GAMBRELL FINANCIAL NEWS

If you’ve been following along with my other segments I’ve talked about when using a cash value life insurance policy, it’s vital the plan is structured properly day one.

If you purchase a plan that is not structured properly from day one and three years down the road you realize the mistake, there’s nothing you can do to correct it. Your only option is to start a new plan and that’s why it’s important you work with a qualified financial professional who understands how to create a properly structured cash value life insurance policy!

My recommended product is an IUL – Index Universal Life!

If you would like a detailed explanation on why I recommend an IUL instead of a Whole Life policy, please check out my segment on “IUL Mysteries, Truths & Myths explained!

Basically, you have two primary objectives in purchasing a life insurance plan…. objective number one is to purchase as much life insurance death benefit as you can for a set amount of dollars to pass on to your beneficiary’s income tax free.

Objective #2 is to pay as much money as you can for the least amount of life insurance death benefit, in this scenario you are not concerned with the death benefit. Your primary goal is to maximize tax free income distributions during retirement.

The following example assumes your primary goal is for the cash value accumulation!

This segment is only covering the initial foundation of a properly structured policy.

When I conduct a policy review one of the first hints I see as to whether a policy is designed correctly is the premium to death benefit ratio.

Usually when I see a large premium with a large death benefit, I automatically assume the owner of this plan was looking for the maximum death benefit he or she could buy and the goal was not cash value accumulation.

Let’s look at two policies with the same annual premium of $900. Premium payments for both plans will end after 20 years when the grandchild is age 20.

The age of the insured is 5 months old.

A grandparent wants to give their grandchild the gift of financial stability by way of a max funded life insurance plan.

With the first cash value policy the death benefit is $287,539 with a $75 monthly premium.

The second policy has a death benefit of $51,108 with a $75 monthly premium.

For the client who doesn’t understand how this process works and for the insurance agent or advisor who doesn’t understand how this process works….. You might think paying $75 per month for a $287,539 policy is the way to go.

The agent or advisor runs the numbers and presents you with the proposal showing a total tax-free income payout of $332,500 spread over 35 years starting at age 66-101! Great news Mr. or Mrs. client with this plan you’ll only pay $900 a year for 20 years totaling $18,000 and your grandchild will receive $9,500 of income tax free money. This income stream will last for 35 years totaling $332,500!

Pay $900 per month starting at 5 months old stopping the payments at age 20 and allow these funds to grow untouched for 45 more years and get back $332,500, doesn’t sound to bad right. $18,000 for $332,500!

What if you spend the same $18,000 over 20 years allowing the funds to grow untouched for 45 more years, but instead of a $332,500 return you have a $1,475,830 return without spending a dime more!

In the first scenario beginning at age 66 your grandchild could receive income tax free distributions of $9,500 each year for 35 years while in the second scenario beginning at age 66 your grandchild could receive income tax free distributions of $42,166 each year for 35 years totaling $1,475,830!

Clearly the policy design in the first scenario wasn’t structured for maximum cash value growth.

Here’s why:

Take a look at scenario 1 policy values below:

Client Details res smith, Female, 0, North Carolina

Initial Death Benefit $287,539.00

Initial Premium $900.00

Minimum Premium $787.86

Target Premium $900.00

Guideline Single Premium $19,513.89

Guideline Level Premium $4,714.93

7 Pay Premium $8,373.75

Riders At No Cost*

Riders Accelerated Benefit Rider –

Terminal Illness Accelerated Benefit Rider –

Chronic Illness Accelerated Benefit Rider –

Critical Illness

Over loan Protection Rider.

Income starting at age 66 to age 101:  $9,500.00 each year for 35 years for a total of ($332,500)

Account Value at age 66: $249,088.87

Surrender Value at age 66: $249,088.87

Death Benefit at age 66: $536,627.87

The larger the death benefit the higher the fees in relation to the monthly premium!

The death benefit is $287,539 the target premium is $75 monthly. If you were trying to get the maximum amount of permanent life insurance $75 could buy, this plan would be an awesome deal and it would also provide you with some cash value accumulation.

The goal of a max funded cash value policy is not about how large the death benefit is.

We need to reduce the policy fees by getting rid over every dollar of life insurance death benefit the IRS will allow.

Following IRS guidelines, we can reduce the death benefit down to just $51,108 and still be allowed to pay $75 per month.

This reduces the overall fees of the policy and allows more of your money to grow income tax free.

The $75 monthly premium for $287,000 of death benefit is the target premium (the premium needed to keep the policy in force).

The target premium for a death benefit of $51,108 is just $13.33 per month however the max funded premium is $75 per month.

With option one we are paying $75 per month for $287,000 of life insurance and in option two we are paying $75 per month for just $51,000 of life insurance.

Obviously, the fees for option one is almost 6X more than option two.

Client Details res smith, Female, 0, North Carolina

Initial Death Benefit $51,108

Initial Premium $900.00

Minimum Premium $242.76

Target Premium $159.97

Guideline Single Premium $5,161.14

Guideline Level Premium $900.01

7 Pay Premium $1,488.37

Riders At No Cost*

Riders Accelerated Benefit Rider –

Terminal Illness Accelerated Benefit Rider –

Chronic Illness Accelerated Benefit Rider –

Critical Illness

Over loan Protection Rider.

Income starting at age 66 to age 101:  $42,166.56 each year for 35 years (1,475,829.60)

Account Value at age 66: $623,896.69

Surrender Value at age 66: $608,237.21

Death Benefit at age 66: $726,777.59

This first process of properly structuring your cash value life insurance plan is vitally important to the overall success of the plan. Get this part wrong and it could cost you thousands.

If you figure out 5 years later too much of your money  is going towards paying for the cost of insurance instead of your cash accumulation buckets… Most people will call the insurance company and ask them to reduce the death benefit to the bare minimum.

The problem with this is… the fees are calculated based on the original design of the policy and can not be changed. Yes, you can lower your death benefit, but you will not lower the fees. Also, by lowering the death benefit 5 years later you could also restart the surrender charge period.

As I mentioned previously the only real way to fix a poor design is to start a new plan!

How you start the plan will help to determine how you’ll end the plan.

If you are viewing this segment from a mobile device you can view the policy details used in this example as images above or if on a computer these images are available to you on the left!

If you have a cash value policy and not sure if its structured the right way, email us a copy of your policy and we’ll review it at no cost or obligation to you! [email protected]

Please check out my segment on “IUL Mysteries, Truths & Myths Explained for more details on how to properly structure a cash value life insurance policy for maximum cash value growth!

Grandparents & Parents…. For less than $38 per month you could potentially provide your children with a half million of tax free income! I’m sure you’ll end up spending way more than an average of $38 dollars a month on fancy cloths, Nikes, smart phones and more. Supplement your spending with a $38 max funded IUL policy to age 20!