Are Big 1st Year Premium Dump-ins Good with Whole Life 4 IBC?

If you’d rather read the article, we made a quick transcript for you below:

Hey, this is Hutch with BankingTruths. com. And today we’re going to discuss front loading a whole life policy, specifically with first year dump ins. Just big single premium dump ins. Whether you have cash on the sidelines sitting in high yield savings, the Fed just lowered rates, making them not as high yield savings accounts.

Maybe you’re getting an inheritance soon. Maybe you’re unwinding some stocks or mutual funds, uh, to take some winnings off the table from these all time market highs, fearing the potential turbulence coming up. Regardless, we have done an analysis like this before and our thesis has not changed. However, we are updating the numbers using the most modern whole life products.

And in fact, we just recently put out an update. If you want to see just normal whole life policies without the maximum, like, you know, just Big first year dumpings. You can go to BankingTruths.com/Update  to see the updated numbers. So let’s get into how this first year dumping thing works mechanically and then go ahead and look at the numbers.

So you’ve probably heard me say when it comes to overfunding life insurance that more and sooner is better and that’s absolutely true. However, most people don’t realize that there is a point of diminishing returns and this limitation actually comes from the IRS. They will turn your policy into a mech and they will revoke your tax advantages.

So just like they cap how much you can put into a raw 7, 000 a year, whatever that year’s limitation is. There is a limitation with life insurance, but it’s not linear. They just want to make sure you have a comparable amount of reasonable death benefit to support giving you the Roth like advantages inside your cash value.

They want to make sure that ultimately this policy is benefiting widows and orphans. So if you do want to disproportionately add and stack these turbochargers onto your policy, you need to add more death benefit, and you can only do that one of two ways. One is you can increase the size of the base policy, the bulkier, heavier part of the engine.

But remember, these paid up additions are like microcosms of death benefit. of the base policy itself, they can only enhance the existing base policy. So the quality of that base does matter, but adding more will definitely increase your obligation, your ongoing guaranteed cost a whole life. And so the other way is to add the titanium chassis, the lighter chassis that allows you to disproportionately stack more P ways early on.

So there’s one carrier in particular that allows you to do a massive First year dumping and we were wondering like, wait a second. Do they have a special deal with the IRS? How, how do they do this? And we were able to look at the rider itself. It’s called a single premium paid up additions rider. You can see in this rider, they allow you to pay one time, a massive amount, and then nothing further.

But really when we looked under the hood, all it is, is just a beefed up bulkier term rider, which kind of defeats the purpose. Uh, but putting more in sooner is usually better. To that point of diminishing return. So we went ahead and tested it to see, is it really better than just adding a normal amount of term riders, stacking PUA’s or doing this big first year dumping and having a ton of PUA’s right away, getting that money working for you.

only to have the efficiency kind of fall off because you can’t continue to add that kind of fuel on an ongoing basis. So that’s what we’re going to look at in this video. So let’s take a look at the numbers. Okay, so we’re going to look at a few different examples of how we triangulate and find that point of diminishing returns and back it off a little bit to find the sweet spot.

But remember, this is for a 47 year old second best rating. Doing 150 K right away. Your numbers are undoubtedly going to be different. So if at any time you want to see your own situation custom model for you, go to bankytruths. com slash schedule and we are happy to help. So at any rate, let’s start with the most minimalistic design.

Just 150k one time and I realize a lot of you are thinking, you know what, I want to be done right after that. But in order for any whole life to be optimal, you need to pay premiums for at least seven years. Now, I realize other people are saying you cannot pay premiums. It’s true. You can always cannibalize the policy itself, whether it’s borrowing against it or sacrificing PUAs to stop paying premiums earlier than seven years.

But ideally you want to pay something for at least seven, even if it’s the minimum. Now, if you remember, that has to do with those IRS rules and the seven pay tests. That’s actually how we optimize a policy before violating their tax guidelines. So all these examples you’re gonna see are seven pays instead of just paying the minimum premiums, I wanted to get to round numbers.

So after a one 50 dump in one time. I just show you paying 10K for the next six years. Now, we are going to show different equalized versions of PEN, but we’re going to show the most minimized cost version of PEN. And with that, we can only fit in 40K maximum in any given year. To equalize with the law of fiat, we’re going to pay 40K four times, then 20, then 30.

Then 20 then 10 and they actually get equalized with the same amount of money is in the policy By year six and even though lafayette had a lot more money going in sooner Penn is already ahead by the time they’re equalized by the next year year seven they’re pulling farther ahead and after that certainly because we are going to do what’s called a rpu or reduce paid up where we just strip both of these policies of all All the charges, all the costs, and just turn them into growth machines.

Well, you can see, even though Lafayette started with a lot more death benefit, you needed that in order to fit in 150. All that extra death benefit in the beginning was kind of a way to, it was kind of a drag, uh, versus the pen. We were able to start with a smaller policy, the titanium term writer, and then once we go ahead and optimize it by stripping the cost, you can see it’s just Pulling leaps and bounds ahead of the Lafayette.

So before we look at the Goldilocks sweet spot scenario for Penn, let’s take it to the other extreme and make Penn a much bigger policy to get as close to the one pay, that 150, 000 dumping with Lafayette. We’re going to do a two pay, not like the wig. We’re going to do two pays of 80. which equals 160.

And then in order to equalize the Lafayette, we had to kick up the premium in years two through seven from 10, Now, to be totally clear, we did not increase the size of the base policy with Lafayette. We didn’t have to because they had that rider. In fact, we’re actually paying the maximum this rider will allow you to pay in future years, which should help Lafayette because we’re really, we’ve opened this big bucket and now we’re fully Filling it to the maximum allowable capacity.

Well, with Penn, we’re not. We actually had to increase the amount of base premium, which you think it would hurt. We talked about that bulkier engine, but we also talked about that that engine is really just a microcosm of the PUA’s. And the fact that Penn has more efficient base policy, even though we’re increasing it, uh, it’s actually not that bad.

If we look by year seven, we can see that it’s pretty good. It’s almost even with the Lafayette. That’s when all the premiums are exactly equal. And really the Penn base is 18, 000. So for those other years, three, four, five, and six, we’re just paying slightly more in PUA. So we did these two big dumpings.

Then we’re min funding a pretty big base premium. And it’s almost even by year seven. And after that, once we do an RPU, you can see Penn has not only more cash value, but more death benefit by a pretty wide margin. Transcribed In fact, if you look closely by year 25, Penn has almost as much cash value as Lafayette does death benefit.

And if you remember, this is very important because with any base policy, the cash value has to equal the death benefit by life expectancy. So it’s, it’s almost like pole vaulting. You want to raise that bar as high as possible because with the whole life policy, you have a pole vaulter that will always reach that bar.

So if you’ve seen my recent whole life policy analysis, where we compare all the major whole life players, you remember this heat map and this heat map is just isolating base only no term rider, no overfunding. It’s actually for a 45 year old. What we’re looking at in this video is a 45 year old. 47 year old, this is actually just 10 pay base only.

We’ve been looking at a seven pay, but it’s really close enough for you to understand the concept of why if Lafayette had such a headstart and they actually had smaller base and more PUAs, why they would underperform longterm so much. And it has to do with the quality of ingredients, not only for the base policy, but remember the PUAs are really just microcosms of this base.

All right, so let’s look at that Goldilocks sweet spot signs for Penn. We just looked at the 80k 2 pay, not the wig, but a really big policy, which actually wasn’t that bad. As soon as we stripped it of all charges, Penn started beating it on a regular basis going forward. If we just split the difference and do 60k times three and then some smaller premiums, it’s not a minimum premium because we brought down the size of the Penn base and therefore the Term Rider, you can see the total death benefit is about half of Lafayette’s.

You can see that when Everything is equalized by year six. They both have in the same amount of money. 240 K that pen is winning by a noticeable amount. And then from that point forward, it just kicks butt. Now, if you remember when we looked at the to pay the 80 K to pay, the cash value was almost as much as the death benefit.

It was 737 actually. Here we’re at 7. 56 plus we have 1. 1 million of death benefit that the Penn Cash value has to grow towards. So there’s actually another big advantage to using Penn if you plan to have multiple dumping events over the course of your life. Maybe your real estate investing is going to go really well and you’re going to need a place to put the spoils when you sell a property.

Maybe you’re going to have windfalls in the stock market. Maybe your side hustles are going to go well, your income’s almost certainly going to go up, but maybe you’ll get some massive bonuses. Well, with the Lafayette policy, if you remember, you could put it in the one 51 time that’s because it’s called a single premium paid up additions writer.

After that you were limited in how much paid up additions you could put in, quite frankly, because of those IRS limits. So the most you could put in after that was 18, 000 and that’s only for until year seven. After that, you actually get squashed back to 16, 000 and change, not so with Penn because you didn’t use up all that capacity.

You can do a lot of 60s. So if we wanted to equalize this, call it maximum funded Lafayette over 21 years, you can put in 487, 000 with Penn. You can get the 487 in by year nine. Uh, so same amount of money in, it’s kind of not fair because now we’re front loading in the pen. But if we look at what the performance is like at the end of year 25, Penn is massively ahead.

Now, another little fun fact, if we look at both of these long pay scenarios, is if we look at their guarantee columns, not because I think it’s going to happen. Both of these companies have 100 and some years. Penn’s actually the same. second oldest mutual company. They pay dividends every year since the civil war, but I think it’s good to consider the overall quality of the base policy because remember, even if no dividends are paid, the cash value has to equal the death benefit.

And if we look at the 21 years of premiums in the Lafayette policy, you put in four 87, they have four 66. That’s pretty good. Almost all your money’s there. You’re light about 20 K, not a huge deal. And again, they’re going to pay dividends. So that’s, That’s probably never going to happen in any universe.

And you do have 684k of permanent death benefit. Now, if we look at 21 years of the long pay premiums into the pen, you notice you don’t have 487 what you put in or 466. You have 571. And actually, if dividends are paid, just going forward with this schedule, you actually have 960. But just going back to the guaranteed parameters, 571 and not 640 of death benefit.

You get an extra. 400 K of death benefit, which you may not care about now, but remember the cash value has to equal that death benefit. So again, the guaranteed value for me just show the underlying quality of a whole life carriers based policy. So hopefully this video gets you to realize that. How quickly you can get money into a policy is not the most important thing.

Contrary to what others are saying out there, we’ve been saying the same story for over a decade now that quality matters. Performance is the most important metric, which is why we go to painstaking measures to constantly put out updates about the different policies that are out there. And if you want to see how we work with clients to customize for their situation, we’re We have a video called banking truths.

com slash sizes, which shows you how we triangulate whether or not you have a dump in to find that Goldilocks sweet spot size for you. And whenever you’re ready to look at your own numbers, speak with one of our experts at bankingtruths.com/schedule. And we hope to talk to you soon.