's actual mortality

experience that year versus what was originally projected when

underwriting that particular block of business, and last how

well the mutual company is managing its operational expenses.

It's also worth noting that these additives get measured and

dispensed by your pit crew or the mutual insurance company you

choose. Since your policy will come into a pit stop for this

extra juice every single year, both the quantity and

the quality of these additives will

vary depending on how good your pit crew is. You want a crew

with both a solid historical track record as well as stellar

recent results since their additives will enhance the

performance of both the base policy and the PUA Rider.

The bigger the engine you've built the more dividend additives

your car will be entitled to, assuming that you've

also been putting the necessary fuel or premiums in along the

way. I'm showing two cans of fuel because some

of it goes to the base policy which will be burned much less

efficiently in the short run but still yield respectable

long term results on its own and some of your premium fuel will

be devoted entirely to the PUA Rider where it boosts both

immediate acceleration and long term performance.

Hopefully whatever liberties I took with the

racing industry didn't annoy too many people.

And more importantly that they helped you better understand

what's under the hood of a properly structured whole life

insurance policy designed for banking and retirement.

Before we look at some examples of how differently structured

whole life cars can perform, let me just clarify that

we're assuming here that maximum cash accumulation is a goal

rather than permanent death benefit.

We'll be using policy specs for a 46 year old male with only

a standard rating - that's two down from preferred best.

And this policy is from the low dividend rate environment of

2019.

So the numbers you're about to see are for conceptual learning

only and that your particular policy specs and

the general performance of whole life may

be substantially different depending on when exactly you're watching this video.

What we have here is the exact same size based policy only as we

move from left to right, we're

adding more and more of the components we just learned about onto

our whole life racecar.

Starting on the left, this is your stock ordinary

base whole life policy without any special riders.

Starting in year four, you can tell this particular policy

starts receiving dividends because a death benefit

starts increasing. This is because we've elected to have the

dividends go to buy paid up additions or PUAs

which will enhance the performance of both the cash value and

the death benefit.

To be clear though this car has no PUA Rider,

allowing you to add fuel that goes straight towards increasing

torque from paid up additions.

But even with the base whole life policy you

can elect to have your dividend additives be converted to PUAs

within your policy and they do compound your overall performance

only at a very slow acceleration rate.

You may have read that whole life insurance is a bad investment

because it takes around 14 years to break even.

Well what they're talking about is just a base policy

all by itself and that's what you're looking at right here.

However it is worth noting that even after those early

negative years the sum of all your premiums actually do wind up

getting a total positive return.

And actually once the long and slow acceleration with that heavy

engine block kicks in, the later years start

accelerating very nicely and even make up for the

slow ramping up period.

All right. Let's upgrade our vehicle now to a base

policy with a maxed out paid up additions rider without the

addition of any term rider. Right out of the gate you

can see from the premium numbers that the added torque of that

shiny silver PUA Rider requires significantly

more fuel - more than double the base premium actually.

The normal heavy metal chassis of the base whole life policy is

all that's needed to support up to this size of a paid up

additions rider without any term rider.

That extra fuel seems to be worth it from the obvious boost to

performance. You can see that our break even crossover happens

in year 9 by maxing out PUA rather than in year

14 like with our base policy only.

And the 20 year cash value and IRR

or internal rate of return numbers seem

to be a bit more attractive across the board. You can see too

that the death benefit starts increasing rapidly right out of

the gate due to the instant premium going to paid up additions

which are really like stacking little mini whole life policies

right on to our base policy.

Only the PUAs are completely paid up with one shot.

Let's kick it up another notch by adding even more PUA

Riders supported by the added titanium chassis of a

term rider. You can see that our death benefit starts out now at

five hundred thousand rather than the hundred sixty

six thousand of just our base policy.

Now if that five hundred thousand dollar death benefit was

manufactured with all base policy and no term rider, sure we

could add the extra premium fuel but a big portion of it would

go towards that bulky gray growth engine supported by the

heavier chassis.

And you saw what kind of acceleration that produced.

Instead by creating the necessary death benefits

support using the lightweight titanium chassis of the term

rider, we can add a disproportionate amount of PUA

Rider premium.

Remember our original base premium was just over thirty

five hundred dollars a year and now we could add over eighty

five hundred of additional fuel most of which will go straight

to instant performance from the paid up additions rider.

This brings our cash on cash break even point down to Year 7 and

you can even see down here that by funding a policy this hard

and early almost your entire 30 year premium

shows up in cash value.

Once this happens we like to say that going forward you're

like moving money from one pocket to another pocket.

Now once we're able to engineer this kind of performance out of

whole life it usually becomes attractive enough for

people to start using it as their own bank and retirement

vehicle especially as our forty six year old stops

paying premiums during retirement.

You can see how these performance figures just keep getting

better and better with no further premiums past the 20th year.

And remember this illustration assumes we see static with

2019 low dividend rate.

If interest rates and dividends increase this policy can

actually be much better than what you're seeing here.

Now this car may be designed optimally

but it's not fueled optimally.

Let me show you the next level of whole life insurance

performance that I found very few clients ever

even see from their agents.

We just flip this comparison around so that the souped up race

car you just saw with the term rider allowing for $12000

of premiums for 20 straight years is

now over here on your left. What you're seeing in

the middle is actually the exact same policy by design, but most

people don't realize that the titanium term chassis allows you

to double stack your PDA riders at least in the shorter

term sprint like races.

Now what I mean by that is you can enhance performance even

further by putting in nearly twice as much premium but for a

shorter period of time. You can continue to fuel your car for 20

years but you're front loading it for maximum performance both

earlier and later.

That extra early fuel throughout the first eight years creates

a massive amount of momentum that translate

to better performance across the board.

You can clearly see that our overall internal rate

of return for the first nine years is higher by a staggering

point and a half. Our break even hits by year

five and by year three we're well into the black on all

new premium dollars. Not to mention the negative returns that

come in the first couple of years have been substantially

mitigated by creating this early momentum.

Even our ongoing death benefit has had much larger increases

because of all the PUAs stacking.

All this extra death benefit is shed of mortality costs

past the first year because as

its namesake suggests a paid up addition is bought and paid for

without one initial premium.

From then on it's pure growth.

Now right next to this front-loaded beast of a car is

the exact same vehicle only with inconsistent fuel or premium

amounts added over the years.

Let's face it - life is uncertain and finances fluctuate.

So this scenario shows someone who started

out with the intention of funding to the maximum but couldn't do so

after the second year.

We have them paying just the minimum base premium in years 3

and 4 but actually they have so much cash value that they could

easily borrow against it to pay this based premium if necessary.

Still, by paying even just the base premium the

cash value increases nicely in years 3 and 4 by

considerably more than the premiums paid in year five.

They're paying a premium that would have violated the mech

limits if done earlier but since the driver previously skipped

the opportunity to fully fuel the PUA Rider they're temporarily

allowed increased capacity to

catch it up to some degree.

In year six they go back to paying the previous maximum and then

from year 7 through nine just paying the bare minimum, and again

in year 10 paying the initial maximum allowable premium.

So in five out of the first ten years nothing but

the bare minimum base premium was paid and still when we compare

the IRR with the front loaded optimal policy we're

not really that far behind.

We're talking 30 basis points difference and even less so

by year 20.

Only 13 basis points of separation where

less money went in and much later at that.

If we get all the way out to year 40 there's

only six basis points difference and

that's without doing any kind of allowable death benefit reduction to maximize cash

value growth.

Remember too that this policy doesn't even have a preferred

rating.

So what does this tell us - that there's nothing wrong with

building yourself a big car even if you can't keep feeling

it to the absolute maximum throughout the policy.

Last we're going

to look at a scenario where someone wants the big car but can't

quite front loaded with all the fuel right away. For

comparison's sake we put the optimal front load of policy to

the far left, the flexible premium scenario we just looked at in

the center, and this new ramping up scenario over here to the

right.

Remember all of these are the exact same base policy in

combination of riders.

Notice for the first couple of years from an IRR standpoint this

policy is way behind the other flexible scenario but

by Year 6, it's exactly the same - even though less total

premium dollars went in.

By year 10 it pulls ahead by

as much as 10 basis points and stays ahead in spite of putting

in less total premiums. When we compare both of these

flexibly funded premium scenario to the front loaded optimal

policy neither are ever that far behind.

So again you're best off building a car big enough for whatever

kind of maximum premiums you'll eventually be able to fuel it

with, even if you can't start those premiums right away or

you can't sustain them every year. And of course with either of

these designs you need to pick a mutual company that

allows for a wide range of flexibility with the PUA Rider

funding. Some mandate that you must do your

maximum possible over-funding in the very first year and some

companies have a use it or lose it provision after not

doing the maximum after a year or a certain number of years.

Hopefully this video helped you to better understand how whole

life works with the different riders and funding levels.

Remember it's better the younger and healthier you start it

so grab a spot on our calendar so we can show you the optimal

product specs for you.