Whole Life Insurance Dividends, IRR, and Loans

Hey it's Matt Decker here with leverage Wealth Management I'm gonna tackle a couple of topics here today surrounding whole life insurance so the first thing that we're gonna talk about is the dividend rate versus the internal rate of return those are two very different things than they often get confused so dividend rate versus internal rate of.

Return we're then gonna talk about the impact of early loans on whole life insurance policies because I think that there's a lot of misconception out there about loans on whole life insurance policies and whether or not it's a direct recognition non direct recognition I think that you'll see that none of that really matters in the long.

Run because of the actual mechanics behind the policy so these whole life insurance policies a lot of times are sold under the idea that you can take early loans you can take money out of these policies early on to pay for things like automobiles to finance business purchases to invest in real estate there's all kinds of different.

Ways that it's sold or packaged as taking money out of these contracts in early years it might be referred to as Bank on yourself be your own banker infinite banking books have been written by people like Nelson Nash Pamela Yellin there's all kinds of stuff out there on using whole life insurance as a replacement for a bank and I'm gonna try.

And debunk a lot of that with just some really simple obvious math that anybody can do and in about five to ten minutes understand that those concepts don't really work so I said we were gonna start with the difference between the dividend rate and the internal rate of return and that one's really easy so what you need to do if you own a whole.

Life insurance policy is you need to ask for an internal rate of return ledger on your current policy and what that's gonna do is it's gonna show you the actual internal rate of return of your policy for every single year now what we're looking at here is a mass mutual policy this is a ten pay whole life insurance policy it's one of their best.

Policies this particular company MassMutual has one of the strongest dividend paying whole life insurance policies out there they have for a really long time so this is not a cheap shot at MassMutual this is not me cherry-picking a bad company this is a really good company in the whole life insurance.

Space one of the best okay this policy happens to have they call it a six point four percent dividend rate so six point four percent dividend rate and what most people think when they purchase these policies is that they're actually getting six point four percent per year okay but if you know anything about how a dividend works let's assume.

That you have a hundred thousand dollars in Ford stock if Ford stock declared a six point four percent dividend you would expect to get sixty four hundred dollars from Ford because you got a hundred thousand dollars in six point four percent dividend they take six point four percent multiplied by the amount of your shares the value of your.

Shares and now all of a sudden you've got an extra sixty four hundred dollars that's how a dividend works it's based on how much money you have invested I think what you'll see when we look at this is that it's nowhere near that so the first thing we're gonna do is we're gonna look at the actual internal rate of return so this is the internal rate.

Of return report on the cash value and what you'll notice is that it's a temp a policy $14,000 a year for those first ten years you'll notice that the internal rate of return is basically zero it's negative for the first several years and then it finally breaks even here between years nine and ten so this is the point between nine and ten where.

You've actually broken even and you have just as much in cash value as you've paid in in premium so for the first ten years there's really no return on this policy that's pretty typical you should come to expect that okay in fact in year one you paid in fourteen thousand you have forty three hundred dollars in cash extremely typical there's not really.

Anything wrong with that that's fairly typical but what I want to really key in on is looking for the highest internal rate of return percentage throughout the lifetime of this policy so you know we go out to year twenty five we're up to four point two seven percent if we go to the next page the highest one that I can find is four point.

85% and I believe that's gonna be the highest so 4.85 percent is the highest internal rate of return on this particular policy and you'll notice that four point eight five percent is a whole heck of a lot less than six point four percent why is that it's because whole life insurance is the most expensive form of life insurance you can buy why.

Is it the most expensive form of life insurance you can buy because it has three guarantees and guarantees are extremely expensive you have a premium guarantee you have a death benefit guarantee and you have a cash guarantee every time you add a guarantee to one of these policies anytime you add a guarantee to anything it doesn't matter.

What product we're talking about if you have a guarantee built into a product it is instantly more expensive than not having the guarantee so that's how you end up with a six point four percent dividend on a product that only has a high point IRR throughout the life of the contract of four point eight five percent and if you want to actually just.

Do this on a year-by-year basis you can and let me show you how to do that so this is just your typical ledger page there's nothing special here but there's a really easy way to understand or to conceptualize the the actual year-by-year return on the policy okay so I know that these policies are front loaded with fees and you've got your.

Cost of insurance charges and so some of you might think well internal rate of return over the long haul that's not nearly the same as as your dividend rate and what you're earning on a year-by-year basis and I totally agree so if you want to understand your whole life insurance policy and and what you're actually earning year by year.

It's really simple here's how you do it so you're gonna take any cash value total cash value so this is total cash value end of year so let's just take this last column your twenty one age fifty two hundred and sixty six eight seventy we're gonna get our calculator we're gonna go to sixty six eight seventy and all we're gonna do is we're.

Going to divide it by the previous year's cash value and the reason we're gonna do that it would be more difficult if you were paying premium this is why I chose a ten pay because we're not paying premium in any of these years so all we have to do to get the rate of turn from year to year is take 266 870 and we're going to divide it by 252 407.

So 266 870 divided by 252 407 and what do we get we get 5.7 percent okay so in that one year we had a six point four percent dividend but our return year over year there's only five point seven percent that's a whole heck of a lot different than six point four okay so keep that in the back of your mind the lifetime internal rate of return at the.

High point at the non-guaranteed projected value not the guaranteed value the non guaranteed projected value was a high of four point eight five and the high point from a year-by-year return is five point seven percent okay so those two numbers are important because it leads into the next conversation about using this policy for loans so here's.

What you need to do if you own a whole life insurance policy you need to pull up the illustration that was originally sent to you in order to help make the sale and you need to do a fine so ctrl F is gonna bring up your find key and what I want you to do is I want you to just search for loans so you're gonna search for loans and you're gonna search until.

You get to the point where it shows you the actual loan provisions on the policy and there it looks like I just found it okay so you notice I had to do that a few times because it mentions loans a lot in here but this is key additional information about this illustration and I'm just gonna read it to you because if you expect to take loans on this policy.

You have to understand how it works and especially if you're in the be your own bank infinite banking Bank on your self mindset and you think I'm not gonna pay interest to the bank I'm gonna pay interest to myself if that's your mindset you have to understand this because this is what you're doing the fully allocated expense method is.

Used to allocate overhead expenses for all illustrations annual net outlays based on a tax bracket data none of that matters this is what matters this illustration using a 5% policy loan interest rate is for a policy issued in California on such and such date this rate may change on each policy anniversary date okay so that's key this.

Illustration is assuming a 5% policy loan but that loan it might change on each policy anniversary date now why is that important it's important because these policies along with any insurance company it doesn't matter if its whole life index life variable life doesn't matter all these policies they're loan rates track with the Moody's corporate.

Bond yield the Moody's corporate bond yield for the last five or six years has been near historic lows near historic lows because interest rates have been near historic lows for years now so if you have a policy loan interest rate that tracks with the Moody's corporate bond yield or that tracks with in a broader sense interest rates in general.

And interest rates have been at near historic lows for years you should assume that if interest rates start to tick back up this sentence right here this rate may change on each policy anniversary date you should expect that sentence to come back to bite you in the future and if interest rates go up you should expect this illustrated this.

Illustration using a 5% policy loan interest rate that 5% is gonna go up it's gonna change now why is that important it's important because if you intend to use this policy to Bank on yourself you have to understand that there at this point there's a baked into the cake 5% policy loan interest rate that 5% charge goes to the insurance.

Company when you pay back your loan it doesn't go to you it goes to the insurance company that 5% charge can go up but what's even more important than that 5% policy loan fluctuating well it's even more important than you not actually paying the 5% to yourself it's actually going to an insurance company what's more important is you have a.

Policy with an internal rate of return lower lower than the interest rate being charged to access your money via loan I'm going to say it again you a policy that has a lifetime maximum internal rate of return of four point eight five percent remember that that's from the beginning of the video we.

Looked at the highest year IRR on cash four point eight five percent yet when you access your money in this policy via loan you're already underwater as soon as you take money out of this policy at five percent they're charging you more than the internal rate of return on the policy and you're underwater so it doesn't matter if your quote-unquote.

Banking on yourself it doesn't matter if you're paying yourself back the interest none of that matters it doesn't matter if it's direct or non direct recognition none of that matters because they're charging you more than your policies making to access your money and this is symptomatic of every single whole life insurance policy that I've seen over the.

Last ten years I nearly never see a whole life insurance policy that has a loan rate lower than the internal rate of return on the policy and the reason that I'm showing you this MassMutual contract is because this MassMutual contract is actually a really good contract it's the best one that's out there consistently year over year and.

Even the best one that's out there consistently year over year does not have an internal rate of return higher than your policy loan rate and that's why in a nutshell I don't think that these Bank on yourself concepts I don't think that financing your business or purchasing a vehicle and none of those things works from a math standpoint in.

An in it whole life insurance policy it works if you don't compare it to anything else but as soon as you start comparing using this policy in these loan provisions to anything else it doesn't work and here's a great example a couple years ago I bought a new car I went to my local credit union and I got a rate of 1.9 percent so if I can get a.

Rate for a new car at 1.9% is it better for me to go that credit union and get a loan at 1.9 or take a loan for my life insurance policy at five I'll pause for you to think about that what's gonna be better a loan for my credit union at 1.9 or a loan for my life insurance policy at five obviously the answer is you'd much.

Rather pay 1.9% to your credit union than five-percent to your insurance company it's a no-brainer and that's why when you compare this to nothing it looks good when you start comparing it to other options to other vehicles when you actually compare it to getting a loan from a bank at a lower rate it no longer makes sense to Bank on yourself.

So I just wanted to make this quick video because this is probably one of the more convoluted subjects in the insurance industry it's probably the most misunderstood concept because some really influential people write some really good sales ebooks on the subject and and it gets a lot of people drinking the kool-aid and I think if you just.

Step back if you ask yourself these questions is my dividend rate my rate of return no is my dividend rate my internal rate of return no are my loan provisions better or worse than my internal rate of return when you ask yourself those three questions you'll understand that using these policies for early loans it just doesn't work there's.

A different place for whole life insurance it's not for using it as a bank because mathematically it doesn't work you got to compare it to other alternatives so anyway I hope that that helped I hope that it shed some light on a really complicated subject it's probably worth way more than a 12 to 15 minute video and I might do something.

Longer on it in the future with some actual numbers and policy examples and a big Excel spreadsheet but for now leave a comment below let me know what else you want to see on this channel let me know what other reviews you want me to do what what products you want me to review and I can work on that as well if you haven't done so already like and.

Subscribe and I look forward to talking to you soon

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