Should I put a lot of Money into Life Insurance?

The question arises, is dumping large sums of money into a life insurance policy really in your best interest? And recently we have reviewed many of these policies, and here are our conclusions on that. Matt, Bob, and Randy each have $50,000 of cash on hand. Matt's advisor sells him a policy and gets $48,412 of that $50,000 into the policy premium in year one. Bob's advisor sells him a policy for a little bit more than half of the $50,000 at $26,050. And Randy's advisor sells him a policy for the same amount of first-year premium as Bob's did. Here's what it looks like. Matt's policy has $1.2 million of death benefit and $38,058 of guaranteed cash value by the end of year one. Bob and Randy's policies only have $558,345 of death benefit, and they only have $17,364 of guaranteed cash value by the end of year one. This is what it looks like. They all started out with $50,000, premiums are paid, and this is the cash that they have remaining. Matt has $1,588 remaining. Bob and Randy both have $23,950 remaining of their original $50,000. So, did Matt, Bob, or Randy get the best deal? Matt's has the most face value and cash value after year one, but Bob and Randy have the most liquidity and the free cash flow that's needed to really make the Perpetual Wealth Code work in their life. Matt has only $39,646, but Bob and Randy each have $41,314 of money they can freely access and use. This gives Bob and Randy a greater opportunity to use their liquidity, create free and greater cash flow, and therefore make more money than Matt. Let's take a look at it. This is total liquidity. Matt starts out with $1,588 of cash in his pocket. Bob and Randy, on the other hand, start out with $23,950 left of that $50,000 they had to begin with. Add their cash values from each of their respective policies. Matt ends up with only $39,646. Bob and Randy end up with $41,314. And here's something that's really, really important. Of the cash liquidity that they have available, only 4% of Matt's is available without paying interest to somebody else. 95.99% of Matt's liquidity will have to be charged interest if it's accessed. Whereas Bob and Randy both have more than 60% of their liquidity in a non-interest charging source, so they can use that money without having to pay interest back to someone else. That's a key thing to think about when we're thinking about putting a dump in of cash value in year one in a policy. Matt, Bob, and Randy continue to pay their premiums over the years, and Matt pays $8,412 annually for the next nine years. Bob pays $7,800 annually for the next nine years. But Randy is in a different income bracket. He has a different stream of income, and he can afford to pay $26,050 annually for the next nine years. In year 10, Matt breaks even. The cost of his insurance is now less than what he has in total cash value. It takes Bob until year 11 to break even, and at this time, his cost of insurance has been less than his total outlay for it. So that's really close. And because Randy's premiums are higher, he's able to break even in year six. And after year six, his total cash value always exceeds the cost of his insurance from there on out. This is what premiums look like for Matt and Bob. And we're going to leave Randy out of this illustration because he's in a different class by himself at this point. But if we look at premiums in year one and watch them over the course of 10 years, we see that Matt ends up paying 22.5% more premium than Bob does. Their break-even points, like we said, are here. Matt at 10, Bob at 11, Randy at year six. In year 20, Matt, Bob, and Randy compare the internal rate of returns on their policy. Matt has experienced a 2.89% internal rate of return when you consider the dividends that are projected. Bob shows that his policy has experienced only a 2.81% internal rate of return, and Randy's beats both Matt and Bob's with 3.85%. Why is this, and which policy is best? Here's the answer. Matt had a lump sum of money and no ability to keep paying premiums larger than $84.12 annually. A large-term rider was attached to his policy by his advisor to keep it from becoming a modified endowment contract when he paid the $48.412 in the first year for a premium. This design created a higher probability of Matt being exposed to unnecessary taxes in the future and forced him to borrow money at an interest cost when opportunities came along in the future. Bob, too, had a lump sum of money, but instead of using a large-term rider, Bob's advisor kept Bob's annual premiums lower and more affordable and comfortable for Bob. $22,362 lower in year one and $612 lower in years two through ten. This gave Bob more liquidity without having to take a policy loan when opportunities arose. Randy was in a position to continue paying higher annual premiums due to his income level. And because of this fact, Randy has a higher internal rate of return in his policy as well as a greater ability to manage money and take advantage of opportunities that come along when you compare it either to Bob or Matt. And this is primarily due to Randy's income level. But there's something missing here before we can compare these scenarios as an apple to an apple. Matt had $1.2 million of face value or death benefit to start with. While Randy and Bob only had $558,345 to start with. Furthermore, in year 11, Matt's face value dropped significantly because the term rider that had been put on that policy to allow the huge dump-in in year one disappears. Interestingly, Bob's face value in year 11 is $570,900 and Randy's is over $1,110,194. Here's what's missing. Matt can't convert his term rider until after year seven without making his original whole life policy become a modified endowment contract and exposing him to unnecessary taxes on his policy growth. Even if he does convert the term rider after year seven and before it drops off in year 10, his face value, whole life and term rider converted combined is going to be less than $1,250,250. Bob's advisor encouraged Bob to purchase an additional convertible term policy instead of putting a term rider on the whole life policy. This made Bob's total face value greater than Matt's from year one. It also allowed Bob to convert his term coverage to whole life anytime after year one without any risk of facing unnecessary taxation. He doesn't have to wait until after year seven like in Matt's case. And the good news for Bob is the cost of the convertible term policy is only $551 a year, which is $61 less than the difference between his annual premium of $7,800 and Matt's annual premium of $8,412. Randy's advisor gave him the same option that Bob's advisor did. With Randy's higher income and ability to pay more in annual premiums, he is able to obtain $1,810,194 of face value by year 10. $1,110,194 is coming from the original whole life policy and an additional $700,000 is coming from the term conversion. Again, no risk of unnecessary taxation being exposed here if he converts that term after year one. He doesn't have to wait till year seven and so it's a much smoother transaction. So let's look at the premiums again that Matt and Bob paid before Bob added his term policy. And we remember going back that over a 10-year period of time, Matt actually paid 22% more than Bob did for that whole life policy. But now let's take a look at what happens when Matt's policy with the term writer and Bob's whole life policy with a separate convertible term policy premiums are compared over the first 10 years. And we can see very easily here that Matt's still paid more than Bob did even with that convertible term policy and more death benefit, which provided Bob with more liquidity and cash value to work with and less interest to have to pay back to the insurance company. Well, let's take a look at face values. Matt's face value in here looks like this. And we stretch it over the 10-year period of time and Matt's face value still can't come up to what Bob's face value is. So to conclude, Matt, Bob, and Randy all started with the same amount of money. Matt's advisor tied up more of his money in premiums compared to Bob. This kept Matt from having more face value and liquidity. Even though his policy had a higher internal rate of return, this policy design kept Matt from making and keeping more money over the years. Bob's policy advisor put Bob's interest first, allowing him to keep more of his money and still provided Bob with exceptional face value. Over the years, this allowed Bob to earn a higher internal rate on his money, even though his original whole life policy internal rate of return was lower than Matt's. And as you know, Randy's internal rate of return on the policy beat both Matt's and Bob's. But Randy was in a different income bracket and was able to capitalize his policy consistently with higher premiums. And therefore, his opportunities were much higher when it came to cash flowing in future years. All said and done, everyone can see that Matt could have saved more money, had more face value, and made more money had he received better advice. Bob was provided with better options, so he ended up with more money, face value, and opportunity. Randy was also provided with great advice, which allowed him to keep more of his money, create higher face value, and take advantage of more opportunities as well. You have to decide. Matt's advisor will receive nearly two times the commission in year one compared to Bob and Randy's advisor. Do you believe that that had anything to do with the way that Matt was advised to dump in as much money as possible to his policy in year one? It's important that you understand why a policy is designed the way it is.