Designing a Policy: What You SHOULD Know

All about the policy design. If I'm going to take a whole life insurance policy and I'm going to make any type of commitment or any type of payments to this policy, my money can again go where? Towards premium or towards that PUA rider. Premium buys me life insurance first and eventually builds cash. And PUA dollars will refer to it as a cash dumping because I'm dumping money into cash and it does get me some death benefit as well. So what many are not aware of is we can actually choose where our money goes within a policy and it can be set up to be flexible as well. But when I look at a life insurance policy what we have up here on the screen is a basic whole life insurance policy. You see an individual paying in $20,000 per year. 100% of this payment is going towards the base premium, the insurance expense component. That's why I have zero in cash in the beginning. It takes a long time to accumulate any real cash value, 10 years plus. Then we see a overfunded whole life insurance policy. Here's a policy with an individual paying in $50,000 for five years. And the thing about this policy is I have $5,000, 10% of the $50,000 going towards the premium, small term rider attached, and we're pumping everything else into that PUA rider. That's how I have rich cash values up front. I break even very early between years three and four. I accelerate the immediate, the initial cash values, and also the long-term growth when I look at an example like this. And I'm not committed to the $50,000 either here in this example either. The thing is when we design a policy up front, if you the consumer designing the policy and you say, hey I want to understand how I can maximize my cash value, this is a great example to be aware of. I want to know how I can minimize the premium piece and maximize that PUA rider. That allows me to get more money into cash value, which is immediately accessible, begins to yield the guaranteed rate and dividends sooner, accelerates everything from the cash value perspective, and long-term you usually see more death benefit here as well. When it comes to policy design, understanding the limits are critical here. So when I say limits, what do I mean? Well, when I'm gonna pay money into the insurance premium or that PUA rider, I have to be aware of the particular insurance company or companies I am considering and what their limitations are. For example, wherever I set that minimum base premium, some companies will allow me to 10x that into PUA's per year, each year. So for example, if I have a $1,000 per year minimum premium, that's what I'm committing to, I can have the ability to contribute $10,000 per year. Not committed to it, but I have the ability. That is the insurance company's limitation. Many are 10x, some are only 3x, some don't have a limit depending on the riders you set and such, but it is important to be aware of that. A lot of the top companies will often have a standard of a 10x limit. You'll see that to be very common in the industry. So one limitation is the insurance company's limit. The other is the IRS limitations. That's referred to as our MEC limit. MEC stands for Modified Endowment Contract. So any life insurance policy can become a MEC. If it does, I have to deal with taxes. What many are not aware of is we can actually set our MEC limit wherever we want. So if one states, I want to be able to pay in $50,000 per year, we're going to set the MEC limit at $50,000. The minimum premium at 10%, $5,000, because I can 10x that. Now I am committing to $5,000 and I have the ability to go up to $50,000 per year. We've created a very flexible savings asset. So I have to set that MEC limit up properly that has a direct relationship to my age and death benefit. So the MEC, Modified Endowment Contract, what is it? Well any life insurance policy can become classified as a MEC. If it does, many of the tax benefits on the cash value that is carried within a life insurance policy are out the window. If I have a MEC policy, the death benefit is still paid out income tax-free. However, when it comes to the cash value, as it grows, it still grows tax-deferred. When I pull money out, whether I withdraw or loan from it, I have to pay ordinary income tax on the gains first when I make a distribution from the policy. Also, if I pull it out prior to age 59 and a half, guess what? I'm hit with a 10% penalty tax. In short, I don't want this MEC to occur. It ruins everything. So when it comes to a MEC on a life insurance policy, how we prevent it is every policy has what is called a MEC limit. That's exactly what it sounds like. It's a limit that determines how much money we can pay into a policy per year before we trigger a taxable event. What many are not aware of is we can set that limit wherever we want. You'll find that it has a direct relationship to our age and death benefit. You'll see this on an illustration with any life insurance company as well, or with most life insurance companies. We've got an illustration up here, for example. You see in the bottom right-hand corner, we see exactly what the MEC limit is. So as we adjust the individual's age, gender, and total death benefit. Total death benefit doesn't mean we have to increase the base premium. We can do this through term riders. However we maneuver that death benefit, that's what is going to adjust the total MEC limit in the policy. So for example, if you say, hey I want to be able to pay in $50,000 on any given year. Say it's $100,000 on any given year. We want to make sure we set the MEC limit up at at least $100,000. And then again when it comes to the insurance company limit, we want to set that at what? At least $10,000 because the company will allow us to 10x that minimum contribution. MEC rollover dollars, when it comes to the MEC limits, or MEC limit on life insurance policy, we do have rollover dollars. I like to think of it as the old cell phone plans with the rollover minutes, if you remember those. So when it comes to the MEC laws and how it works, let's say we have a policy with a $100,000 MEC limit. That means we can pay up to $100,000 per year if we want to. Let's assume year one we pay in $50,000. That means I could have paid in another $50k up to $100k, but I did not. I only paid in $50k. Year two rolls around. My MEC limit resets at $100,000 plus any unused space from the prior year, which would be the $50,000. So my total, my cumulative MEC limit for year two is $150,000. Let's say year two, I again only pay in $50,000. What this means, I could have paid in $150k, but again I only paid in $50k. So year three rolls around. MEC limit resets at $100,000 plus any unused MEC space from all prior years. So year one and two, that rolls over the extra $50k. So year three I could pay in a total of $200,000. And it will continue to compound on itself. Now if I want to make a big catch-up contribution, I can do that as well. So for example, year three, let's say I inherit some money. I sell a piece of property, come into a windfall, get a big bonus at work, whatever it might be, and I've got $200k, I can make a large catch-up contribution into the policy. And this, going back to the insurance company limits with the 10 times rule, the 10x limitation, often they will permit you to make a big catch-up contribution if the proper riders are attached. The company will have issues with it if I don't have the right rider attached because it may push my death benefit up, they view it as a liability. That's good for another topic. However, I can make large catch-up contributions and make up for lost time. So it's not as if I don't use my MEC space, I lose it. No, I can always make big catch-up contributions down the road. Flexible payments. So when it comes to the policy design and creating a flexible policy, this is one of my favorite parts, and it's important to set up properly, is when we hear the word life insurance policy, I'm just going to say insurance policy, what comes to mind? Premium. Bill. I pay the same amount every month, every year. If it's a life insurance policy, it pays it when I die. Oh, and cash value eventually builds up. That's, it works, but there are way better ways to do it. So we can design a policy, how do we take that traditional life insurance policy and turn it into a flexible savings asset? That's where I begin to get intrigued. Okay, how do I use this? So it all goes back to the limits. Wherever I have my minimum premium, I can contribute 10x that into PUAs. Whatever my MEC limit is, I can pay up to that number per year. So when we design a policy, we'll always ask the question, how much do you want the ability to pay into the policy on any given year? If one states, I might want the ability to pay in $100,000 per year. What we're going to do is set up a policy where the MEC limit is at least $100,000 and the base premium is $10,000. This allows me to commit to 10,000. It might be 11 or 12K with the term rider attached, but I can commit to a minimum amount and add more funds at leisure. I'm not committed to the 100K number. This way it doesn't feel like a bill. Now it is important to be aware of the insurance company that I'm looking at or different companies because they all have different rules around flexibility, but it is possible to set policies up like this. Again, the main goal is how do I set up the policy where I have the ability to contribute X, but I only commit to Y. Now I can really use it as a flexible savings asset and not a burden. This way I don't get a bill for 100K a year and now I'm stressing to try and make that payment. Now we can make it very flexible and then all of a sudden I've got an attractive savings asset.