This is WHY Business Owners Use Whole Life Insurance - Part 2 (The Numbers!!) | IBC Global

In the last video, we talked about how businesses and corporations utilize high cash value life insurance and how it actually works from the company structure, how they position the policies on their employees, how the company owns it, it's an asset on their balance sheet, the vesting period, retirement benefit, all that good stuff. Let's look at some actual numbers now. So we're going to go through a deep dive here. What we're going to look at, so who are our three executives? Alex, John, and Liz. Let's assume we've got John who's 50 years old in this example, the age could be anything. The company or corporation is going to take out a policy on Alex, no, I said John, sorry, on John. Let's say I'm the business owner of the company, I say, you know what? I like the idea of this plan, I'm going to fund it at $100,000 per year for 7 years, it could be 5 years, it could be until he's age 65. I could design it like this one where really as the business owner I'm paying $10,000 per year and then at my discretion I can add up to $100,000 per year. This way if cash flow is tight I don't feel like I'm on the hook for $100,000 because I'm going to do this for each of my executives. So if I put this on 10 executives that's $1,000,000 per year I'm directing toward these policies. This is what companies do whether it's $100,000 or $10,000 a piece every company is different dependent on their size. But here is something corporations look for and it is necessary. What do you notice about the 1st year? This is a whole life insurance policy and this is really the minimum we see in the 1st year with these types of products. They've got just about 90% of the $100,000 in cash value right off the bat. Company makes the contribution the company owns the policy the cash value is an asset on the company's balance sheet. So it does not go to John. So if I own this company I've got life insurance now on John so if he dies that death benefit of $2,500,000 goes where? Well as the company I sign myself my company as the beneficiary. So if he dies the death benefit flows back to the company income tax-free. Now sometimes you will see what's called here incorporated a split dollar plan. I'm going to do it this way and what this entails is leaving or assigning a portion of the death benefit to John's family members. A lot of companies like to do that small and large a lot of small businesses prefer that strategy. Big corporations do too. The bank we work with that purchased two BOLI policies they have that set up because the co-CEO said listen when we put this plan in place I don't want my employees to feel like I'm just doing this to benefit the corporation I want to give them something. So if any of the employees die a death benefit flows back to the employee's beneficiary for a one-time salary. We can make it whatever we want but you can assign a percentage of that benefit to the employee as well and it all depends on the company and relationship there. But let's look at a couple things here. Payment $100,000 per year. Year 2 he pays in $100,000 he's got $190,000. Year 3 he's paid in the total now over 3 years of $300,000 he's got $295,000 and year 4 he's paid in $400,000 and he has more than $400,000. So a lot of companies look at this as the corporate plan where they can retain their executives they've got key man insurance all that good stuff that we touched on in the last video. But at the same time business owner looks at this and says, like, wait a minute my money's just sitting in the bank excess cash that I like to keep in reserves here it actually grows. What are the core benefits we always talk about with properly designed whole life insurance policies with the major mutual companies safe liquid tax-free area to position money? It's going to fall somewhere between that range 3% to 5%. That's how it's approached just kind of calling it it is what it is. Can it do better? It has in the past but we're in a low interest rate environment right now got to set expectations properly in my opinion. So funds it for 7 years nothing goes in thereafter what do you notice? Cash value just keeps on growing. So that's the policy growth what it looks like when they actually make the payments they've got access to the cash value all the way through they also have key man insurance. And it was a short fund funding it a little past age 55. But now let's see how they actually put this in action. So what do you see on the right? Executive benefit plan it's the exact same policy. What's highlighted in yellow represents the break-even point so by year 4 if I'm the business owner I've paid in $400,000 by year 7 I've paid in $700,000 I've got $780,000 and I never pay another penny into it. I can but I don't in this example. So time passes total payments cap out at $700,000 because we do not add anything else in. To the company by the way all of these payments are made with after-tax dollars so I cannot deduct them the payment that is. Now let me scroll back up annual amount dispersed from the policy so this is going to be the retirement benefit and then the cumulative disbursement this is going to tally up how much money I distributed as a company from the cash value. Let's go up here so at age 65 I say to John hey John thanks so much for all your years of service for staying with the company you helped us grow it was a privilege and I enjoyed it so much thanks again. Here's your benefit $50,000 per year in this example age 65 1st payment $50,000 this comes from the company specifically what happens the company pulls $50,000 from their cash value so you'll notice drops by about $1,000 that year because I'm still earning interest on the policy but I pull out $50,000 as a company this way I'm not pulling it from company revenue from company profits because John he's retired he's no longer producing revenue from the company he's gone so I don't want to hurt my company revenue by paying someone who's no longer producing he put on all that time before that's great but we got to focus on what's ahead. So what companies do is they pull it from this big bucket of cash they've built up. So as I the company take that $50,000 distribution it's not taxable to the corporation I can withdraw up to my cost basis and then loan out the rest we've got other content on that but that's not taxable to me. When I pay him the $50,000 I book that as a compensation expense what does that do from a tax standpoint? Well it's a compensation expense so I do have some tax deduction there. So $50,000 each year we pull out. Now here's really what I want to look at look at this $77,000, $78,000 really as the company I've paid in a total of how much? $100,000 for 7 years $700,000. This column again is the cumulative payments so I'm pulling out $50,000 per year. Is he still going to be alive at $78,000? Probably. So now I've paid in $700,000 I've pulled out $700,000. Here's your cash value here's your death benefit that flows back to the company if he dies at any point in time. Now chances are likely he's going to live longer perhaps $85,000, $90,000 so let's scroll down and here's really what I want to demonstrate from a number standpoint if you like the numbers like me I'm a nerd, I know is this. So when you see this negative $50,000 here this again is the cumulative payments so I've paid in $700,000 I've pulled out $700,000 at this point and now I've pulled out a total of $750,000 so I got my principal back and more that's what I'm distributing. So up until age 90 we're going to assume in this example he died at 90 but we've taken distributions from this policy the initial $700,000 plus another $550,000. So $1,250,000 paid in $700,000 $1,250,000 came out of which that's what John got there we go the $50,000 per year. Now here's the thing too and we could pull out much more than $50,000 per year in this example but what corporations do from a longevity perspective and this actually comes from the family office concept and wealthy families corporations took that model and apply it in their businesses which is something in itself but look at this we're not draining the cash value there's cash left there's $850,000 by the time John's 90 and John got his $50,000 that's what we agreed to when he signed up for this plan that's why he stayed with the company. This could be $500,000 per year depends on the policy size and how we set up the plan. But that's still left over and so is this a death benefit of just about $1,100,000. So if you're the business owner when you started this plan 40 years ago how much total dollars did you pay into it? You may recall $700,000 $100,000 for 7 years. When John dies when the executive dies we want to make sure that we have that cost recovery and really what that means is I want to recover the $700,000 I paid into it. Even though I have access to it all the way through in terms of the cash value I want to recover that. I also want to account for inflation typically right around 3% and we can look at different assumptions as well. But why I want to account for that is obviously the costs are going to increase over time. So here I didn't run any inflation percentages I just rounded up several hundred thousand dollars $1,100,000. So he dies I get my $700,000 back plus about another $400,000 and it's all income tax-free as well. Comes back to the corporation. This is what companies do small and large very powerful again from a long-term planning standpoint and short-term. You know when I talk about the short-term because I feel personally I'd rather have a lot of money up front than not have a lot of money up front because I can use it for my business. Like the business that's been my greatest return out of anything that I have. Long-term yes I want to focus on that but what I can do with the money today that's really where I'm going to grow the company and continue to push things forward. The death benefit flows back and lastly these are the numbers let's say John leaves here's what I want to illustrate. Let's say John leaves 10 years in when he's 59 and we'll assume he started the policy July 2021. We're in July right now. John leaves he walks away from his retirement benefit. I bring someone else in to replace John or someone else has earned their way into that position. I've got this 10-year-old policy on John that I'm not making payments to. I can keep it on John or I can elect to transfer it I've got $900,000 and almost $2.06 million in life insurance and I can exercise what's called a transfer of insured rider transfer of insured rider TIR and put it on the new employee or new executive. And here's the thing it's going to be based on the original start date. So if I put it on a new employee say Joe at this point in time and Joe is 50 years old how old was Joe when we the company started this policy? What's the policy date? July 2021. So we're in 2031 10 years down the road. Even Joe's 50 today when we start the policy it's based on his original age of 40 and that's the actual insurance age that will be applied to that policy. So what I'd see in a case like this if I started with someone who's 50 and put it on someone who's 40 assuming they have no health issues I would likely see a bump in cash value performance and death benefit from a MEC limit standpoint there is a fee typically when those riders are exercised it's minimal but it's for just for awareness. But anyway the point is we don't have to lose time and go through that early capitalization phase again we can just take advantage of a policy that's already compounding I don't have to pay anything into it because I already have a lot of professional sports teams exercise these types of strategies when they're trading players. I actually learned that when I was working at the corporate planning firm but where I learned it from was one of the top underwriters at one of the major mutual companies I knew him because my wife actually knew him pure coincidence they're in the same congregation I was there one day like hey look at that that's my business too talking to him and he's talking to me about a professional basketball player that the company he worked at took a very large policy out on and also the pro basketball players kids and then he mentioned yeah you know when these teams trade players they'll transfer policies all the time this transfer of insured rider I'm like wow that's pretty cool I'm like 26 at the time I think 25, 26 I'm like yeah I like that just talking to him and then obviously I learned more just in that role it's something really really valuable to be aware of not for the here and now but the more awareness we have as time passes to know hey I can do something like that transfer a policy and I don't have to start all over go through those new expenses it can be a world of difference my money keeps moving forward. So I hope you enjoyed this one if you like this video please hit the like button subscribe for more and we'll talk to you soon. Thanks so much. 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.