Whole Life’s Riders and Growth Components Explained

This can be accomplished two ways – by adding more bulky base policy with its heavy metal support or you can add in a streamlined titanium chassis in the form of a term rider to accommodate a lopsided amount of paid-up additions. Since the term rider provides this extra death benefit for a fraction of the cost than adding more base policy would, we’ve represented here as the lighter shinier silver titanium chassis versus the dark gray heavy metal that come stock with the base policy.

To be clear, the term rider or streamlined chassis itself is not a performance factor other than the fact that it provides the necessary support for more high performing PUAs without the extra drag from adding more heavy base policy.

Let’s talk about dividends. Since they are not guaranteed and both a base whole life policy and a PUA Rider can function without dividends it’s best to describe them as a special additive. This is especially true since the exact amount of dividends you’ll receive will fluctuate regularly throughout the life of your policy.

It’s no accident that there are three different colored beakers represented here because a dividend is made up of three distinct components. The interest component based on what your mutual insurance company earns on its entire portfolio of investments that year, the company’s actual mortality experience that year versus what was originally projected when underwriting that particular block of business, and last how well the mutual company is managing its operational expenses.

It’s also worth noting that these additives get measured and dispensed by your pit crew or the mutual insurance company you choose. Since your policy will come into a pit stop for this extra juice every single year, both the quantity and the quality of these additives will vary depending on how good your pit crew is. You want a crew with both a solid historical track record as well as stellar recent results since their additives will enhance the performance of both the base policy and the PUA Rider.

The bigger the engine you’ve built the more dividend additives your car will be entitled to, assuming that you’ve also been putting the necessary fuel or premiums in along the way. I’m showing two cans of fuel because some of it goes to the base policy which will be burned much less efficiently in the short run but still yield respectable long term results on its own and some of your premium fuel will be devoted entirely to the PUA Rider where it boosts both immediate acceleration and long term performance.

Hopefully whatever liberties I took with the racing industry didn’t annoy too many people. And more importantly that they helped you better understand what’s under the hood of a properly structured whole life insurance policy designed for banking and retirement.

Before we look at some examples of how differently structured whole life cars can perform, let me just clarify that we’re assuming here that maximum cash accumulation is a goal rather than permanent death benefit. We’ll be using policy specs for a 46-year-old male with only a standard rating – that’s two down from preferred best. And this policy is from the low dividend rate environment of 2019.

The numbers you’re about to see are for conceptual learning only and that your particular policy specs and the general performance of whole life may be substantially different depending on when exactly you’re watching this video.

What we have here is the exact same size-based policy only as we move from left to right, we’re adding more and more of the components we just learned about onto our whole life racecar.

Starting on the left, this is your stock ordinary base whole life policy without any special riders. Starting in year four, you can tell this particular policy starts receiving dividends because a death benefit starts increasing. This is because we’ve elected to have the dividends go to buy paid-up additions or PUAs which will enhance the performance of both the cash value and the death benefit.

To be clear though this car has no PUA Rider, allowing you to add fuel that goes straight towards increasing torque from paid up additions. But even with the base whole life policy, you can elect to have your dividend additives be converted to PUAs within your policy and they do compound your overall performance only at a very slow acceleration rate.

You may have read that whole life insurance is a bad investment because it takes around 14 years to break even. Well, what they’re talking about is just a base policy all by itself and that’s what you’re looking at right here. However, it is worth noting that even after those early negative years the sum of all your premiums actually do wind up getting a total positive return. And actually, once the long and slow acceleration with that heavy engine block kicks in, the later years start accelerating very nicely and even make up for the slow ramping up period.

All right. Let’s upgrade our vehicle now to a base policy with a maxed out paid-up additions rider without the addition of any term rider. Right out of the gate you can see from the premium numbers that the added torque of that shiny silver PUA Rider requires significantly more fuel – more than double the base premium actually.

The normal heavy metal chassis of the base whole life policy is all that’s needed to support up to this size of a paid-up additions rider without any term rider. That extra fuel seems to be worth it from the obvious boost to performance. You can see that our break-even crossover happens in year 9 by maxing out PUA rather than in year 14 like with our base policy only.

And the 20-year cash value and IRR or internal rate of return numbers seem to be a bit more attractive across the board. You can see too that the death benefit starts increasing rapidly right out of the gate due to the instant premium going to paid-up additions which are really like stacking little mini whole life policies right on to our base policy. Only the PUAs are completely paid up with one shot.

Let’s kick it up another notch by adding even more PUA Riders supported by the added titanium chassis of a term rider. You can see that our death benefit starts out now at five hundred thousand rather than the hundred sixty-six thousand of just our base policy.

Now if that five hundred-thousand-dollar death benefit was manufactured with all base policy and no term rider, sure we could add the extra premium fuel but a big portion of it would go towards that bulky gray growth engine supported by the heavier chassis. And you saw what kind of acceleration that produced.

Instead by creating the necessary death benefits support using the lightweight titanium chassis of the term rider, we can add a disproportionate amount of PUA Rider premium. Remember our original base premium was just over thirty-five hundred dollars a year and now we could add over eighty-five hundred of additional fuel most of which will go straight to instant performance from the paid-up additions rider.

This brings our cash on cash break-even point down to Year 7 and you can even see down here that by funding a policy this hard and early almost your entire 30-year premium shows up in cash value. Once this happens we like to say that going forward you’re like moving money from one pocket to another pocket.

Now once we’re able to engineer this kind of performance out of whole life it usually becomes attractive enough for people to start using it as their own bank and retirement vehicle especially as our forty-six-year-old stops paying premiums during retirement.

You can see how these performance figures just keep getting better and better with no further premiums past the 20th year. And remember this illustration assumes we see static with 2019 low dividend rate. If interest rates and dividends increase this policy can actually be much better than what you’re seeing here.

Now this car may be designed optimally but it’s not fueled optimally. Let me show you the next level of whole life insurance performance that I found very few clients ever even see from their agents.

We just flip this comparison around so that the souped-up race car you just saw with the term rider allowing for $12000 of premiums for 20 straight years is now over here on your left. What you’re seeing in the middle is actually the exact same policy by design, but most people don’t realize that the titanium term chassis allows you to double stack your PDA riders at least in the shorter term sprint like races.

Now what I mean by that is you can enhance performance even further by putting in nearly twice as much premium but for a shorter period of time. You can continue to fuel your car for 20 years but you’re front loading it for maximum performance both earlier and later. That extra early fuel throughout the first eight years creates a massive amount of momentum that translate to better performance across the board.

You can clearly see that our overall internal rate of return for the first nine years is higher by a staggering point and a half. Our break-even hits by year five and by year three we’re well into the black on all new premium dollars. Not to mention the negative returns that come in the first couple of years have been substantially mitigated by creating this early momentum.

Even our ongoing death benefit has had much larger increases because of all the PUAs stacking. All this extra death benefit is shed of mortality costs past the first year because as its namesake suggests a paid-up addition is bought and paid for without one initial premium. From then on, it’s pure growth.

Now right next to this front-loaded beast of a car is the exact same vehicle only with inconsistent fuel or premium amounts added over the years. Let’s face it – life is uncertain and finances fluctuate. This scenario shows someone who started out with the intention of funding to the maximum but couldn’t do so after the second year.

We have them paying just the minimum base premium in years 3 and 4 but actually, they have so much cash value that they could easily borrow against it to pay this based premium if necessary.

Still, by paying even just the base premium the cash value increases nicely in years 3 and 4 by considerably more than the premiums paid in year five. They’re paying a premium that would have violated the mech limits if done earlier but since the driver previously skipped the opportunity to fully fuel the PUA Rider they’re temporarily allowed increased capacity to catch it up to some degree.