Can You Get TOO BIG of a Whole Life Policy for Cash Value?

Can you get too big of a whole life insurance policy if your goal is cash value? The answer is yes. Here's typically where we see this happen. Someone says, I'm interested in a whole life insurance policy. I want to put a certain dollar amount in. We build the policy for that dollar amount and they end up paying in less. I'll give you an example. Someone says, Steve, let's get a policy where I can fund up to $100,000 per year. We look at their cash flow, their assets. They can absolutely do this. So we design the policy appropriately. We might need a death benefit of $2.5 million. That'll give us a MEC limit of 100K. The base premium plus the term rider come out to $10,000. So their minimum premium is 10% of their target funding amount. And then their PUA rider is $90,000. So we've got a 10-90 split here. So again, their plan is to fund $100,000 per year. However, they don't do it. They end up moving money toward other assets for whatever reason. They do not fund their policy with $100,000 per year, and they end up putting in $50,000 per year. So what we've done here is we built the policy with a death benefit high enough to handle 100K per year. And also, a base premium to accommodate $100,000 per year. If I could go back in time in my DeLorean, I would build that policy for $50,000 per year instead. Specifically, I would set the death benefit at $1.25 million. I'd cut it in half. I'd set the base premium plus the term rider at $5,000. I'd also cut that in half and then have $45,000 per year going toward PUAs. So I'll give you an example of it. We'll look at the same company and the same insurance product here. So the first illustration, we see a policy that is designed to handle funding of 100K per year for 10 years. This is on a 50-year-old male. The death benefit is $2.5 million. Here's your base premium. Here's your term rider. So your minimum is just about $10,000 per year, and we are stuffing that paid-up additions rider. So here's the plan. Fund 100K per year for 10 years. Looks great when we look at the cash value. However, we don't do that. What we end up funding is this. So here, you've got the exact same policy. Age 50 male, same base premium, same death benefit of $2.5 million. But instead of seeing 100K per year go in, what do you see? 50,000 per year going in. So with this policy, it's still okay. But it is not optimal. This is an example of going too big with a policy. And how you can prove that is by looking at the exact same product, the exact same individual. We've got a 50-year-old male funding $50,000 per year. But what's the difference? Cut the death benefit in half, cut the premium in half. So now, of that $50,000 per year going in, instead of having $10,000 per year going toward the premium and the cost of the term insurance We've got about 5,000. So here's a quick side-by-side of the three examples we just looked at. First, you've got the plan. Here's your 100K per year. Okay, looks great. However, if that doesn't happen, we end up only funding half. So pretend this is you. You're funding $50,000 per year. The break-even point in this example is year six because you paid 300 and now you have 300. So this is where I would say, Hey, I know the plan was to fund 100k per year. If we go six years in the past, I would have designed it like this. Same exact product, where you fund the exact same 50k per year, but by year six in this example, you're at about $320,000. The upfront cash value is noticeably more as well. In fact, it's noticeably more all the way through. So here is a cash value difference column. That shows how much more you have in cash value with the option with the lower premium and lower death benefit compared to the example to the left of it. By the 10th year, it's $34,000 more in cash value. Same product, same out-of-pocket to you. We just lowered that minimum premium. So it is possible to get too big of a policy. Really, like how this happens is typically when someone's very excited, they've learned about whole life insurance, they've learned how they can maximize the cash value, and they say, I want to put all this money in there. And then they end up not doing that for whatever reason. Like life happens to everyone and that's okay. So typically what I have found helpful to prevent someone from falling into this trap is just by asking questions and going through the exercise we just went through here. Where if they say, hey, I want to fund 100K per year. I want to do it for the next 10 years. I would say, okay, we can definitely model that. Then I would ask, do you think it's realistic that you'll definitely be able to hit 100K every single year? Do you have any doubts or reservations about that? If they say yes, I would say, okay, what about 75? What about 50? What's a more conservative number? I'm not trying to downsell them, but at the same time, I'm not trying to upsell them. I just want to help them come to a number that they're going to be comfortable with when they get beyond the excitement phase. I'm also going to look at their financials to see how realistic it is that they can actually fund these large dollar amounts. Because if you build a policy out that's very large and you have the intention of max funding it, and then you don't, That is often what causes buyer's remorse where an individual says, eh, it's not quite performing how I expected. And we look at it and say, well, that's because we didn't fund it as expected. But you can't say that to a client. You've got to be respectful in terms of educating them around a very complicated product when you look at it. And if you do that upfront, my goodness, does that make life so much easier for the person with the policy, for the agent, for everyone. So it's really just. Taking the time to go through the different options and showing, hey, you've got these great plans to really stuff a policy. And if you do stuff it for a couple of years, it's going to look great. But if you don't, here's what it's going to look like. Here are the drawbacks. And then here's what other people do to make an informed decision. Looking at an option where it's maxed out to fund a policy half the size. So, can you get too big of a policy? Yes, you absolutely can, but you can also prevent it by looking at options like we looked at today. Hope this helps. See you in the next video.