Understanding 10/90 Split For IBC – Is Base Whole Life Always Bad?

Base Whole Life Isn't Always Bad... Richness of Ingredients is King!

The biggest myth when it comes to designing Whole Life insurance policies for the infinite banking concept (IBC), is that the Base Whole Life policy is bad. Some agents even take it a step further to insinuate that the best Whole Life insurance companies are the ones that allow you to buy the least amount of Base Whole Life while simultaneously pay most amount of PUA premium (paid-up additions).

This video dissects this logic by comparing Guardian Whole Life policy that allows for up to 10/90 blend (10% into base premium and 90% into PUAs) against both Mass Mutual’s and Penn Mutual’s best Whole Life policy for infinite banking. In both cases the Base:PUA ratio is not as lean as 10/90, yet they still outperform Guardian’s 10/90 split.

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

Today we’re gonna talk about the biggest myth ever when it comes to designing a whole life policy for infinite banking and having been at this for a decade and a half. Now we know how the sausage is made when it comes to designing whole life policies. We also know the shenanigans that other agents are up to.

When you peel back the guts of what these other agents are doing, you’ll often find that there’s some kind of career or captive contract issue, where if they concentrate their business to this particular company, they get extra boosts, extra perks, extra benefits, extra retirement bonuses, deferred comp, whatever it is for concentrating their business to.

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We don’t play games like that – we like to be able to stay current and be able to pivot as the market moves. So we have broker contracts with all the companies and we get paid the same whether we sell this much or this much of said companies it’s probably not the most profitable tact.

It just makes our life easier because things change. Like there were the big regulation changes at the end of last year and it gives us the freedom to go ahead and pivot without any conflicts of interest involved. So the biggest myth, what is it? The biggest myth? And it actually sounds pretty good, is that the best way to design a policy is always use the lowest base premium to PUA ratio.

Like you want to pay the lowest percentage into the base premium and the highest percentage into PUA, which again, it on the surface who could even argue with that, that sounds amazing. But if I use this analogy, this chef analogy that would be like saying this particular restaurant uses the best recipes, the best proportions of ingredients.

And therefore it tastes the best. The meal tastes the best, but you also know that the quality of ingredients actually matter. Like, does it really matter the proportions that the ingredients are mixed at? If they’re inferior ingredients, the answer’s no. And so there’s a mix. Like we always use the most term writer we can and therefore put in the most PUA can.

But sometimes with certain companies that requires a higher base or sometimes with certain companies, their best product, isn’t a life paid to 100 where you’re gonna have a low premium payment, cuz you’re stretching that payment out to age 100 and slapping on a turn rider. Sometimes the best, uh, product is a 10 pay where you take a hundred year to age, 100 worth of premiums and compress it into the next 10 years.

That base premium’s gonna be higher, but it’s a more concentrated ingredient, if you will. It’s more rich in nutrients if you will, because of its structure. So it’s not that cut and dry. Right? And that’s what we’re gonna spend the rest of this video. Looking at, in terms of the best temps, the best L 100 S and compare it with the product and company out there, which is a good product and company where you can actually get the lowest base to PUA ratio.

You can see for yourself which one you like best. All right. So to back up my rhetoric with some math, I’m gonna show you a company approved piece and I’ll let you know, we don’t normally show these company approved pieces, but we actually came to our own conclusion by doing our own independent study in our 2022 Whole Life product update video comparing the best IBC policies. 

There’s some examples at the end of this video, but I just wanted you to know that in showing this, we came to the exact same numbers and Penn Mutual actually came out to be the most efficient in terms of both.

Base policy and PUA ratios. And what you’re looking at here is a life paid up to at age 100 policy for a 45 year old. It’s a million bucks, uh, just paying premiums to age 100 against the other mass mutual New York life guardian one America, all quality companies. Their lowest base premium or policy. And what you can see is Penn actually has the lowest premium for that million dollar death benefit.

It also has the highest IRR for the death benefit, as well as the highest IRR (internal rate of return) on the cash value for that time. Now keep in mind, there’s nothing special happening here. There’s no term writer. There’s no additional PUAs – dividends are just being rolled back into the policy as PUAs, but this is one of those kind of slow go whole life policies that get a bad wrap out in the industry, because they take whatever 10, 12, or 14 years to break even.

What you can see is of that kind of base ingredient pen as the most efficient and why that’s important is a PUA (paid up addition) is essentially on the same chassis as the life paid up to 100, you’re essentially just putting in a lifetime’s worth of premiums in the first year. And if you did that outside, like not in a PUA, but you just bought a product like that, that would be a MEC – a modified endowment contract.

And you’d lose your tax benefits right away. But the reason why you can do that inside of inside of a PUA is because it’s attached to a bigger policy. So they look at the whole kitten caboodle and decide that it doesn’t, and that’s what we do. For, um, for infinite banking is we add a term writer so we can add a disproportionate amount of PUA onto the base policy so that you can get in extra PUA.

Now we also have a great video called whole life growth, whole life’s growth and its writers. Where we talk about what I just said, conceptually, with the analogy of a race car. And then we actually show a case study of different levels like this kind of slow going policy and then certain levels of, uh, UAS and term writers on top of that in case you’re wondering, not yet though.

um, So going back to the biggest myth of that you’ll hear from some whole life competitors is you have to have the lowest base policy to PWA ratios because PWAs are better. And it’s true in that you can get more in more money in there sooner, but if the quality of those ingredients. Aren’t as strong as you can, as you can get, say with Penn mutual where they don’t allow you to put as much term to base, uh, or PUA to base, then does it really matter?

Again, going back to the ingredients, you could have the best recipe in the world, but if you’re ingredients are lack luster or they aren’t organic, or they aren’t grass fed or they aren’t, whatever the analogy that you like is, uh, maybe it doesn’t matter. How if. Efficient the recipe itself is, and that’s what this chart shows me.

Now. Another thing to consider is in a whole life policy, death benefit is not a bad thing. You, the higher, the death benefit is the higher, the cash value has to equal upon life expectancy, or it just kind of steep in is the growth. Uh, and so the fact that Penn has the highest death benefit, IRR, the lowest amount of premiums to the most amount of death benefit also puts the most amount of lift if you will naturally on that guaranteed cash value, which is why you’re seeing the cash value, IRRs being so much stronger than most of the competitor.

So, so more evidence to dispel. The fact that base premium is bad is to look at these 10 pay premiums. These contractually paid up in 10 year, 10 paid policies. It also give us a glimpse into, uh, what their, what the company’s PWAs look like. Cuz. Remember a PWA is just a lifetime’s worth of premium paid up in one year.

What we just looked at was something paid up in 55 years. This is paid up in 10 years. So it’s a lot closer to how PWAs look. Not exactly, but remember it’s all along the same chassis. And so if we take a look pen again is number one. Their temp pay premium. Isn’t the lowest looks like New York life is a little bit lower, but in terms of IRR internal rate return on both the death benefit and the cash value, they seem to be performing the best.

And there’s nothing else added to these temp pays. We’re just looking at the quality of ingredients, but we’re frontloading 10 years of premiums. Uh, you can see mass mutual, you can pay a lot more. You can pay 71,000 for the same million of death benefit and intuitively you might be thinking well, You’re paying for less death benefits.

So the cash value is gonna just crush. Well, you can see it doesn’t crush. It actually, uh, works out to be a close second in these timeframes. Uh, and that’s what we found in our own results, not just for a 45 year old, but also for a 37 year old and the 53 year old, which again is in our 20, 22 whole life update.

Don’t go there yet. Cuz I got some other cool stuff to show you and tell you, um, But I want you to see that across the board, these 10 pays just looking at base is bad. Well, you pay more premium for this base, but it’s a richer ingredient. There’s, it’s a more concentrated ingredient of goodness. So, uh, you could pay the lower base in the other one, right?

And hopefully the thought is. That enough term writer and PUA will overcome that base premium versus this 10 pay is just saying, what if we just front load the heck out of everything? Uh, and you can see that more base here would actually be good. Just, you know, it’s apples to oranges, but just comparing this to the life at 100.

But again, going back to what I was trying to share. With the other, uh, example of the, uh, life paid up at 100, we’re gonna have a small layer of that. And then some term writers and a lot of UAS, which are gonna act a lot closer to this 10 pay built on top of it. So all of a sudden, the ratio of how much base to PO isn’t as valid as, or isn’t as important as how robust the ingredients are that you’re putting into this blend.

so continuing with the 10 pay theme, let’s compare the leanest, meanest 10 pay out there, the mass mutual 10 pay, uh, with the leanest and meanest, uh, L 100 policy. And when I see leanest and meanest, I’m not talking in terms of performance, but in terms of being able to pay the least amount of base premium, uh, and the most amount of PUA, uh, and that would be guardian, both good companies, both good policies.

And then we’ll circle back and compare the pen to each of them in just a moment. But just following along with the logic of, you know, base is bad and you want the smallest number of base. If we look at the mass mutual 10 pay for a 50,000 premium, and this is on a 44 year old male, uh, preferred the second best rating, the base premium is 11,780 out of a total premium of 50,000 making the PUA payments only 38,000 versus with the guardian.

You can do as little as a $5,000 base and a $45,000 UA payment. So a 10% or a often referred to as a 10 90, a 10% base, a 90% UA payments on paper. This sounds great. Uh, you’re actually putting a lot more to UAS, but again, it goes back to the quality of incre agents. And we know with the Tempe policy, it’s going to be a lot.

Richer and nutrients, if you will, uh, the, the mass 10 pay then will the guardian L 100, because you’re compressing, uh, lifetime worth of payment into the first 10 years. So some producers will harp on this 10 90, this ratio of base premium to, to term ratio. Like it really matters here. Uh, when in fact, when we look at the performance together, you’re gonna see otherwise now to be fair, we tried to.

Equalize the premiums as much as we could, but it’s hard because you’re dealing with different MEC testing parameters. And this is actually a, a little bit of an intangible benefit to adding more base. When you have a super thin base policy, like the guardian policy, uh, you get cut off, you can’t put as many premiums in and you could see in the year or eight, or excuse me, nine and 10, there’s only $20,004 going into the guardian.

And in the mass. And later when we see the pen, we were able to fit in 20,236. So there’s two 30, $2 twice in two years. So the guardian has six $44 less, which is kind of not fair to the guardian. Uh, but it’s not gonna make that big of a difference when you see how vastly different, uh, the results are. And.

The other thing that’s worth noting is that the guardian policy actually becomes a me in year 26. Now you don’t have to me, it, you could just stop paying, uh, in year 25 and therefore it wouldn’t me. Uh, but you actually have the ability to keep paying in the mass 10 bay here and later on in the pen.

Because they have bigger base policies. That actually is a, a benefit in that you actually have more capacity in the policy. Uh, so, and in the pen, you’ll see, you can even stuff in even more cash than what we’re showing here, but just using this as our baseline comparative analysis to do apples to apples, uh, what you can see is, uh, by the 10 in fear.

The mass mutual 10 pay already has an additional $9,000 in it. Um, by year 15, it’s got an additional $30,000 in it. Uh, by year 25, we just jumped to the end. It’s got an additional $92,000. Uh, into it. Um, the death benefit isn’t quite as much on the mass, uh, because of the actuarial structure of that particular 10 pay.

But what you’re gonna see is the pen actually has more cash value and more death benefit. And it has more capacity altogether, but just to dispel the myth that at less base more term is better. In this case, you can clearly see it. Isn’t. And when we just go back to the breakdown, you know, the guardian is a 10% base, 90% PUA with the mass 10 pay.

It’s a 23% base, uh, 76% PUA. Uh, and a lot of people also don’t realize that you can add term riders and you can add PUA to 10 pays you can, you can’t. Quite as much as you can with an L 100 chassis, but it still is possible. And that’s why at the end of 10 years here, you can see the additional payments of 84, 56 going into the 10 pay policy.

Uh, they’re not right for everybody. It does require kind of a bigger, initial commitment when people need flexibility. Of course, once you really understand infinite banking and borrowing against the policy itself, it shouldn’t really be an issue once you get a couple years worth into the policy. Uh, but it is something to note.

So before we drill into the performance between the pen and the mass and the pen and the guardian, I wanna highlight the qualitative differences between the guardian 10 90 D and the pen 16 and a half. 83 and a half, if you will. The guardian is certainly Alina ratio, 5,000 of base premium gets you 218,000 of whole life base death benefit and notice with pen, the minimum base we can do for this 44 year old preferred male, we have to do 82.

15 a premium instead of 5,000, that’s an, it’s an extra 64% of base premium. And some of you were saying, I don’t want that. Cuz I heard it was bad. But if you remember from the early part of this video where we qualitatively compare and show the efficiency of the base premium. If the base premium of pen gets you a better overall IRR, not only in cash value and death benefit, it’s not necessarily a bad thing.

And let me also remind you that essentially a paid up addition is the same chassis as you would have an L 100 with a base premium. It just is front loaded with a lifetime times worth the premium. In one year. So base premium really acts like a PUA. It’s just more slower paid, but you want overall efficiency with it and you see you get it with the pen because you’re paying an extra 64% over the 5,000 to, to equal the 8,200 of base premium.

But you’re getting more than a hundred, hundred percent, almost 110% extra death benefit. And that just goes to the overall efficiency of what that base premium gets you. Death benefit. It gets you more death benefit for lower costs. But remember the guaranteed cash value has to equal the death benefit by life expectancy.

So it’s gonna give you a better overall growth chassis growth trajectory, uh, for essentially the, the engine of your policy, if you will. So it’s not necessarily a bad thing. And so. You know, you may be really wooed by this whole 10 90 thing, but you might just be answering the wrong question correctly. Is it so much about the recipe or the ratio, or is it more about the quality of ingredients that go into the ratio to give you the best tasting meal or in this case?

The best performance. And that’s what we’re about to show. You. So as we compare the guardian 10 90 to the pen, 16 and a half 83 and a half, whatever you want to call it, you’ll notice that the guardian starts with more death benefit. And that’s because of the low base. There needs to be additional turn to be able to stuff in that much in PWAs.

You’ll also notice that death benefit stays flat for about eight years. And that’s because it takes eight years for the one year term writer or the. To fully convert out, as you can see there on the pin side. However, remember it started with considerably more base death benefit. Half of that nine 11 was base and half was, uh, essentially term writer and UAS.

So you can see the term writer gets fully converted out, uh, by the end of the. By the fifth year, uh, the PWAs start pushing the total death benefit up that’s because all the term riders gone and that’s what the actuaries at Penn told me is it didn’t make sense for them to do anything more than call it a 50 blend of base and term because their base policy was so efficient, uh, having the extra term drag.

Really took too long for the PWAs to convert it out. And it actually worked out to be more efficient this way. By year 10 you’ll notice Penn has an additional 22,000 of cash value. It’s almost 5% more cash value by year 10. Not to mention 220, some thousand 230, some thousand of additional death benefit, even though it started with smaller death benefit.

And again, that has to do with the efficiency of those PWAs and the overall efficient structure of the lean and mean less premium in a more death benefit structure of air, permanent life insurance product. Uh, at the end of the 25th year, you can see that guardian has. 1,000,051 of cash value. And one point basically six, seven of death benefit versus 1.2 million of cash value in Penn.

Not quite, but almost there. So almost $150,000 more cash value and over 2 million of death benefits. So, uh, these are real numbers, especially consider. And you started this policy by putting in 50,000 a year. We’re talking about the 25th year. Uh, almost three of those full premiums are just showing up as additional cash value.

Uh, and there’s an extra $330,000 of additional death benefit. And most people say they don’t care about death benefit, but remember if you’re gonna do this right, if you’re gonna do your retirement, infinite banking style, you can get arbitrage off borrowing then really you our way against the cash value.

And a lot of those loans you don’t intend to debate. Pay back, the death benefit, pays it back and whatever’s left, goes to your air. So, uh, what’s 330,000 amongst friends. Uh, it’s probably kind of a big deal. Like why wouldn’t you want it? Uh, you, it allows you to spend more of your retirement since there actually is additional legacy value left behind.

Uh, let’s take a look at guarantees. Now, when it comes to guarantees, you would think that something like a 10 90 policy, 5,000, a base and 45,000 in PWAs would beat something where 8,300 was going to base and the rest going to PWAs. But you can see that happens early on with the guardian. It is winning in guarantee gas value, which essentially just means no dividends are ever paid.

Uh, but by year six, the pen starts to pull ahead. Uh, in both the cash value and the death benefit column, cuz remember that term writer, uh, guardian started with more death benefit. But once those P once the term writer gets converted on the pen, that is guaranteed, cuz it’s paid up additional guaranteed death benefit and the corresponding guarantee cash value, no dividends are being paid here.

Now, uh, things are pretty close, but again, so much more money is allegedly going to PWAs early on. It’s kind of crazy that the pen is essentially winning from year six on, and even by the end of the study period, it’s ahead by, uh, 21, not quite over $20,000, 6 57 versus, uh, 6 78. And it’s got an additional a hundred and some 110,000 of death benefit, uh, which is pretty impressive.

And don’t get me wrong. All of these are quality companies making quality, whole life products. So I worked at guardian as my second company, after a stint and Prudential after Prudential, I did mutualized that you could no longer get a piece of a rock there. They didn’t sell mutual whole life anymore, but I serviced it.

Uh, but guardian, I still have some of my oldest guardian policies. Uh, I, I, later when I, or first went independent, I got some kid policies from mass mutual. Still have those, but most of my acquisitions throughout the 2010, that whole decade were Penn mutual whole life. And I had some of the same concerns that some of you have like, Hey, these are, uh, bigger companies, guardian and mass mutual with slightly betters in the, in the high nineties versus the low to mid nineties.

And so maybe I’m better off. Everybody says they’re more solid. And that pin can’t keep up with this great dividend. And they’ve been saying that for, uh, 10 12, 15 years now. Uh, but when I stress tested the pen, I wanted to see how bad it got before it actually was even with the guardian and the mass. If you didn’t even reduce the dividend, that’s what I’m about to show you now, like if we reduce.

Pin, how far can we reduce it and still have it be around even, even slightly winning, slightly beating the guardian 10 90 and the mass mutual Tempe. Let’s take a look. So in this scenario, we’ve lowered pens, dividend by 50 basis points and kept guardians totally intact. Kind of goes along with the argument you sometimes hear from people selling it.

That pins dividend is too strong and they can’t keep it that way. So if the second after you bought the policy, they dropped their dividend by. 50 basis points, which is a massive reduction for them. And guardian didn’t have to, that would be the scenario. And what you can see is by the seventh year, the pen cash value has pulled ahead.

The death benefits ahead by this point and for the rest of the study period, it is steadily ahead. Now, if we look at 70 basis points drop, what you’ll see is that again? Uh, the pen is actually ahead this time by the. It takes till the ninth year, the ninth year, it pulls ahead. So it takes a little bit longer, but then it is ahead steadily the whole time in both cash value and death benefit until the 25th year, the 25th year, the guardian pulls ahead by a.

Thousand dollars. Uh, in that case, it’s hard to imagine this scenario, but that’s how, uh, drastic the stress testing has to be in order for that narrative to come true. So hopefully this video helped to dispel the myth that base is bad and that the less base you have, the better off you’re gonna be. It doesn’t make sense because.

PUA at the end of the day are really just an accelerated version of that base. So what’s more important is the quality of ingredients that make up the recipe of your whole life insurance policy. Should you do the max term rider possible? Absolutely. But that’s gonna vary depending on what type of policy you get.

And in both instances, we showed you that, uh, whether it be the mass temp pay or the pen life paid up at age 100, Both of them require more base and less term, but both of those base premiums, uh, were more robust and therefore got you better results. Again, none of these companies are bad. Uh, they’re kind of like my kids.

I love them all. I know they’re good and bad qualities. Uh, but you have to do the testing and measuring to see which one is gonna perform best for you. There’s one more thing about base that you have to see. So again, with the bigger base of the pen policy, say, compared to the guardian, if you remember the guardian, you couldn’t fund it past 26 years, if you wanted to.

And there may be a case. I know some of you may say, Hey, 44 to 26. I may be in retirement. But maybe you don’t have a retirement problem. Maybe you have these RMDs and four outs and you need a place to put them. Wouldn’t it be great. If you could at least put $8,400 and, and pump up your legacy value and borrow against that and manage your tax situation and, and take more from your whole life when the stock market.

Down simply by just pumping your RMDs into your whole life policy. Well, guess what, with a smaller base, after 26 years in this scenario, you can’t, you’re forced out, uh, with the pen and the bigger base you can do it. Not only that, but instead of just six years of $50,000, that’s all we could do in this particular scenario before both the mass and the guardian were cut off, and then you could only do 28 and then 20,000 in change.

With the pen. This is the absolute max you can put in. This is not what we illustrated. We did apples to apples. I think there was an extra $64, but other than that, apples to apples instead of six premium payments of $50,000, how about eight? And then instead of $20,000 for year nine, how about 42 and then three.

So you can fit in an extra. $77,000 in this instance than both the guardian and the mass simply by having that bigger base blend. So it’s not. Always as cut and dry, as it sounds with good rhetoric, do the testing and measuring work with a company that will help you do the math for your particular situation to ensure that you get the best policy based on whatever your fact pattern is.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA Founder of BankingTruths.com
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