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HOW TO Read a Life Insurance Illustration | IBC Global, Inc - YouTube
Channel: Insurance Business Concepts (IBC) Global
[10]
Reading a life insurance illustration.
[13]
So if you've ever been presented聽
a life insurance illustration
[16]
there are a lot of columns
[18]
and you might feel like you're聽
reading stereo instructions sometimes.
[21]
Now there are columns that are definitely
[24]
more important than others,
[25]
such as the, net cash value,聽
the net death benefits,
[29]
how much am I paying in?
[31]
my annual outlay, my premium.
[33]
But while some columns
[35]
may not be as important as others,
[38]
it's still good to know them
[39]
or at least have a source
[40]
to better understand the columns.
[42]
Because frankly it is our聽
money going into the product.
[45]
I want to have an idea
[47]
or have someone that can explain it to me properly
[50]
in the event I want to know or I need to know.
[53]
So let's get into it.
[54]
We're going to look at 2 illustrations聽
here with different companies.
[58]
We took the company's names聽
off of these illustrations
[60]
but let's have some fun.
[63]
So first we're going to look at a 50 year old male
[67]
who's paying in $100,000 per year for 10 years.
[71]
That's a total of $1,000,000.
[74]
So if you're ever paying money into a policy
[76]
my question would be to you,
[79]
if we flip positions,
[81]
where is my money going?
[82]
Steve,
[83]
if I'm giving you $100,000 where聽
is it going within this policy?
[87]
So at the end of the day
[88]
money can go toward one of two areas.
[92]
The premium or the PUA聽
[Paid-up Additions] component.
[96]
The premium first and foremost does what?
[100]
Purchases me whole life insurance,
[102]
a death benefit
[103]
and then eventually builds聽
cash value beginning year 3.
[107]
In this particular example you'll see just that.
[110]
Whereas PUA dollars immediately聽
accelerate the cash value growth.
[114]
There is
[116]
a term insurance rider on this policy as well.
[121]
The purpose of a term rider
[123]
is that this is a cheap or cost effective method
[127]
to raise the death benefit,
[129]
which primarily raises the MEC limit.
[131]
So now I've got a permission slip to聽
reduce my insurance premium further
[135]
and plow more money into the cash value.
[138]
Alright so let's go through this.
[140]
Couple components here,
[141]
one; there's $10,715,
[146]
this is my base premium.
[149]
So it purchases me a whole聽
life death benefit of $440,000
[156]
and that is my premium component.
[158]
Now in gold I see this $1,320,000
[163]
that is a term insurance rider.
[167]
And then to the right you see this premium
[170]
of just under $9,300.
[173]
That is not the cost of the term rider,
[176]
it does not cost $9,300.
[179]
In this particular example
[181]
there is right around $1,000 or so
[184]
that satisfies the term cost.
[186]
The rest of that rider goes towards PUA's.
[189]
It is a blended PUA rider,
[191]
consisting of PUA's accelerating聽
the cash value growth
[195]
and a one-year renewable term rider.
[197]
There are reports which we often just disclose
[200]
and in full illustrations there as well
[203]
that displays the full term rider cost
[207]
and what it renews to each year as well.
[210]
Then we've got in green
[215]
$80,000
[216]
that is a pure PUA component.
[219]
That's why we see n/a here
[222]
and that's my PUA rider.
[223]
So let's go through the different columns here.
[228]
Year
[230]
and age
[231]
and year,
[232]
pretty straightforward.
[233]
What I will say is
[235]
year 1 age at the end of the year is 51
[239]
this illustration is on a 50 year old male.
[242]
This particular company聽
displays at the end of each year
[245]
how old the individual will be.
[248]
Why I state that is,
[249]
the next example we're going to look at
[251]
states the age at the beginning of each year.
[254]
Good to be aware of that聽
little uh difference there
[257]
with insurance companies.
[259]
Annual outlay $100,000 per year.
[262]
So what this reads is
[264]
everything I'm paying in
[266]
my total out of pocket $100,000
[269]
consisting of the premium, PUA
[271]
and term rider,
[272]
everything lumped together,
[273]
that's my net out of pocket.
[276]
Same thing as two columns to the right,
[279]
the annual net outlay, exact聽
same thing in that respect.
[283]
Now the next column
[286]
let's scroll up here,
[288]
annual surrender
[290]
what this represents is as follows.
[293]
The base premium was what?
[297]
$10,700 and change
[299]
what you'll see is while I am paying,
[302]
the annual surrender is zero.
[306]
Beginning year 11
[309]
we see a surrender of $10,716.
[314]
Now when you hear the word surrender
[316]
what pops to mind?
[318]
Surrender fees, charges,
[320]
typically something that's not good here.
[323]
Am I penalized?
[324]
The answer is, no,
[326]
kind of.
[327]
what this represents here
[328]
is your base premium of $10,716 that is still due
[334]
but you're not paying it.
[336]
What's happening here is the聽
policy is paying for itself
[340]
through dividends and interest
[342]
where you're out of pocket,
[344]
you'll want to refer to聽
the net outlay column here,
[347]
is still zero.
[348]
That means you're paying聽
nothing out of pocket each year.
[351]
That premiums still do
[353]
but the policy is paying for it on its own.
[357]
Then we see "annual dividend beginning year".
[360]
So this company on this illustration
[363]
has a dividend rate of 6%.
[368]
They have a guaranteed rate of 4%.
[374]
Where I'm going with this is
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when you see a dividend column聽
on a life insurance illustration
[380]
it often does not reflect the guaranteed rate,
[383]
only the dividend,
[384]
which is technically the surplus.
[388]
Everything above the guarantee,
[389]
so in this case,
[390]
guarantee of 4%
[392]
total dividend of 6%
[395]
gives me a difference of 2%,
[398]
that's my surplus.
[399]
So the point here is this dividend column
[402]
represents only a 2% surplus
[406]
not the company's total dividend rate.
[408]
That can be confusing as we聽
dig into these illustrations.
[411]
Perhaps you've done that in the past to say,
[413]
"hey the company's got a six percent dividend rate
[416]
this thing is not even 2%"
[417]
like "what is going on?"
[419]
it's because the guarantee is not聽
included in the dividend column.
[424]
Then we've got the basic聽
policy cash value end year.
[428]
This is what I will often聽
refer to as a useless column.
[432]
The reason why is it represents
[435]
if you only paid the base premium of $10,716
[442]
and that only yielded the guaranteed rate of 4%
[446]
no dividends were added
[448]
you added nothing in the PUA's, no riders
[450]
nothing like that,
[451]
again you just pay the base premium
[453]
and you only receive the guaranteed rate of 4%
[456]
here's what the cash value would look like.
[460]
First two years overcharges聽
me for the death benefit
[463]
that's why I see nothing,
[464]
beginning year 3 comes back
[467]
and capitalizes over time.
[470]
Next column,
[472]
cash value of additions and year.
[475]
So what this represents is money聽
you add into the PUA component.
[480]
So remember we added what聽
$80,000 into the pure PUA
[485]
and then you also had that combination
[487]
of money going towards PUA's聽
and the term rider expense.
[491]
So this displays cash value of additions.
[494]
Money you add to the cash聽
value outside of the premium
[498]
this does not in any way, shape or form reflect
[502]
dollars you add to the base premium component
[506]
$86,000,
[508]
year 2 $176,000.
[510]
It does reflect the interest
[512]
any dividends in interest
[515]
added on to the policy as well
[517]
in addition to your payments to.
[520]
Net cash value,
[522]
this is your money column
[525]
what you have access to as the policy grows.
[528]
That's really what we want to track
[529]
as far as the cash value growth over time.
[532]
Then we've got "total paid聽
up additions beginning year".
[536]
This is a valuable column to be aware of
[538]
because typically when we hear聽
paid up additions we think what?
[542]
PUA rider
[544]
money that I can direct towards the cash value.
[546]
Here what it represents
[548]
is the amount of paid-up additional聽
death benefit life insurance
[553]
that is purchased from your cash editions.
[556]
So let's go through this slowly here.
[560]
If you add or a 50 year old聽
male adds $86,000 into PUA's
[565]
into a cash value add
[567]
that will purchase him
[571]
another $261,000 of whole聽
life insurance death benefit.
[575]
Remember those models where we talk about
[577]
your money can go toward premium or PUA's.
[581]
PUA's accelerate cash value
[582]
but if we put $1,000 into PUA's
[585]
I'll see it show up in cash
[586]
but I also might get another $3
[589]
or I should say $3,000 in death benefit
[592]
that's exactly what we're seeing here.
[594]
We pay in $86,000
[595]
you see just about 3x show up
[598]
in added whole life insurance death benefit.
[602]
Amount of one year term
[605]
this is a term rider that聽
gradually decreases as time passes.
[612]
The main reason we attached聽
this term rider to this policy
[617]
is it is a cheap way to again聽
raise the death benefit.
[623]
Here's our net death benefit in the far right
[625]
just under $2,000,000.
[627]
Why would we want to add $1,300,000
[630]
in term insurance to this policy?
[633]
Well the reason why
[635]
you'll see disclosed on the聽
bottom right hand corner
[640]
under the MEC limit $100,000.
[643]
So this individual wanted the ability
[645]
to pay up to $100,000 per year.
[648]
So we solved for the minimum death benefit
[651]
just about $2,000,000
[653]
to obtain that $100,000 MEC limit.
[656]
What that accomplished,
[657]
minimum death benefit
[658]
equates to minimum insurance expenses.
[662]
Based off of that $100,000 payment.
[663]
I know this can be complex.
[666]
Next page
[669]
very similar here in respect to the columns.
[671]
The only difference is that we looked at a
[674]
reduced paid up option
[677]
and all that did
[678]
was kill the surrender column.
[680]
So now we see no annual surrender here.
[684]
Meaning that premium of $10,716 is gone.
[689]
Once we go reduced paid up,
[691]
even if we want to continue to pay into it
[693]
we no longer can do so.
[695]
So the disadvantage is we聽
cannot add money to the policy.
[699]
The advantage is that premium is gone,
[701]
so we remove what I'll refer to as the drag,
[704]
we cut the drag so now all聽
dividends and interest can be
[708]
kicked back to into the cash聽
value which is attractive.
[712]
Let's look at another company here.
[715]
All companies are similar but have聽
things termed a little bit differently.
[719]
There we go a little too fast.
[723]
Alright, so different insurance company,
[728]
same 50 year old male
[730]
but only paying in $100,000 for 5 years
[733]
again where is the money going?
[734]
Premium $9,100,
[738]
buys him a death benefit of $330,000.
[742]
That might get him a MEC聽
limit of $14,000 or $15,000
[746]
not that much space.
[748]
Total death benefit,
[749]
we'll get down to this in a minute here
[751]
$2,000,000.
[753]
We'll see here target additional benefit
[757]
just under $1,700,000.
[760]
That is term insurance that聽
we added to the policy.
[764]
Again cheap or cost-effective manner
[767]
to raise the death benefit
[769]
which raises the MEC limit.
[771]
Cost for that term rider is disclosed right here
[776]
that is the first year cost
[777]
just about $1000.
[779]
The cost will actually decrease聽
each year thereafter as well
[783]
and I'll show you exactly why here in a second.
[785]
Almost forgot the most important piece,
[787]
paid up additions just over $90,000.
[792]
So as we look at this guy
[795]
a couple things we'll see.
[798]
As illustrated
[799]
policy changed to reduced paid up
[802]
beginning of year 8 in this example.
[804]
So exercise the same reduced聽
paid up option but a bit earlier.
[809]
And refunded for 5 years
[811]
so policy year and age at start of each year.
[815]
So this is a 50 year old male,
[817]
he only difference is year one
[819]
it reads age 50 instead of age 51
[823]
like the last illustration we just saw.
[825]
Next,
[828]
base policy annual premium, that's the $9,100.
[834]
Base guaranteed cash value,
[837]
that's that useless column I'll refer to.
[840]
What this again represents is
[842]
if you only paid the base premium of $9,100
[845]
and that only yielded the guaranteed rate.
[849]
You added nothing into PUA's,
[851]
added no riders, nothing like,
[853]
that this is what the cash聽
value will grow to over time.
[858]
Annual dividend or end-of-year dividend,
[862]
this company's dividend
[863]
rate 5.65%,
[867]
guaranteed rate, 4%,
[871]
so like the last illustration
[873]
this represents the surplus only,
[877]
everything between the guaranteed聽
rate and total dividend rate,
[882]
which is 1.65%.
[886]
Net premium, net after tax outlay
[889]
my total out of pocket payment,聽
pretty straightforward.
[893]
Cumulative net after tax outlay,
[895]
this tallies my total payments over time,
[898]
$500,000 total.
[900]
Cash value of all ads,
[903]
so this represents money I add into PUA's,
[908]
at $90,000 and change,
[910]
if you remember that up top,
[911]
this is how much of it after聽
the term rider cost as well,
[916]
is left over in cash value.
[919]
Column immediately to the right
[921]
total face amount of all ads,
[923]
this represents how much聽
additional whole life death benefit
[928]
is purchased by the PUA payment.
[931]
So if I add $88 ,000 into cash value
[934]
that buys you another $275,000 in death benefit.
[938]
Face amount of 1 year term,
[942]
this is the 1 year term rider.
[945]
So your whole life goes up
[948]
your term comes down over time.
[953]
Then we've got the net cash value
[956]
and net death benefit,
[958]
breaking even year 4, very attractive.
[961]
The company only overcharges聽
us for the base premium
[965]
in the first year in this example,
[967]
not the first and second.
[969]
And then we can also run a custom report
[971]
with custom guaranteed values
[974]
based off of our total net payment.
[975]
I know this is a lot of information.
[979]
I had fun with it
[980]
if you have any questions聽
feel free to reach out anytime
[982]
and as always I hope this helps.
[986]
Hey guys Steve Parisi here.
[988]
If you enjoyed the content you just saw
[990]
please subscribe, like
[992]
and hit the notification bell for future videos.
[995]
If you'd like more information
[997]
or to see some custom policies for yourself
[999]
feel free to call or email our offices
[1002]
at the contact information below.
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