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7702 What's Changing: Highlights of the Main Changes with Whole Life Products | IBC Global - YouTube
Channel: Insurance Business Concepts (IBC) Global
[0]
So what is changing
[1]
with whole life insurance
[2]
when it comes to the 7702 update?
[5]
A lot of things.
[6]
Some for better
[7]
some for worse.
[8]
In this video
[9]
we are going to go through
[10]
2 topics when it comes to
[11]
whole life insurance
[13]
and questions we received
[14]
around these 2 topics.
[15]
The question that we received is
[17]
what will change?
[19]
The first topic or subject
[20]
I'd like to touch on is policy design
[23]
one of my favorite things.
[25]
So when it comes to policy design
[27]
specifically with the
[28]
major mutual carriers
[30]
there's been no change.
[32]
Meaning if I want a policy
[33]
where I'd like to pay
[34]
in any amount of money
[36]
often the lowest
[37]
I can drive that base premium
[39]
is about 10%
[41]
of the total payment
[42]
or total desired payment.
[44]
So what I mean when I say that
[46]
is this has been the case for a long time
[48]
and still is the case
[49]
if you wanted the ability
[51]
to pay in up to $100,000 per year
[54]
but you did not want to get a bill
[56]
for $100,000 per year
[57]
you could literally
[59]
commit to the premium piece only
[62]
the $10,000 per year
[64]
that could even be paid monthly
[65]
and then 100% at your discretion
[68]
you can pour excess funds
[70]
into PUAs [Paid-up additions]
[71]
hyper growing the cash value.
[73]
The most aggressive we could go
[74]
with those top companies
[76]
is that 10/90 split
[77]
there's been no change there
[79]
nothing that we've seen
[80]
I've talked to companies
[81]
about this a number of times
[82]
and that has remained the same
[84]
which is nice.
[85]
Because I can still design a policy
[88]
for minimum expenses
[89]
minimum compensation
[91]
maximum consumer value
[92]
which if someone's interested in that
[94]
that's how a policy
[95]
should be designed in my opinion.
[97]
What I will state
[98]
is in respect to the 7702 change
[101]
as often we receive questions
[103]
around hey should I go
[104]
with a 10/90 split
[106]
or should I go with a 30/70
[108]
or a 60/40
[110]
whatever it might be
[111]
and a 10/90
[114]
always delivers the strongest
[115]
guaranteed values
[117]
and based on actual history
[119]
real performance
[120]
it has always delivered
[121]
the strongest net cash values.
[124]
What we've seen
[125]
in respect to how companies have
[127]
repriced their products
[128]
to comply with this new change
[130]
because some companies
[131]
have made a number of adjustments
[132]
not just their guaranteed rates
[134]
we've seen that a 10/90 design
[136]
is even more favorable
[138]
with this 7702 change
[140]
than what it was before.
[141]
And what I mean
[142]
when I say more favorable
[144]
is comparing it to policies
[146]
that also comply
[148]
with the new 7702 update
[150]
but with a higher base premium
[151]
so a lower base premium
[153]
if your goal is maximum cash value
[156]
that'll do the trick.
[158]
But of course
[158]
we can always look at different options
[160]
because
[161]
it's always good to see options.
[162]
The one thing that did change
[164]
one of the things that changed
[165]
quite a bit
[166]
guaranteed rates.
[168]
So since the 1980s
[171]
guaranteed rates
[172]
with whole life insurance policies
[174]
have been at 4%
[176]
with most companies out there.
[178]
That's gone
[180]
as of 2022
[181]
it'll be gone with all new contracts.
[183]
If you have purchased a product
[184]
with a 4% guarantee
[186]
or you make a purchase
[187]
up until 2022
[189]
so during 2021
[191]
you can still lock in
[191]
the guaranteed rate of 4%
[193]
if that makes sense for you
[195]
if that's the best option
[196]
it's always good to compare
[198]
and contrast
[198]
because there are advantages to this
[200]
but that's been in force
[202]
since the 1980s.
[203]
Now what I want to touch on next
[205]
is something a bit technical
[207]
but it is important.
[208]
The guaranteed rate
[210]
on a whole life insurance product
[212]
does impact the
[213]
MEC [Modified Endowment Contract] limit.
[215]
So we have here
[216]
guaranteed rate of 3%
[218]
MEC limits increase by about 40%
[221]
Let's start with the 4% guarantee
[223]
that has been around for a long time.
[225]
If I take an age 40 male
[236]
and that 40-year old says hey
[238]
I want the ability to pay in
[240]
up to $100,000 per year
[242]
we would need a MEC limit of what?
[245]
$100,000.
[246]
What has a direct relationship
[248]
to the MEC limit
[249]
on a life insurance policy?
[250]
Because you can set the MEC limit
[252]
wherever you'd like
[253]
the MEC limit
[254]
has a direct relationship
[256]
to an individual's age
[257]
that's why I specified 40 years old
[260]
their age
[260]
and also death benefit.
[263]
So based on a 4% guarantee
[266]
the needed death benefit
[272]
is that guy right there
[273]
$2,800,000
[275]
and because most companies
[276]
have had a 4% guarantee
[278]
that's where we have seen
[280]
all companies need to require
[282]
about the same death benefit
[284]
for the same MEC limit.
[285]
Meaning
[286]
a 40-year-old male
[287]
with MassMutual,
[288]
Guardian, New York Life
[289]
any company out there
[290]
if they have a 4% guarantee
[292]
I'm going to need about
[293]
$2,800,000 in death benefit
[295]
in order to obtain
[296]
that $100,000 MEC limit.
[298]
Now
[299]
guaranteed rates are adjusting
[301]
companies have the choice
[303]
to set their guaranteed rate
[305]
anywhere between 2%
[308]
to 3.75%.
[311]
Some companies
[312]
have filed guaranteed rates
[315]
of 3% across the board
[317]
so for example
[318]
New York Life and Guardian
[319]
has filed a 3% guaranteed rate
[322]
for all of their products.
[324]
MassMutual
[325]
has filed guaranteed rates
[326]
between 2% and 3.75%
[329]
depending on what
[330]
whole life insurance product you select
[332]
so that's where having awareness
[334]
(1) around the actual guaranteed rate
[337]
but (2) around the MEC limit
[339]
with a particular product and company
[341]
is important
[342]
and it will not be an
[343]
apples-to-apples comparison
[345]
in all cases
[346]
like it has been
[347]
for a very long time
[349]
since I was born in the 80s.
[351]
So if we
[353]
isolate the guaranteed rate though
[355]
what I want to touch on here
[356]
is how it impacts policy performance
[358]
lower guaranteed rates
[360]
will result
[361]
in lower guaranteed values
[363]
so when I compare
[364]
a whole life insurance policy
[366]
on an individual
[367]
not a bank-owned life insurance policy
[369]
like we've looked at in past videos
[371]
but an individual policy
[373]
the policy with the guaranteed rate of 4%
[376]
did produce
[376]
stronger guaranteed cash values
[379]
and internal rates of return
[380]
than what the 3% guarantee does
[382]
which makes sense.
[384]
But
[384]
here's really what I want to touch on
[387]
is if I have a company
[389]
that has a 5.65% dividend
[392]
like Guardian for instance
[393]
that's their total dividend rate
[395]
for 2021
[396]
if you were to Google search that
[398]
that's what would pop up.
[399]
Now
[401]
it used to be a 4% guarantee
[403]
which means the surplus was 1.65%.
[406]
Here's where I'm going with this
[408]
3% guarantee
[410]
means the declared surplus rate
[412]
is now 2.65%
[415]
and why that's important
[417]
is when you look at the
[418]
dividend column
[419]
on a life insurance illustration
[420]
with any company
[422]
that annual dividend column
[424]
does not
[425]
let me emphasize this point
[427]
does not include
[429]
the guaranteed rates.
[431]
Meaning that dividend column
[432]
only reflects the surplus piece
[435]
even though it says annual dividend
[436]
and I would think hey
[437]
it's the company's dividend rate
[439]
I wish it was like that
[440]
but it's not
[441]
for a number of reasons.
[443]
So let's take a look at
[445]
an illustration here
[446]
side by side
[446]
so we can actually see the comparison
[448]
before we do that
[450]
what you will find
[451]
is the MEC limits
[452]
because the guaranteed rates
[454]
have dropped
[455]
if I have a 3% guarantee
[456]
I get about a 40% increase.
[458]
So for example
[460]
with the 3% guarantee
[463]
for the same age 40 male
[465]
so same scenario here
[467]
same $100,000 MEC limit
[470]
we're going to assume
[470]
that's exactly the same
[472]
the death benefit I need
[474]
is not $2,800,000
[476]
with a 3% guarantee.
[478]
If I go with a $2,800,000 death benefit
[481]
I'd actually have
[482]
a $140,000 MEC limit
[484]
so the death benefit needed
[487]
for the individual that says hey
[488]
the death benefit
[489]
right now I don't care about
[490]
I want maximum cash value
[495]
we would need a death benefit
[496]
just north of $2,000,000
[498]
that gives a 40-year-old male
[500]
a $100,000 MEC limit
[503]
based on a 3% guarantee.
[506]
If that doesn't make sense
[507]
please comment
[507]
in the comment section below.
[510]
So overall
[511]
weaker guarantees
[512]
but you will see
[513]
greater long-term potential
[515]
companies have been able to
[517]
kick down their insurance expenses
[519]
their reserve requirements
[520]
because of this change
[521]
it has helped them
[522]
and they are trying to
[523]
give that back to the consumer as well.
[526]
So let's take a look here
[528]
what I want to look at
[529]
is the actual illustrations
[531]
let's begin with the old product.
[534]
So this is a product
[535]
with a guaranteed rate of 4%
[537]
and everything is apples-to-apples
[540]
4% guarantee
[542]
40-year-old male
[543]
net death benefit $2.800,000
[546]
that gave him
[548]
the $100,000 MEC limit.
[550]
Let's look at the
[552]
new product
[553]
with a 3% guarantee
[555]
here's how you can tell
[557]
that's the needed death benefit
[558]
$2,050,000.
[560]
But let's go back to the old one here
[562]
because here's what I want to touch on
[565]
old one
[566]
this will be really interesting
[568]
if you're looking to open a policy
[570]
or if you're in the business
[574]
where is your money going?
[575]
The question I always ask
[576]
is hey if I'm you
[578]
Mr. Consumer
[579]
and I'm looking to pay in
[580]
potentially $100,000 per year
[582]
or if it's $10,000 per year
[584]
whatever
[585]
your money
[586]
going back to policy design
[588]
can be directed
[589]
toward the premium piece
[592]
there we go
[593]
or the PUA piece.
[595]
So this is a company
[596]
that actually allows us
[598]
to go 11X the base premium
[600]
technically
[601]
wherever you set that minimum premium
[603]
they will allow you to 10X that figure
[606]
the premium figure in PUAs
[609]
for a net of $100,000.
[612]
So I optimized that one as low
[614]
as we legally could
[615]
based on the
[616]
insurance company limitations
[617]
just juice the thing.
[619]
But my point here
[620]
minimum premium
[622]
maximum cash value
[623]
old product.
[624]
As we look at this guy
[626]
what do we notice?
[628]
The dividend column
[630]
here's what I want to isolate
[632]
end of year dividend
[635]
if this is the old product
[636]
with a 4% guarantee
[638]
this column reflects what?
[642]
This is fun stuff, isn't it?
[644]
The surplus.
[648]
And if I have a 4% guarantee
[651]
what's the surplus?
[654]
1.65%.
[657]
So let's do this
[660]
all I want to do
[661]
is take note of the dividend here
[667]
year 2
[668]
when the first dividend is paid?
[671]
In year 20
[673]
that's too low.
[674]
Let's go year 15
[677]
so what do you see there?
[678]
The dividend column year 1
[680]
reads $3,886
[682]
in fact I'm gonna do this
[683]
you'll see why.
[685]
Did I say year 1?
[687]
I meant year 2
[688]
and then year 15 it reads what?
[694]
$5,947.
[696]
So let's compare that to the new one
[698]
cash values by the way
[699]
old product
[700]
breaks even
[701]
between years 3 and 4
[703]
and year 15
[705]
$772,000 almost $773,000.
[709]
New product
[711]
first let's validate the design
[713]
are all things equal?
[714]
So not in terms of the death benefit
[716]
but in terms of a
[717]
minimum premium
[719]
maximum cash value allocation
[721]
minimum death benefit
[722]
for the $100,000 MEC limit
[724]
and the answer is yes.
[725]
Here's how you can tell
[728]
there's your premium
[734]
there we go
[736]
there's your PUA
[740]
identical figures
[741]
I might be off by a penny
[742]
but that doesn't matter.
[744]
Same $100,000 per year going in
[747]
I need less life insurance
[749]
so I need a lesser term Rider
[750]
so the term insurance costs
[752]
are a little bit less
[753]
the PUA Rider fee however
[755]
is higher with this particular company.
[759]
Some companies have raised it
[760]
some have not
[761]
it's good to have awareness on that
[762]
we're going to touch on that
[763]
in future videos.
[764]
But as we look at this guy here
[767]
design is identical.
[772]
Let's scroll down
[775]
dividends
[776]
here's what I want to look at
[782]
so what do we notice here?
[785]
Dividend year 2 $5,806
[789]
and what was it
[790]
in the first example?
[792]
$3,886 now it's $5,086
[797]
$5,086 so it's higher.
[800]
How about year 15?
[803]
When the other one is?
[808]
$16,872
[810]
What was it in the last one?
[812]
All things are equal here
[814]
same illustration
[815]
same dividend crediting rate
[819]
significantly higher
[820]
why is that?
[822]
Well the guaranteed rate is what?
[825]
And I'm going through this slowly
[827]
but I want to be thorough here
[829]
guaranteed rate is 3%
[832]
total dividend interest rate is 5.65%
[835]
and this dividend column
[836]
reflects what?
[838]
The total surplus.
[840]
So what would the surplus
[841]
crediting rate here be?
[843]
1.65% like the last one in green?
[847]
No, 2.65% so it's higher
[853]
and you have a lower
[854]
insurance expense
[855]
which helps that dividend move
[857]
at a faster pace.
[859]
So the potential
[860]
with this new update
[862]
is really based on dividends
[864]
and the non-guarantees
[865]
but it does exist
[866]
I mean it's not just
[867]
all dividend sensitive
[868]
they did reduce their insurance expenses
[871]
which should really keep
[872]
the integrity of the policy intact
[875]
and the guaranteed cash values
[876]
that rate
[877]
still exceeds the insurance expenses
[879]
so I walk away with more money
[880]
at the end of the day no matter what.
[883]
But look at this
[885]
about 84% upfront
[887]
instead of 88% to 89%
[890]
breaking even
[891]
between year 4 and 5
[892]
really year 5 in this example.
[894]
Now year 15
[895]
what did you have in the last one?
[897]
About $772,000
[899]
whereas this guy here is at $794,000.
[901]
If we look at the guarantees though
[903]
it'll be a different story
[905]
where you'll see the old product
[906]
have stronger guarantees.
[908]
So like anything
[910]
pros and cons whenever an update occurs
[912]
but what I have noticed
[915]
specifically with the major mutuals
[917]
because that's who we
[918]
work with more than anyone else
[920]
is where they are making adjustments
[922]
to protect themselves as a company
[925]
at the same time
[926]
they are giving that back
[927]
to the policyholders
[929]
really to maintain
[932]
the fact that they're
[933]
one of the major mutuals
[934]
and can stay at the top
[935]
which you have to do that
[937]
in this industry.
[938]
But I know that was a lot of information
[940]
if you enjoyed it
[940]
please hit the like button
[941]
subscribe for more
[942]
and as always
[944]
I hope this helps.
[944]
Thanks so much.
[949]
Hey guys Steve Parisi here.
[951]
If you enjoyed the content you just saw
[954]
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[955]
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[956]
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[957]
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[958]
If you'd like more information
[960]
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[963]
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[964]
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[966]
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