Have you ever wondered what the difference is between a regular whole life insurance policy versus a whole life insurance policy designed for cash accumulation? Well, there are a few differences in the way the policy performs and their design.
A whole life insurance policy is a permanent life insurance policy that as long as it’s in force, it’s a unilateral contract between the policy owner and the insurance company. The insurance company is going to provide all of the benefits in the contract. The policy owner is only responsible for one thing, and that is paying the premium.
The insurance company is promising to pay the death benefit once the insured dies. As long as that policy is in force, which will be the whole life, as long as the premiums are paid.
The second promise is to have a cash value in that policy that’s equal to the face amount at the age of maturity, which is typically age 121. These policies are actuarially designed to get better and better every single year. Why? Because of that second promise. The insurance company has to stash away more and more money every single year in order to meet that second promise of having equal cash value and death benefit at that age of maturity.
So we’ll often get the question, “Hey, I’m kind of old. Can I still get a whole life insurance policy? Isn’t it really expensive?” And to that, the answer is, well, it is more expensive, but that’s because the insurance company has less time to meet that second promise. They have to stash away more money sooner in order to meet that second promise.
So here’s an example. Let’s say you’re 40 years old and you’re thinking about insuring yourself, as well as ensuring your parent who is 60 years old. Now, when you’re looking at insuring your parent and you’re using a policy paid-up at age 121, if your parent is 60 years old, there’s only 61 years to stuff the premiums into so that the insurance company has cash value equal to the initial death benefit at age 121.
Now let’s shift over to insuring yourself. If you’re 40 years old now, you have 81 years to stuff the premiums into to make sure that the insurance company has cash value equal to the initial death benefit at your age, 121, so the premiums will be lower in your situation versus your parent.
But keep this in mind. For your parents policy, the cash value will be greater everywhere along the line because the insurance company has to put more cash away because they have a shorter window in order to put that money away.
So let’s shift gears. What’s the difference between that regular whole life insurance policy that we just talked about versus a whole life insurance policy, especially designed for cash accumulation? Typically, when you’re dealing with a specially designed policy, there are a few criteria you want to have.
Number one is you want to make sure the company is a non-direct recognition company that pays dividends to their policyholders. Number two, you want to make sure you have a paid-up additions rider on the policy that allows us to supercharge the cash value accumulation early on in the policy.
Typically, with the regular whole life insurance policy, it takes about ten years for them to become efficient from a cash value perspective. Meaning if you have a regular whole life insurance policy, you’ll have some cash value accumulation, but it will be slow and steady up to that age 121, that age of maturity. But with a specially designed policy, the cash accumulates more quickly within the first few policy years.
Typically, you could expect the first four policy years to be vital to have that paid-up additions rider on. So you have access to a larger portion of the premiums you’re paying into that policy. A specially designed whole life insurance policy focuses on cash value access versus death benefit.
Now, the death benefit is also important because we’re talking about a whole life policy, and usually the policy will be in effect at your death. So somebody is going to benefit from that death benefit. But, the fact that the policy gets better and better year after year is the engine that makes the cash accumulation vehicle run.
Another key about these specially designed policies is it has a built in flexibility factor because it has a paid-up additions rider. We have the flexibility of dropping that rider and reducing the premium down to the base premium, versus with a regular whole life insurance policy. You’re kind of locked in to that premium and the only way you could get out is with a contract change to lower the face amount.
When utilizing a specially designed life insurance policy, you have the built in flexibility to be able to reduce your premiums when life happens. Let’s say the car goes, a roof, or even a furnace goes and cash flow is tighter. You can reduce the premium on the paid-up additions rider.
Typically with these specially designed policies. You want that paid-up additions rider active for anywhere between four and ten years of that policy. After that, the whole life insurance policy, the base policy within the specially designed contract becomes more and more efficient and you no longer need that supercharger on it.
That brings us to a question that a client had recently. And the client said, “Hey, if these policies get better and better every year, and by the fifth or sixth year for every dollar I’m putting into the policy as far as base premium, my cash value is growing by more than a dollar, shouldn’t I wait to put the paid-up additions rider on in the sixth year rather than in the beginning?”
And the answer to that is simple. As we went over today, the paid-up additions rider is what supercharges that cash value accumulation within those first policy years. So for that reason, it’s important to fund that paid-up additions rider early on in the policy so that you can make your contract more efficient on a quicker basis. instead of the policy breaking even on an annual basis, meaning that the cash value increase is greater than the premium in, say, the sixth year, you could actually accelerate that to the fourth or fifth year by having a paid-up addition’s rider on the policy right from the beginning.
One note on the similarities between these contracts, the specially designed and the regular whole life, is that both have contractual guarantees for the loan provision, meaning that if you have cash value available within your policy, you have a contractual guarantee, access to that policy, via the policy loan provision, so that you have flexibility and access to that money.
So let’s review what we talked about today. First and foremost, the difference between a regular whole life insurance policy and a policy specially designed for cash accumulation. The specially designed policy has more flexibility and becomes more efficient sooner because of the super charge that comes with the paid-up additions rider.
If you’d like to get started with this specially designed whole life insurance policy or you already have policies and you would like us to take a look at them, be sure to schedule your free strategy session today.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.