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Let’s talk about whole life guaranteed growth, which is probably one of the most attractive aspects of a whole life policy especially to newcomers. It’s probably one of the most misunderstood elements of the whole life policy as well.
I wrote a very extensive article on whole life guaranteed growth and four ways to accelerate it. You can get the link to my Whole Life’s Guaranteed Growth article here and I’m going to show one schematic on there and it has to do with what I see right here.
So probably the coolest thing about whole life guaranteed growth is whatever the base policy death benefit is, your cash value has to equal the death benefit as soon as you die or whether you reach age 120 (whichever comes first).
Now, most of you are not gonna make it to 120 although some of your kids will. The important thing is if we look at the guaranteed trajectory that all of these policies have, it’s a contract in the policy that if you pay these premiums you can see the cash value in blue here approaches the top end of the basic death benefits and actually equals it way out here at age 120.
Notice that life expectancy here somewhere in this area you’ve actually gotten the bulk of your guaranteed growth. So that’s very very appealing because I know most of you are concerned about Whole Life not so much for the guaranteed death benefit, but because of the cash value and using that for retirement or having that safely on hand for liquidity or whatever that is.
But just knowing that at the very worst-case scenario of “no dividends are ever paid if dividend rates don’t go back up” it doesn’t rely on any of that. The basic cash value has to equal the death benefit.
This is especially appealing when you consider paid-up additions. Hopefully, you’ve read about them but if not, check out this article where we go in-depth into paid-up additions. When you buy paid-up additions either through dividend payments (like you roll your dividends back in the policy) or you make extra PUA payments over and above the base premium, which most you were doing by adding term riders.
When you buy these paid-up additions, not only does it increase your base cash value but I just took this little schematic and I stacked the extra death benefit on top. And that’s actually what happens.
You can read about this here at our PUA article but think about it – since your basic cash value has to equal the death benefit, if you raise the amount of the death benefit well then aren’t you also raising the trajectory of your cash value growth?
And that’s what I show in the video. This is not a scale model. Don’t hold me to this, but you get the point.
I want to actually look at some carriers, they all design how their guaranteed growth works and how much of the total return is dependent on dividends. And I think this is where the biggest myth comes in and I think some of you need to be cognizant of it when you’re looking at illustrations.
Not that you’re ever going to have to worry about just getting the guaranteed cash value because all these companies (well not all of them but most of them) have paid a dividend each and every year for the last 100 plus years. Some of them like the ones we use have paid a dividend 150-160 plus years.
But the reason is, you want to see how efficient the guaranteed structure is. So if we look at the guaranteed cash value in all these examples we’re looking at we just show the initial premium of ten thousand and that’s using a term rider and doing max PUAs in for a male age forty-five second best rating. That is important – your numbers are going to differ. But I want you to see the ratio of the total return (he non-guaranteed side) with the guaranteed side.
And so this particular carrier, I’m not going to mention any names but they have one of the strongest guaranteed policies. So if you can see here you put ten thousand dollars a year for 10 years. And even if you never got any dividends even if dividend rates didn’t go up, you’ve got one hundred four thousand dollars not to mention your death benefit has gone up from 214 to 381.
Now if we look at the non-guaranteed side we can see it’s not that much different. We only get to 108. And in fact if we look at year 5, there are forty-seven thousand and eighteen bucks here and there are only forty-seven thousand five hundred thirty-nine dollars. And if we look at this annual dividend column you can see that this company, especially in today’s dividend rates, isn’t paying very robust dividends.
In fact, you see the first year is nineteen dollars so there are certainly other companies that do things a little bit differently. So here’s a different one.
We can see the guarantees are very comparable here 104 but instead of 108 total cash value with the current dividends we see 110, and you can see in the annual dividend column how there are more dividends being paid but this chassis is not very dependent on annual dividends, which sounds great from a sales standpoint if somebody says look almost all of this is guaranteed.
That’s great. In a low low-interest environment like we’re in now. But what happens when dividend rates go up? So if the total return is largely just based on the guaranteed cash value. Well then, you’re pretty much guaranteed not to get much of an increase when interest rates go up and dividend rates go up.
If you haven’t seen it already I’m just going to digress for a moment. The video we have here, “A Historic Whole Life Policy“, actually shows this – it shows a policy that was illustrated in a much lower dividend rate environment, then dividend rate spikes and then they went down and even went down lower to what they were illustrated at. And even still this policy greatly outperformed because of those spike years.
So you want to have a policy that’s dependent on dividends, you want to have a nice blend of guaranteed cash value growth but also current dividends. So we’re going to look at some more of that.
You know you can see you get to 110 and they don’t even have a strong guarantee performance but at least that means that the dividends will vary. You’re more likely to get a better total return here when dividends start to go up, when interest rates go up and dividend rates also go up.
Here we have 102 to 110. Right, so you can kind of see some different ratios. Here’s one of our favorite carriers. This just shows the guaranteed. And this is the same ten thousand for the forty-five-year-old after 10 years. A hundred thousand so only one hundred thousand guaranteed. But notice instead of the one waits and the 110 we get to 115?
That’s because more of the return is coming from dividends – you’re getting more bang for your buck for those dividends and you’re still getting a decent guaranteed amount. Again this company paid a dividend every year for the last hundred and fifty plus years.
This company here, they have a collapsed on the same page here the guaranteed assumptions get all the way to 102 almost to 103. And notice that the total return with dividends are all the way up to 121.
This is a big deal and this is one of our favorite carriers right now because they have a very nice blend of a very strong guaranteed chassis but also very strong dividends but an also PUAs so their PUAs give you actually more death benefits for your buck, which as we talked about in a guaranteed growth that raises the bar that the cash value has to meet.
So as you stack these PUAs on, as we see here, every year you stack these PUAs on it’s raising the bar for the total guaranteed cash value to grow towards it.
So hopefully this helps, you really should be exploring many different policies not just looking at one illustration but looking at several and finding a group that can help you do the shopping for you and help you point to these little subtleties, these little idiosyncrasies amongst the different carriers and products out there can really help you focus on what you need to get what you’re looking for, which is maximum cash value growth and really the best bang for your buck on all fronts – cash value, death benefit, dividends, PUAs and so forth.
John “Hutch” Hutchinson ChFC®, CLU®, EA, AEP®, CExP®