Drawbacks to Whole Life Insurance: Cash Value | IBC Global

So the drawbacks to high cash value life insurance, whole life insurance, what's the drawback? The negative piece to it. Because we often talk about the benefits. Frankly, that's what we do. We educate individuals, consumers, and those in the business on how to maximize the cash value of life insurance policies. However, what are the potential drawbacks? Or some of them. We're not gonna cover anywhere near all of them, just some of the main things to consider. And what I do wanna mention is I'm going to specifically be focusing on the cash value. We're not gonna go into the whole debate, whole life versus term life versus investments and such, because everything has its place. It depends on our individual situation. Now, when it comes to the drawbacks, here's one drawback here, and this comes up a lot. When I am funding a cash value life insurance policy, it is going to take time to capitalize. Meaning, when I first open up a policy, whatever dollar amount I pay in, I'm going to have less than that amount of money in cash value. For example, I make a $10,000 payment in the first year. Depending on how the policy is designed, I can have anywhere from zero of that payment all the way upwards to over 9,000, 90% plus, depends on the policy design here. But in any event, it is going to take some time to capitalize. We're gonna touch on this in more detail as well. Two, the minimum premium piece must be paid initially. Now, a misconception we hear sometimes is that a whole life insurance policy requires payments to be made for my whole life, which is not the case. However, when I first open a policy, now the design is very important here, but I do have to pay premiums initially. And a lot of times, especially if a policy is not designed with a high cash value or high cash allocation upfront in the early years, I can get in a position where if life happens, I can't pay, I can take a huge hit and lose a lot of what I paid in. Main point, the premium must be paid initially, and I'll get into more detail on that. We have more information on that in our Life Happens series as well, if we stop paying very early. Cash value returns. This question comes up so much because it's common. What's the cash value going to produce? And we try and directly answer the question. We do, and you may have seen this as well, a lot of individuals will beat around the bush or say you shouldn't look at it this way. Well, to be frank, if I pay money into a policy, I wanna know what that's going to grow to, just to simplify it. How much am I going to have as I paid in? The thing is, what is rarely touched on on this point is how to maximize the cash value growth, the returns, short-term and long-term. That's what we focus on. I've seen some other groups focus on this as well, very small percentage of individuals, but I have seen some others do this. We actually have been doing it forever. We work with an actuary as well. I've had consultation calls with him, and the way that he'll advise individuals to set up policies is the exact same way we recommend it from an actuarial perspective. So we've got a couple of different design methods here. This is important, and it will influence whether the drawback is so severe, I don't want a policy, or if the drawback is minimized upfront and the benefits are worth the initial capitalization fees. So point one, time to capitalize. If I'm paying any amount of money into a policy, my money can go where? If I take the policy design, not gonna go into the full details, like I do sometimes, money can go where? Premium or PUAs? If I have a policy, so red's going to represent the premium, with 100% premium, base premium, that's what that means. I will see a policy often take over 10 years to break even, meaning if I paid in $10,000 per year for 10 years, 100K in, I'm not gonna break even by year 10, it's gonna take 12 to 14 years just to see my cash value equal what I paid in. So 10 years plus with 100% base premium, and when you hear these stories or read online that whole life insurance is a horrible place to grow money because it might only produce or has only produced 2%, if that, well, when we have seen that to be true, because those cases are 100% validated too, just like we validate historical performance with well-designed policies and such that we have in the books. But when that's validated, every case that I've seen that occur is when a policy is poorly designed, huge insurance expense. This, in my opinion, would be the biggest drawback if my focus is cash value and I go with 100% base premium, that's a big drawback because I have nothing in the beginning. We're gonna show an example here soon too. If I go with a 50% base premium policy, usually gonna take about seven years to break even, and what we've seen, the returns or yields there are gonna fall between 2 1⁄2 to 4%, at best, and this is the average internal rate of return over time. And then if I minimize, if I go with 10% base premium or select the smaller company that lets me go lower, I'm gonna see a break-even point between three and five years, and likely between three and 5 1⁄2, we put three to six just to simplify it a little bit, but we've got other videos that really go into detail on that with some concrete data and an analysis as well. So, point one, time to capitalize. The lower the base, the earlier the capitalization and the stronger the cash value. So a drawback would be misunderstanding or lack of education only showing one option, perhaps one of these. We see this split very popular with anywhere from a 40 to 60% base in the IBC world. So individuals that promote or practice infinite banking or become your own banker, they'll often recommend a 40-60 split because it was in a book and they leave it at that. This is the way to do it just because it was written in a book, how the individual wrote that, which is not validated. We work with companies and they do not do that. They want the cash asset on the balance sheet. So minimum premium must be paid initially. So here, that 100% base premium is a commitment. This 10% base premium, the minimum 10% is a commitment in the beginning. So whatever split I go with, whatever the minimum insurance piece is, is going to be the commitment. A drawback would be having a high base premium, being locked into it, life happens, I can't pay, now it feels like a burden, I don't want that. And then the cash value returns, well, this we just touched on, has a huge impact depending on that policy design. So here, we're talking about the drawbacks of a whole life insurance policy. What's interesting here, what are we really emphasizing? It ties into a lot of our content. Policy design. This is what causes one to feel if whole life is a fit or not. In the majority of cases, and just doing this for several years, that's usually what I've seen. Or we've seen. So let's demonstrate, which we're just gonna show both ends of the spectrum. 100% base premium, maximum cash value, minimum premium. We're not gonna show that 50% example. We do have studies on that in our public and private content. So focusing again on what the drawbacks, time to capitalize. Here's a traditional whole life policy. I pay in $20,000. How's my cash look in year one? Zippo, not gonna show for it. And that's gonna be the same if I pay in 2000 or 200,000. If it's all base premium, I'm going to see this occur in the first year with a traditional product. So in my mind, and most consumers, that is a huge drawback. The company overcharges me for the death benefit upfront. Same thing year two, if I look at year three, I paid in a total of $60,000 and I got 13.6 to show for it, $13,000. Like what the heck? I can do a lot more with my money. That's where you'll hear the individual state, you want to buy term and invest the difference because look how long a whole life policy takes to break even here, to get your money back between 13, 14 years. Imagine if you could put your money into an account, earning between, call it 4% or 8%, how much further ahead you'd be, which has some validity to it. And you can argue with the death benefit, all that good stuff, the death benefit has a place. My point being, this is a drawback that can be an objection or difficult for one to overcome, myself included. I would not want to do this because I don't care how great the long-term cash value is, which is not gonna be as good as this one, but what can I do with the money investing in business, investing in real estate, clearing debt, whatever it might be in the meantime. I want to accelerate the speed of my overall financial situation. I'm starting to ramble, focusing on the drawbacks. Main thing, capitalization with a traditional policy. An optimal policy, exact same thing. We lessen the impact, but still this is the drawback right here, the main one in my opinion. I pay in 20K, I have 17 to show for it. If I paid in 200, I'd have 171 to show for it. If the ratios are the same, I'm gonna see very similar cash value. Point being, the capitalization phase. Yes, we made the numbers look oh so much better, and this is the same insurance company, same whole life insurance product, same health rating, but no matter how well I design it, I've got a negative hit. Break even between years four and five, this is how we design policies, and it gets better and better over time. This really makes it easier for individuals to get involved, and it makes any policy stronger, definitely short term, but long term as well, and we have several studies on that. Point being though, when I look at the drawbacks of whole life insurance, primarily the capitalization phase, there's long term, safe, liquid, tax-free area to position money. But if I design it right, cut down on the capitalization phase, reduce my minimum commitment, and then also I'm gonna beef up my cash value returns if it's designed properly. Know this one had a lot of content, a lot of material. Hopefully it was helpful. Reach out with any questions, and we will talk to you soon. Hey guys, Steve Parisi here. If you enjoyed the content you just saw, please subscribe, like, and hit the notification bell for future videos. 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