Case Study: Retirement Planning With Whole Life Insurance

How does life insurance fit into my overall financial plan? Have you ever wondered that? Have you ever been pitched on that? Or just heard about it from whoever it might be, an insurance agent, a financial professional, whatever. This is something that is extremely effective and very, very popular if executed properly. So when I'm looking at a financial plan and I'm trying to plan for the here and now and the future, I want to make sure my assets are positioned properly. Where do I put my money? I can put it in different buckets, call it taxable buckets, tax-free buckets, tax-deferred buckets like a 401k. But there's other areas, there's different areas I can position my money. And then I hear about life insurance. And I hear when it comes to whole life insurance, cash value life insurance specifically, big banks, major corporations, ultra-wealthy individuals have utilized it for a long period of time. And you don't have to have billions of dollars to do this. We work with banks and corporations. We work with individuals that put away small amounts of money each year. If policies are set up properly, it can work beautifully. We're going to take a look here at an actual case study. This is based off an actual individual. We just removed all confidential information to protect the innocent, of course, I'm kidding. We've got a 55-year-old male here. Here is his present financial picture. Does well for himself, earns over half a million dollars per year, $550,000. Now he's got a net worth of just over 5 million, 5.2 to be precise. His liquid net worth, however, non-real estate assets is about $4.6 million. So we see a breakdown, a lot of money here in cash. He, I'll state this, is not one for the market, does not like risk, has never been his thing. And that's perfectly fine. Whenever working with someone, that's where the conversation comes into play. What is an individual's objectives? What are their interests? What do they want to stay away from? You know, with the people we work with, some of them love the market. Some of them love crypto. Some want nothing to do with it. It's always a matter of preference. Some want to dig into it, do the research, others don't. Here we have an individual that has been an aggressive saver. He's disciplined, what he earns, he puts the majority of it away every single year. Earns a return, but it is conservative, so it's guaranteed, he knows it's there. So breakdown of assets, taxable, almost 1.8 million. Qualified, qualified assets would be a 401k, a tax-deferred vehicle. So when I make payments or contributions to a qualified account, I can write that off. That's deducted from my income. Grows tax-deferred, and when I access that, I've got to pay full income tax on it. Tax-free, small bucket there. That's something he definitely wants to increase on our first conversation. That's what he talked about. He'd like to get that tax-free bucket higher. And then real estate, about a million bucks with liabilities of about 50% of that. That's his mortgage. Okay, so what we're gonna do in this case study is map out his present path. The path he's traveling, the path he's traveling, before he meets us, engages with any financial planners. If he continues to do exactly what he is doing, what will things look like over time? So what we've got right now, his annual savings rate. He is an aggressive saver. His company also puts away a lot of money between 401k plans, defined benefit plans. What we've got here is $200,000 per year. It's actually a little bit more than that on some years. That is what he saves each year out of his $550,000 of income. Now this individual is very systematic. He has his entire budget broken down as far as what his expenses are, what it takes to operate his household. Everything is on a spreadsheet, very impressive. But you don't have to have that all the time. We can always help talk through this. So personal savings, $200,000 per year. Company contribution, $100,000 per year. That is $300,000 per year going into pure savings for this individual, broken down among different assets. He has been putting a lot into cash. And when I say cash savings, that includes money markets, which he's been doing this for a while. The rate used to be much higher than it is today. But he continues to put money there. Peace of mind, it's safe. So what we're going to look at as far as interest rate assumptions are concerned is what I'm gonna see is he's 55 years old now. If he continues to work till age 65 at this pace, contributing $300,000 per year, what will that grow to at these different rates? By the way, we're gonna focus on the conservative one here, 4%. However, I wanna show different rates here depending on your situation. If this is something you're considering, some people like to look at rates more aggressive than 4%. Some like to go more conservative. It's always a matter of preference here. It's not one way is the best way. So let's take a look here. What we're gonna do is take our liquid net worth. So his present assets that he has are about 4.6 million. Assume the $300,000 payment per year for 10 years with these different interest rate assumptions. Let's take a look. So what we're gonna do, pull up a calculator that looks like it's from 1980. So present value, he's got just about 4.6 million in liquid net worth. What we wanna do then, punch in the annual payment, next 10 years. There we go. So if he just puts it in a 0% account, it'll grow to about 7.6 million. Now let's assume 4%. There we go. $10,550,000. So if he earns 4% year over year on his present bucket of cash, paying in $300,000 per year, he'll have $10,550,000. And that is realistic. He has a lot and very conservative assets, cash savings, but he has some assets that are performing at a higher rate than 4%. So let's take a look here. Let's go back. So we've got about 10.5. Here's what we want to do. $10,500,000. 4%, there's a liquid net worth at age 65. Let's take a look at 5% and then 7% just to see what it would look like. 11.45, then at 7%, 13.5 call it. 7.4, 13.5. I'm just going to round. Okay, so how's he doing? He's doing quite well. If he continues on this path with his balance sheet and such, he'll be fine based off of what he's living now as well. I mean, he has been a disciplined saver and he will be perfectly fine on his own. However, he is looking at how to maximize his situation. That's the fun part, isn't it? How do I take what I have and maximize it or optimize it? Like we always talk about cash value, life insurance products. How do I optimize that thing to get the most possible value out of it? All right, so age 65, liquid assets. What we're going to do here. So we're excluding his real estate here. I just want to be clear there. $10,500,000, income. So what does the income assumption look like here? If he continues to earn 4%, even if we kick it down to 3%, what does it look like utilizing that $10,500,000 to distribute income to him for the rest of his life, for him and his family? Now, he does want to leave a legacy as well. Presently, he does not have life insurance in force. I should rephrase. He has a $1,000,000 term policy that's due to expire in a little over one year. So he's got no life insurance in force. So with that said, $10,500,000 is his present net worth. Liquid net worth at age 65. What we're going to look at here is how does he distribute income, not run out of money? So we're going to look at a traditional strategy here. Conserve the principal. If I'm spitting off 4%, what's that look like as it comes to me? Going fairly conservative at 4%. So what we're going to do here, pull up another 1980s calculator. Let's have some fun here. $10,500,000 annual interest rate, 4% number of years, 65 through age 100, let's go. It doesn't really matter in this scenario, but that would be 35 years. So we're taking him out to 65 and what we're going to do is this. Here we go. So what this is displaying is here is my account balance, $10,500,000, all assets positioned. He could take the money that he's been piling in cash and put it into an annuity at that point in time in order to generate something like this. There's a lot of things you can do, but there is the annual income, $400,000 per year. Now, what I do want to add here is he had a lot of assets that did not consist of a tax-free bucket. So that does look good on the surface, retirement for the rest of your life and conserve the $10.5 million principal balance. So when I die, that's passed to my heirs. That's great. However, not much of this, of his portfolio is tax-free and there's no life insurance in play. So of that $400,000 per year, we don't know where tax brackets are going to be. But if we just assessed a tax rate on that, he does still have some deductions, but we could assess between 30% and 40% depending on what we want to use. What would that look like? Let's assess just at 30% for simplicity. We can change that anytime we want. Let's take a look here. So $400,000. I'm just going to net it $400,000. What would he net? Times 0.7. There we go, $280,000 per year after tax leaves the principal intact. Really not bad. He lives relatively modest as well. I mean, we do think that that would work. So again, his path, looking at a 4% assumption all the way through, it works. But now we're going to go back to the optimization. All right. So $400,000 per year in income. Gross. What we'll do here, we've got $408,000 before tax and then call it $280,000 after tax. Quick side note, if we're ever working with any individual, as we really start to lean into this more, we're going to get more accuracy on these figures. This is meant to be more conceptual just so we can see what it looks like. So again, right here, $408,000 or $400,000 it should be. Not sure where I got that eight from, but $400,000 before tax, $208,000 after tax. Wants to leave a legacy. Gross amount at death. Conserve the principal balance. Recall that we are excluding the real estate here. So it would actually be more than that because we're going to have appreciation on the real estate. It could be close to $12,000,000 or greater. However, how much of that comes out in taxes? Not just income tax to his heirs, to his children. Also, depending on the estate tax limits at that point in time, we're going to have to deal with some other issues too. So how much should we put there? Let's put in five to eight million. A lot of variables there in respect to taxation, especially on the estate tax, the state you live in such. Again, I'm not an expert by any means when it comes to estate taxes. We do have a extremely sharp law firm and attorney. We would refer anyone to for information on that. So here's the current path. Let's continue on here. We're going to look at an alternative next. Let's recap this. So as we progress on, what's my current path? Liquid assets, just about $4,500,000 there. $4,900,000 going back. Personal savings, $200,000. Company savings, $100,000. Now, interest rate, 4%. That assumption at $865,000. What did my balance come out to? About $10,000,000, $10.5 million. Let's put this in here. The income that was generated was what? $208,000 after tax, legacy. $10,500,000 on paper, net, not quite $10,500,000. I'm going to call it between $5,000,000 and $8,000,000. In the future, we will have more information on this as far as providing clarity. If you're in a position with children above the estate tax limit, what are creative ways to position your assets properly so you can leave everything efficiently? For him, it's important. He wants to maximize his current position, income position, once he retires. But also, who wants this to happen? You work all this time to build up your assets and then a big chunk is eaten out when it eventually is passed to our heirs, both in income tax and potential estate or inheritance tax as well. Now, let's progress on here. Let's look at an alternative plan. So what we're going to look at here, we want to compare and contrast here. That's always the plan. Just so we can see how we can actually leverage the cash value life insurance product. So we're not going to, I don't like to use the word purchase a life insurance policy. Here's why. Reposition portion of assets and cash flow to a whole life insurance policy. Now, if you are new to our channel, to our concepts, our firm that is, really what we do, what our specialty is, IBC Global, is designing policies for maximum cash value. That's really where I started, working in designing plans for corporations, banks, individuals. How do I optimize the cash value? So if you're viewing this video and you've seen just traditional whole life insurance, what you're going to see next is going to look much, much different, but it is a whole life product. So what it is, cash value life insurance policy. Guaranteed growth. So I've got guarantees associated with this and a worst case scenario, it will appreciate. Here's what we're going to do. Based on his position, if you go back to his balance sheet, where is he heavy? Cash savings, 1.65 million presently, and he's pumping a lot of money in there as well. It's safe. They don't have to worry about it crashing at any point in time. That's why the peace of mind factor. Remember, he's not one for the market, likes real estate, but hasn't really dove into it yet. He does want to do that, but he hasn't up to this point. So going back to this, we've got cash of $1.6 million. We have a personal savings rate of $200,000. The company contributions, those going to 401ks and defined benefit plans will continue. So that we cannot decide where that goes. They're set. They can call it, set it and forget it. You've got some control as far as where you want the assets invested, but where it goes is where it goes. So what we have to work with is cash. And savings of about $1.6 million. There's more than that, but I always like to leave some money in cash. And then savings of $200,000. Now remember, you may have caught this earlier, savings of $200,000. He does save more than that on average. It's closer to about $250,000. Whenever redirecting or repositioning cashflow and assets, I do not like to take everything and put it all in one bucket here. Depends on my age, situation, everything. Every plan's different. So here we're going to look at $200,000 because he does have funds going elsewhere and he's got the company savings. Here's exactly what we're going to look at from a funding perspective. Years one through four in the policy, $550,000 per year. That is a total of 2.2 million. Here's how we're doing that. The 1.6, that's being dispersed over the first three years. Now the thing is, during those first three years, he's still saving $200,000 per year. And we're not putting that $200,000 per year into the life insurance policy in the first three years. What we're doing is just transferring the cash during the first three years. Then during those three years, we've banked, call it, another $600,000 in cash. Maybe we put it in a prepaid account with the life insurance company to earn a little bit of interest, whatever it may have been. But by year four, because we are still saving the $200,000, that's where we come up with the fourth payment of $550,000. That's $2.2 million into a life insurance policy over a period of four years. High cash value, that's the key. I'm going to show you it next actually. Then going to continue to fund years five through 10, $200,000 per year. For a total of $1.2 million. Overall, total repositioning of assets and cash flow, $3.4 million. Now, cash flow and cash was moved over. Everything else, we want to allow to continue to grow. Still have the company savings. We want to see what that looks like over time because that's going to play a big part of the retirement play when he starts to take income out at age 65. So let's go through this a little bit. The policy funding and I really want to hit on the design here because if you haven't seen how to design a policy yet, this is where it's going to kind of be that aha moment. Repositioning assets, not a pure cost. So let's take a look here. What we've got is a policy. Here's the actual design here. 55 year old male. In fact, let's first look at this. That's better. You ever see a life insurance illustration where you've got the guaranteed values or the guaranteed on one side and then the non-guaranteed on the other side? That's what we did here. So funding, let's take a look. Guaranteed values. This is absolute worst case scenario. Has not happened. This is with one of the major mutual companies. We always talk about the four major mutual companies, MassMutual, Guardian, New York Life, or Northwestern Mutual, have consistently delivered strong internal rates of return, actual cash value performance to their consumers, not just good looking illustrations and then it's gone in the wind. So guaranteed values though, I still like to look at the worst worst case scenario. Here's the funding. $550,000 for 4 years and then $200,000 per year thereafter. Look at the guarantees. I pay in 550. If you've seen whole life insurance in the past, what's your cash value typically in the first year? Zero. Maybe you've seen examples where it's 30% or 50%. Here, we're just about at 90% of the payment in the first year, a little bit less. $9.3 million death benefit. So where we came up with that number, that 9.3 million is kind of an oddball figure. It's not based off of how much the $550,000 purchased. We completely reverse engineered this policy. This was based off of the following. When we design a policy, I always want to know what is the minimum initial death benefit we can obtain? What it has to do with is an IRS rule called the MEC limit. A huge benefit to a cash value life insurance policy the core benefits are really as follows. As that cash value builds over time, it is a safe area to position money. Meaning not tied to or invested in the market at all. We'll produce somewhere, call it between 3.5% to 5.5%. There'll be that net internal rate of return at the end of the day. IRR is your actual performance. So safe area to position money. Liquid area to position money. Whatever I have in cash value, I can access. It's your money. And then third, this is where everybody gets attracted, tax-free. Tax-free if, I always like to emphasize that word, if we do everything properly. There are instances where we can run into a taxable event. One is this MEC, a modified endowment contract. If a life insurance policy becomes classified as a MEC, this modified endowment contract, what ends up happening is your cash value still grows tax-deferred. The death benefit still paid out tax-free, but in respect to the cash value, grows tax-deferred. And anything I access, I have to pay ordinary income tax on the gains only, but income tax. And if I'm under age 59 and a half, I got to deal with a 10% penalty tax. I don't want a MEC. Now, the nice thing is, is we can actually set that MEC limit wherever we want. So when we design a policy, we had $550,000 per year going into the policy. That death benefit gave us a MEC limit of guess what? $550,000. It is the minimum death benefit based on the amount the client, the consumer wanted to pay. If he wanted to contribute $200,000, we're going to lower that death benefit and MEC limit. Initially, I want to optimize the cash value because what happens if one does that? It ends up optimizing the long-term death benefit as well, which plays into the plan when we get back on track here. So a little bit on policy design there. This is why the policy is so cash rich right off the bat. I'm going to go through where his money is going next. But here we go. Guaranteed ledger of the illustration. Breakeven point between years six and seven. Non-guaranteed ledger of the illustration. Breakeven point between years three and four. This is an age 55 male, which by the way, we've done this for people in their 60s, even 70s when a policy is designed properly. So we've got the funding going in here. $550,000 for four years, then $200,000 through year 10. Time passes, what's it look like? There we go. We're going to come back to this as well. If I look at age 85 on the non-guaranteed side, got about $11 million in cash value and $13.5 million in death benefit. Now there's another middle of the road, non-guaranteed assumption, which we're going to assume in all of the examples. One thing I want to touch on, these annual and average IRRs are what I'm actually earning on the policy. That's the net performance at the end of the day. So guaranteed year over year, tops out at just about 3%. But then you see an average about 2.5%. And again, if everything's done properly, this is an effective tax-free yield as well. So it can do a lot of damage there, very attractive in that respect. So we've got the policy here. Let's touch on this one more time as far as how to maximize these policies. Because the thing is when repositioning assets to get back on the overall plan, if one decides that it's just not working for me, this isn't doing the trick, I can get my money back. Like it's all there. 4 years in, I've got everything back. If I say it's not for me, I can cash it out. If I cash it out in respect to the gains, there are taxes due there. So that's one thing to be aware of. But it is appreciating for me over time, even based off the guarantees at a better rate than a bank account when I look at it. And I've got the death benefit from a legacy standpoint. Let's take a look at this guy. So how these policies are constructed in this manner, if you've seen whole life, but you haven't seen it like this, because this is whole life insurance, is like this. Where is my money going at the end of the day? I can allocate it toward the insurance premium. Here we go. $50,000 per year. Or I can direct it toward what is called a Paid Up Additions Rider, PUA, English Translation Cash Dumping, $500,000. Here we've got one of the top companies. We've got a $50,000 base premium. Where we came up with that figure, the $50,000 premium is the minimum. The company will allow me to pay a total of 10x that figure into PUA's per year. So base premium, 10x that into PUA's per year. We're minimizing the insurance expenses as much as we can and plowing everything else into cash value. This is where, if I look at the guarantees again, this matches that Excel spreadsheet we just saw. We just pulled these values and threw them on there. That's where I have the strong cash values from start to finish. One last thing I would like to touch on here that is extremely valuable to a consumer is when you looked at those illustrations we just looked at, the premium was what? $50,000. We had $550,000 going into the plan. When it comes to policy design, we talked about how to optimize the cash value, but designing it for flexibility is just as important. If I have a policy with that $50,000 base premium, guess what that allows me to do? I can commit to just that base premium each year, meaning I can pay only that. And then at my discretion, I can throw in excess funds into the PUA component at leisure, very flexible there. So I can commit to the minimum, the premium, the term rider as well, which is very small, but commit to the minimal amount. And then again, at discretion, just pour excess funds in. So if it goes according to plan at the 550 per year, he can do that, but at the same time, he does not have to. And that's of course where we monitor the plan over time, but that's the creativity we can do with life insurance. So year 10 cash value, I got so excited there, I forgot to take the year 10 values. Let's take a look here. Hey guys, Steve Parisi here. If you enjoyed the content you just saw, please subscribe, like, and hit the notification bell for future videos. If you'd like more information or to see some custom policies for yourself, feel free to call or email our offices at the contact information below.