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Answering YOUR Cash Value Questions! - The Difference Between the Guaranteed & Non-Guaranteed Column - YouTube
Channel: Insurance Business Concepts (IBC) Global
[0]
Alright today we are going to answer
[2]
some commonly asked questions
[4]
around whole life insurance
[5]
with a specific focus
[6]
on the cash value.
[8]
The questions we receive today
[10]
go hand in hand with each other.
[12]
The first question is
[13]
what is the difference
[15]
between the guaranteed
[16]
and non-guaranteed side
[18]
of a life insurance illustration?
[19]
We're going to walkthrough
[20]
a couple examples
[22]
with different policies
[23]
on a 45-year-old individual
[25]
and also a 50-year-old individual
[26]
to provide some additional context
[28]
or more information.
[29]
But then the 2nd question
[31]
what is the difference
[32]
between the tabular values
[34]
and then the supplemental values
[35]
on the life insurance illustration?
[37]
Have you ever looked
[38]
at a life insurance illustration
[40]
and just felt overwhelmed
[41]
or confused?
[42]
Because there's so many columns
[44]
there's so many different variations
[46]
that look like the same
[47]
the same amount of money
[48]
going into a policy
[49]
but then the actual
[50]
cash values are different
[51]
and you're looking at it and thinking okay
[53]
I just want to know
[55]
what my money will look like
[57]
if I pay X amount of dollars in
[59]
for X number of years?
[60]
We're going to go through
[61]
exactly that
[62]
so let's first look at the tabular
[65]
and supplemental values actually
[67]
so the difference between these 2
[69]
we're going to go through first
[70]
just a verbal overview
[72]
and then look at some actual visuals.
[73]
So the tabular values
[75]
on a life insurance illustration
[77]
will always assume
[78]
that the base premium
[80]
is paid forever.
[81]
For example
[82]
if you have a policy
[84]
that is payable till age 100
[86]
this might be called
[87]
a life paid-up at 100
[89]
legacy 100
[90]
whatever the name of the contract is
[92]
if premiums are payable
[95]
up until the age of 100
[96]
the tabular values
[98]
will always assume
[100]
at least the minimum base premium
[102]
is paid up until age 100.
[105]
Now on that point
[106]
if I have base premium paid forever
[108]
it's not always forever.
[109]
If you have a 10-Pay policy
[112]
and at the name of the contract
[114]
it's a 10-Pay
[114]
meaning premiums are payable
[116]
for a maximum of 10 years
[118]
that base premium will display
[120]
on the tabular values
[122]
a 10-year funding period.
[125]
So going back
[126]
to the legacy 100 example
[128]
you may state okay
[130]
here is a legacy 100 policy
[132]
where I can pay into it
[133]
up until age 100
[135]
but I'm going to pay into it
[136]
for 5 or 10 years and then stop
[139]
that's your actual plan
[140]
that might be what you actually do.
[142]
However the tabular values
[145]
will assume after
[146]
call it your 10 years of funding
[148]
the minimum premium
[149]
is still paid into the policy
[151]
and we're going to look
[152]
at an example on that.
[153]
So any customizations we make
[156]
on the policy
[157]
are typically not included
[159]
on the tabular values
[160]
I often refer to it as a junk column
[163]
on a life insurance illustration
[165]
and you'll see why
[166]
mainly because we can't customize it.
[169]
If we execute
[170]
a reduced paid-up option
[172]
that is not reflected on the tabular details
[174]
or tabular values.
[176]
If we cut the term Rider off on a policy
[179]
that is not reflected
[180]
on the tabular values.
[183]
The guaranteed values
[184]
often look horrible
[186]
on the tabular value side of the illustration
[189]
and the reason why is
[190]
if I have a policy and I plan to
[193]
cut the term Rider after year 7
[195]
in order to continue to have my cash value
[197]
grow at the fastest rate possible
[200]
this will assume that the term Rider
[201]
stays on the policy forever
[203]
and the costs continue to increase
[205]
and then if I'm looking at
[206]
the guaranteed values
[208]
what will happen in this situation
[210]
is that the term Rider costs
[212]
will exceed the guaranteed rate
[214]
and my values will go south.
[215]
You'll see an example on that
[217]
but I don't like that
[218]
when looking at the guaranteed values
[220]
because it's not accurate
[221]
however
[222]
it can definitely cause concern
[224]
for an interested buyer
[226]
if you're interested in a policy
[227]
because
[228]
you want to see what's guaranteed
[229]
and that is an inaccurate reflection
[232]
in my opinion.
[233]
The supplemental values
[235]
are much better
[237]
the supplemental values
[238]
assume any custom funds scenarios
[242]
any tweaks we make to the policy
[244]
for example
[245]
if I take that L-100 policy
[247]
you can pay up to the age of 100
[249]
but you don't have to pay that long
[251]
say after 10 years you stop altogether
[254]
you don't pay another penny into it
[256]
we cut the term Rider
[258]
we go reduced paid-up
[260]
the supplemental values
[262]
will show us exactly that.
[264]
So if you plan
[266]
to pay into a policy for 5 years
[268]
and then stop
[270]
20 years
[270]
and then stop
[272]
the supplemental values
[273]
we'll assume just that
[275]
when we're preparing illustrations
[277]
and you're looking at the numbers
[278]
that's what I want
[279]
that's often what it shows.
[281]
So that is a quick overview
[282]
of the tabular and supplemental values
[285]
let's progress on
[286]
to the differences between
[287]
the guaranteed
[288]
and non-guaranteed side of illustrations
[291]
and here we go.
[292]
The guaranteed side
[293]
reflects the guaranteed rate only
[296]
no dividends are paid.
[297]
One other thing to be aware of
[300]
is often on the guaranteed side
[302]
of life insurance illustrations
[304]
those guaranteed rates will be applied
[306]
but it is also the insurance company
[308]
is also going to assume
[310]
that they are going to charge
[311]
the maximum allowable rate
[314]
for any Riders attached
[315]
for any fees associated with Riders.
[318]
For example
[319]
if you have a term insurance Rider
[321]
attached to a policy
[323]
all insurance companies
[324]
have their current term insurance charges
[326]
and also their maximum allowable charge
[328]
meaning if they want to
[330]
raise the cost of that term Rider
[332]
they can.
[333]
Now do all companies do that?
[335]
Usually no
[336]
it hasn't happened in over 150 years
[338]
but they can
[339]
and the guaranteed values
[340]
will reflect that.
[342]
If you have a company
[344]
that perhaps has
[345]
a PUA [Paid-up additions] Rider fee
[346]
of call it 8%
[348]
but they have a maximum of 10%
[350]
maybe it's much higher than that
[351]
some smaller companies have PUA fees
[354]
with a maximum allowable charge
[355]
north of 20%
[357]
that is heavy when you look at it.
[359]
But the guaranteed side
[361]
of an illustration
[362]
is going to reflect
[364]
the maximum charges
[365]
for any Riders and fees as well
[367]
so not only does it present
[369]
just the guaranteed rate
[371]
which is a worst-case scenario
[372]
also the most expensive
[375]
or making the policy
[376]
as expensive as possible
[377]
so it really paints a great picture
[379]
as far as a worst-case scenario.
[382]
One thing I like to look at
[383]
when I'm looking at numbers
[385]
is if I'm comfortable with this
[387]
the guaranteed values
[388]
on that guaranteed ledger
[389]
of a life insurance illustration
[391]
then I'll be happy with the policy
[392]
especially
[393]
if it's with one of the major mutuals
[395]
because we've always seen it
[396]
doing better than the guaranteed values.
[399]
Progressing on
[400]
to the non-guaranteed side
[401]
so this will always reflect
[404]
the company's current dividend rate
[406]
and then also what their current charge is
[408]
for any Riders
[409]
and current fees on PUA Riders.
[412]
What I'll add before
[413]
we look at the numbers
[414]
is you can run different assumptions
[417]
so for example
[418]
if I have a guaranteed rate of 4%
[421]
and a dividend of 6%
[423]
I can run a midpoint assumption at 5%
[426]
and I can even be creative
[427]
and run different dividend assumptions
[429]
so we can always go
[431]
up to whatever the current dividend rate is
[433]
and then anywhere in between
[435]
the guaranteed floor
[436]
and the present dividend rate
[438]
so we can run conservative projections
[440]
if someone would like to see that
[442]
I like looking at that stuff myself.
[444]
So let's begin
[445]
with the tabular values here
[448]
what we'll look at
[449]
is a 45-year-old male
[451]
now this individual's plan
[453]
is to pay to the policy
[455]
$100,000 per year
[457]
for 5 years
[458]
$500,000 going into the policy
[460]
and nothing thereafter.
[462]
So his plan
[464]
here we go
[465]
$100,000 total
[468]
for 5 years
[471]
and then 0 thereafter.
[474]
Now as we look at this guy
[475]
so this
[477]
represents the tabular details
[479]
this product is a whole life 95
[482]
meaning that premiums
[484]
are payable up until the age of 95.
[486]
So if we take a look here
[489]
what do we notice?
[490]
We see guaranteed and current
[492]
so this also
[493]
provides a partial answer
[495]
to the individual's question
[496]
as far as what's the difference
[497]
between the guaranteed
[499]
and non-guaranteed side.
[500]
Current
[501]
means the current dividend rate
[503]
but what do you see here?
[507]
Funding for 5 years
[508]
there's the $100,000
[510]
but his actual plan
[511]
is to pay 0 in beginning year 6.
[514]
Do we see 0 there?
[516]
No
[516]
we see $10,000 per year.
[519]
The guaranteed cash value
[520]
what happens with it?
[522]
It's climbing up
[523]
but here's what I want to point out
[529]
what happens
[530]
before we actually get to the next page?
[533]
He's getting close to age 80
[534]
he's paying in in this example
[537]
$10,000 per year
[538]
what's happening to his cash value?
[541]
Slowing down
[542]
and look at this
[544]
years 34 and 35
[546]
it actually goes down.
[548]
So why does it start to go down?
[550]
When we scroll down further
[553]
it really comes down
[555]
and then the death benefit blows up
[556]
it functions almost like a universal life policy
[559]
when those go south.
[561]
The reason why
[562]
is again this represents
[564]
the tabular values
[565]
which does not represent
[567]
any customizations
[569]
we attach to a policy
[570]
or we make after the fact
[572]
of starting a policy.
[574]
For example
[575]
if an individual's plan
[577]
is to pay in for 5 years
[578]
and then nothing thereafter
[581]
what we would do is (1)
[584]
stop the payments
[585]
so it's out of pocket is 0
[587]
but also after year 7
[591]
we'd execute a term reduction
[594]
and reduced paid-up option
[596]
which would eliminate
[597]
the premium altogether
[599]
cut the term Rider
[600]
and now all of the guaranteed rate
[602]
or if I look at the current values
[604]
dividends are kicked back into cash value
[607]
the term Rider is gone
[608]
there's no drag on the policy
[609]
and things look like
[610]
what they should look like.
[612]
Let's take a look at that
[613]
so here are the tabular values
[618]
let's take a look
[619]
at a ledger statement
[623]
which reflects just the
[624]
non-guaranteed values.
[627]
So what do we see here?
[629]
We see the customization
[631]
included on this policy
[634]
net out of pocket
[635]
$100,000 per year for 5 years
[638]
nothing thereafter.
[640]
Base premium over here
[642]
$10,000 years 1 through 7
[646]
during the 1st 5 years
[647]
I'm paying that
[648]
I'm paying in $100,000 total
[650]
of which $10,000 of that
[652]
is directed toward my base premium.
[654]
With this product the base premium
[656]
begins coming back to cash value
[657]
year 2.
[659]
What about years 6 and 7 though?
[661]
It's still due
[662]
but you're not paying it in this example
[664]
what's happening here
[667]
is the insurance terminology
[669]
is a premium offset
[671]
and what this means
[674]
is we elected to have the
[675]
dividends and the guaranteed rate
[677]
cover that base premium for us
[679]
so the insurance expenses are covered
[681]
the premium
[682]
and the cost of the term Rider
[685]
and then anything left over
[686]
is kicked back into cash value.
[688]
Up until year 8
[691]
at that point in time
[694]
what do you notice about the premium?
[695]
It's gone.
[697]
What do you notice about the term Rider?
[699]
It's gone.
[700]
Death benefit also drops a bit
[702]
but then again no payments
[706]
cash value grows
[708]
that is based on the
[708]
non-guaranteed values.
[710]
Shall we look at the
[711]
custom guaranteed values?
[713]
It's very beneficial to look at here
[716]
very important to be transparent with this.
[718]
Do you have to look at every sheet
[719]
that we're going through here?
[721]
No
[721]
but it definitely helps to understand
[724]
what you're looking at
[725]
especially when you have a full illustration
[727]
because this is going to provide
[728]
the information that you want.
[732]
So we've got the custom example
[735]
$100,000 for 5 years
[736]
this is what the individual wants to do
[739]
and what do you notice here?
[742]
On the left
[743]
guaranteed values
[745]
this is actually
[747]
assuming a guaranteed rate of 3%.
[751]
Then we see current values
[753]
this is based on the company's
[754]
present dividend rate of 5.65%
[758]
and then you see intermediate
[760]
which assumes a rate in between the 2
[762]
so that'll be about 1.325
[765]
on top of 3%
[767]
so call it a dividend of 4.325%.
[775]
Okay, so that gives you a nice
[778]
conservative assumption as well
[780]
in the event dividends come down.
[782]
But here's what I like
[784]
is now we get the
[785]
actual guaranteed values
[786]
worst-case scenario
[788]
$100,000 for 5 years
[790]
assuming the guaranteed rate of 3% only
[793]
and the maximum allowable charge
[796]
for that term cost
[797]
where it will hurt the individual the most
[800]
is years 6 and 7.
[802]
Now if you see your values
[804]
continue to go up
[805]
when a premium here
[807]
is technically still due year 6 and 7
[809]
because it is
[810]
but its values are still going up
[812]
based on the guaranteed
[813]
which is the guaranteed values
[814]
the worst-case scenario assumption
[817]
that is a fantastic sign
[819]
the policy is designed properly.
[821]
If you have a hybrid based premium
[823]
that won't work
[824]
or you'll see it come down
[826]
but after the reduced paid-up option
[828]
is executed
[830]
cash value continues to appreciate
[833]
death benefit does not
[836]
the reason why
[837]
is if you're not paying anything
[838]
into the policy
[840]
no premium or PUA payments
[842]
and there's no dividends
[843]
being applied to the policy
[845]
the guaranteed
[846]
that you have a guaranteed death benefit
[848]
it'll stay at that forever.
[850]
If you're not making payments
[852]
and dividends are being paid
[854]
like the 2 examples on the right
[856]
then you'll see your death benefit
[858]
will appreciate.
[859]
Here we go
[860]
same thing
[861]
reduced paid-up option
[863]
and term reduction
[865]
that's your death benefit
[867]
and then here's your cash value.
[872]
So we looked at the tabular values
[874]
which did not look good
[875]
especially when looking at
[876]
the guaranteed values
[878]
then we looked at the ledger statement
[880]
which was a reflection
[881]
of the non-guaranteed values
[883]
but the ledger statement
[885]
I'm sorry is the supplemental value
[887]
so that was step 2
[888]
that showed the customization
[890]
where we cut the term Rider
[891]
after year 7
[892]
eliminated the base premium
[894]
and then we looked at
[895]
a custom guaranteed value report.
[897]
And this company
[898]
puts it all side by side here like this
[900]
which is great
[902]
as we look at another example
[903]
some companies do not do that
[905]
or we have to actually break it up.
[908]
So here we go
[909]
this is on a 50-year-old male
[911]
a legacy 100 policy
[913]
so he can pay into it
[915]
up until the age of 100
[917]
however his plan
[920]
at the age of 50
[921]
is to pay in $100,000 per year
[926]
for 10 years
[929]
and then stop
[930]
not a penny in thereafter.
[932]
So here we go
[934]
there's your base premium
[935]
very close to 10%
[937]
but here's what I want to look at
[938]
tabular values.
[941]
If this is you
[943]
what are you going to think?
[944]
You know I wanted to see
[945]
$100,000 per year for 10 years
[947]
but I look at this contract premium
[951]
what happens in year 11?
[954]
Steve, it still shows me $10,776
[957]
like I told you
[958]
I don't want to have to continue
[960]
to make those payments.
[962]
If I just tell you
[962]
oh you don't have to actually
[964]
we can elect different options
[965]
you might follow
[966]
but if you could see it
[967]
it is much much better.
[969]
Before we progress on
[970]
here's what I want to look at here
[972]
(1) we see the cash value
[975]
breaking even just about year 5
[977]
which is good
[978]
but as I look at this guy
[980]
those are the non-guaranteed values
[982]
on the left are the guaranteed values
[985]
now there's a big issue here
[987]
as there always will be
[989]
when I look at the tabular values
[992]
what do you notice
[993]
about your death benefit?
[994]
Year 13 to 14 it implodes
[998]
so it's kind of hidden in the design here
[999]
because we've got
[1000]
so many things going on
[1002]
but the term costs
[1003]
became too expensive
[1005]
you see your death benefit
[1007]
just dropped down to that $2,500,000 figure
[1010]
this is not optimized
[1012]
from a guaranteed
[1013]
cash value standpoint at all.
[1016]
So what we would actually have to run here
[1018]
is an additional report
[1020]
looking at the supplemental values
[1022]
but now looking at the guaranteed
[1023]
and non-guaranteed side.
[1025]
Here we go
[1026]
so same thing here
[1028]
exact same product
[1032]
what do you notice?
[1033]
You've got $100,000 per year
[1035]
for 10 years going in.
[1036]
Beautiful.
[1037]
There's your net cash value.
[1040]
Fun stuff, right?
[1042]
Breaking even year 11 in this example
[1045]
okay not bad
[1047]
for the guarantees.
[1049]
Annual surrender
[1050]
this represents
[1052]
your base premium that is still due
[1054]
but you're not paying it in this example
[1056]
so I still have a premium that's due
[1058]
but again this is
[1059]
a premium offset option
[1061]
allowing the policy to pay for itself
[1063]
to the guaranteed rate and dividends
[1067]
and then what we did
[1069]
because again this is the
[1073]
supplemental values
[1074]
there we go
[1075]
reduced paid-up
[1077]
year 16.
[1079]
The supplemental values
[1080]
will reflect a reduced paid-up option
[1082]
exercised
[1084]
there's your cash value
[1085]
continues to grow
[1086]
no more term column
[1088]
because we chopped it off
[1089]
the term Rider
[1090]
no more annual premium column
[1092]
because a reduced paid-up option
[1094]
gets rid of it altogether
[1096]
and our cash value
[1097]
just continues to grow.
[1098]
So then what we would do
[1101]
is look at the same thing
[1103]
with the current values
[1108]
and this looks much better
[1109]
there's your break-even
[1110]
just about year 5
[1111]
doing what it should
[1112]
and continuously
[1114]
appreciating over time
[1115]
everything's exactly the same
[1116]
on this example.
[1118]
A lot of information here
[1119]
now what we do like to do is
[1122]
put this all on a simplified spreadsheet
[1124]
so you can see it side by side
[1127]
supplemental guaranteed
[1129]
supplemental non-guaranteed
[1130]
makes it much more transparent
[1132]
easy to follow.
[1133]
If you're in the business
[1134]
and would like to learn how to do that
[1136]
in a time-efficient manner
[1138]
because you may be looking at that
[1139]
and thinking hey that takes a long time
[1140]
to put together
[1141]
it does
[1143]
but we do have our ILS agent academy
[1146]
that does provide information on
[1147]
how we create that
[1149]
and we've got our mastermind calls
[1150]
that walk through it as well.
[1152]
If you're interested in a policy
[1153]
if you're going through this information
[1155]
and you'd like to see some examples
[1157]
or work with us
[1158]
or just have a conversation
[1160]
please feel free to reach out anytime
[1161]
this is something we like to cover
[1163]
with everyone we work with
[1165]
especially if you have questions
[1166]
or like to dig deep.
[1168]
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