Basic Questions Regarding Whole Life

edsfopmfolm

New Member
5
Newbie here.

I am contemplating purchasing a whole life policy and have met with agents from a few different companies (random friends and associates have apparently given my name out to their agents recently). Here is my situation because whole life was not on my radar screen a few weeks ago.

I am in my mid 30's. With the exception of my mortgage I have finally gotten rid of debt (student loans took awhile). I am now maxing out my 401k at work and am looking for a vehicle to accumulate money for retirement purposes. My savings is not where it should be nor is the 401k due to a late start. While I do have a family I am NOT looking at this for death benefit purposes. Thus, I was quite surprised when this product was suggested by a distant family member, an acquaintenance and not surprisingly the salesmen.

What is the minimum amount of death benefit you can set up? Are their negative ramifications of doing the bare minimum (to me, not the agent). At the same time, I am curious about starting with a certain level premium but may increase it ina few years. Does that trigger a new round of fees? In sum, what features should I be insisting be in the policy to maximize my goals (assuming I'm looking at the right product)?

Sorry for my ignorance.

Any and all help appreciated.
 
If you're not looking for death protection, you shouldn't be looking at whole life. Just my opinion.

I agree. HOWEVER. If your agent is worth their weight, they understand how the death benefit can be leveraged for retirement income and wealth building purposes. In that case you may want a death benefit.
 
Hi and welcome.

It's hard to wrap one's head around the concept but life insurance is actually a pretty impressive asset class, especially participating whole life insurance (participating means it's eligible to receive dividends it declared by the insurance companies board of directors).

Here's the type of recommendations a good agent or financial advisor would make concerning this topic. In no real particular order.

1.) The process you will be using to accumulate assets inside a whole life policy is commonly referred to as overfunding. It's a process that uses something called a paid up additional insurance or PUA, or several other names depending on the company, to place additional cash inside the policy. This additional cash actually purchases additional life insurance (don't get too hung up on this as it's sort of coincidental for our purposes), which can be surredered later for cash, but also gives you a larger policy, which means more ownership, which means more dividends).

2.) The end of that last paragraph skipped a few things so let's back track. If you are going to do this, you should only be looking at participating whole life insurance from a mutual life insurance companies. Mutuals vest ownership in policy holder's hands and often pay a dividend to their participating policy holders. Taking a look at dividend paying history is important. Not so much to compare who has paid more (this can be somwhat misleading), but to ensure that they have remained loyal to the concept.

3.) Minimum face amount is a tricky question. The maximum amount of cash you can store in a life insurance policy is actually set by the IRS, they've limited the amount of money that can go into the contract before it's no longer classified as life insurance, but rather something called a modified endowment contract (MEC), which has much less favorable taxable consequences. This maximum depends on the face amount of the policy. Some agents will attempt to gloss over what is a MEC and how life insurance becomes a MEC; it's a lot more complicated (especially when there's whole life insurance using paid up additions) then just having a paid up policy within 7 years as many are taught on their insurance exam study material and then echo to their clients.

The good news about MECs is that all insurance companies have the software to calculate what kind of extra contributions to a policy will create a MEC, and will run the calculation when extra money is received to ensure MEC status is not created accidentally.

4.) Speaking of dividends, the dividend option that is used for the purpose we are dicussing is to be reinvested to purchases paid up additions. Meaning dividends get paid, and then are placed back into the policy just like money is when you yourself send the check to overfund the policy.

5.) The cool thing about life insurance is that you are making after tax contributions to it, so there is a cost basis for tax purposes. Life insurance enjoys FIFO (first in first out) distributions for tax calculations, meaning you get to draw out your non taxable basis without a taxable event (because you already paid taxes on it) and then to avoid taxes on the growth of your money you can take a policy loan. Policies can be designed to pay back loans, loan interest is sort of a non issue because it's your money and the interest will be returned to you. Or you can plan to never repay the loan and simply let it accumulate. It's easy for an insurance company to guess how much money you can pull out of an insurance contract each year, say at retirement, without having to worry about repaying the loan.



+++++++++++++

Now a few caveat emptors for you to keep in mind since you've stated that you've spoken to several agents and I'm assuming there's a potential bit of competition going on here.

Some agent's will recommend something called non-direct recognition over direct recognition and tell you it's better because you don't get penalized for taking a policy loan with respect to dividends. Here's the mechanics behind what's going on.

Direct recognition of dividends is a process used by an insurance company to pay dividends by directly recognizing outstanding policy loans the exact same way they would a distribution or surredender of PUAs (all that's financial jargon for taking money straight out of the policy no loan). As a result, they treat a loan in the same fashion (this is getting complicated I know), which results in a different (lower) dividend amount when there's a loan against the policy.

Non-direct recognition of dividends is a process used by an insurance company to pay dividends in a way that does not recognize policy loans as a distribution and as such does not effect the dividends paid when there is an outstanding policy loan.

First, let's talk about why direct recognition even came about. When interest rates jumped, whole life insurance lagged behind CDs by a hefty amount. Many people decided to take policy loans from their insurance policies and use the cash to place inside CD's which were paying higher returns. To combat this, insurance companies began using direct recognition, which was a way to offer higher dividends and as such a higher rate of return as a reward for leaving money inside the insurance contract.

Today, insurance agent's who pimp non-direct recognition forget to mention that all non-direct recognition companies have a variabled loan interest rate. Meaning, if rates began to rise, and you took a policy loan, the insurance company can increase the interest assessed on the policy loan to combat the effect of money leaving the contract and not decreasing dividends.

That's a really long way of saying that non-direct recognition isn't better than direct recognition, so don't fall for the hype.

You should spend some time looking at what the PUA load charges on the policies you are looking at is. The insurance company is going to assess a small fee, just like commissions paid for mutual funds, or stocks, or any other types of investments. These fees can vary quite a bit.

That's enough for now, depending on your seriousness concerning this topic, this has generated a lot of questions.
 
Last edited:
This is what you just told that user:

"Make sure you choose the DEC Flux Capicator policy with the Dilithium Crystal conflaturation rate of return. Never buy the reverse negative dividend distribution WL mode policy."

Good Lord
 
I hope BNTRS has a non-res in TX, so he can sell a policy to the OP for all the time it took to type up that lengthy post.
 
Hi and welcome.

It's hard to wrap one's head around the concept but life insurance is actually a pretty impressive asset class, especially participating whole life insurance (participating means it's eligible to receive dividends it declared by the insurance companies board of directors).

Here's the type of recommendations a good agent or financial advisor would make concerning this topic. In no real particular order.

1.) The process you will be using to accumulate assets inside a whole life policy is commonly referred to as overfunding. It's a process that uses something called a paid up additional insurance or PUA, or several other names depending on the company, to place additional cash inside the policy. This additional cash actually purchases additional life insurance (don't get too hung up on this as it's sort of coincidental for our purposes), which can be surredered later for cash, but also gives you a larger policy, which means more ownership, which means more dividends).

2.) The end of that last paragraph skipped a few things so let's back track. If you are going to do this, you should only be looking at participating whole life insurance from a mutual life insurance companies. Mutuals vest ownership in policy holder's hands and often pay a dividend to their participating policy holders. Taking a look at dividend paying history is important. Not so much to compare who has paid more (this can be somwhat misleading), but to ensure that they have remained loyal to the concept.

3.) Minimum face amount is a tricky question. The maximum amount of cash you can store in a life insurance policy is actually set by the IRS, they've limited the amount of money that can go into the contract before it's no longer classified as life insurance, but rather something called a modified endowment contract (MEC), which has much less favorable taxable consequences. This maximum depends on the face amount of the policy. Some agents will attempt to gloss over what is a MEC and how life insurance becomes a MEC; it's a lot more complicated (especially when there's whole life insurance using paid up additions) then just having a paid up policy within 7 years as many are taught on their insurance exam study material and then echo to their clients.

The good news about MECs is that all insurance companies have the software to calculate what kind of extra contributions to a policy will create a MEC, and will run the calculation when extra money is received to ensure MEC status is not created accidentally.

4.) Speaking of dividends, the dividend option that is used for the purpose we are dicussing is to be reinvested to purchases paid up additions. Meaning dividends get paid, and then are placed back into the policy just like money is when you yourself send the check to overfund the policy.

5.) The cool thing about life insurance is that you are making after tax contributions to it, so there is a cost basis for tax purposes. Life insurance enjoys FIFO (first in first out) distributions for tax calculations, meaning you get to draw out your non taxable basis without a taxable event (because you already paid taxes on it) and then to avoid taxes on the growth of your money you can take a policy loan. Policies can be designed to pay back loans, loan interest is sort of a non issue because it's your money and the interest will be returned to you. Or you can plan to never repay the loan and simply let it accumulate. It's easy for an insurance company to guess how much money you can pull out of an insurance contract each year, say at retirement, without having to worry about repaying the loan.



+++++++++++++

Now a few caveat emptors for you to keep in mind since you've stated that you've spoken to several agents and I'm assuming there's a potential bit of competition going on here.

Some agent's will recommend something called non-direct recognition over direct recognition and tell you it's better because you don't get penalized for taking a policy loan with respect to dividends. Here's the mechanics behind what's going on.

Direct recognition of dividends is a process used by an insurance company to pay dividends by directly recognizing outstanding policy loans the exact same way they would a distribution or surredender of PUAs (all that's financial jargon for taking money straight out of the policy no loan). As a result, they treat a loan in the same fashion (this is getting complicated I know), which results in a different (lower) dividend amount when there's a loan against the policy.

Non-direct recognition of dividends is a process used by an insurance company to pay dividends in a way that does not recognize policy loans as a distribution and as such does not effect the dividends paid when there is an outstanding policy loan.

First, let's talk about why direct recognition even came about. When interest rates jumped, whole life insurance lagged behind CDs by a hefty amount. Many people decided to take policy loans from their insurance policies and use the cash to place inside CD's which were paying higher returns. To combat this, insurance companies began using direct recognition, which was a way to offer higher dividends and as such a higher rate of return as a reward for leaving money inside the insurance contract.

Today, insurance agent's who pimp non-direct recognition forget to mention that all non-direct recognition companies have a variabled loan interest rate. Meaning, if rates began to rise, and you took a policy loan, the insurance company can increase the interest assessed on the policy loan to combat the effect of money leaving the contract and not decreasing dividends.

That's a really long way of saying that non-direct recognition isn't better than direct recognition, so don't fall for the hype.

You should spend some time looking at what the PUA load charges on the policies you are looking at is. The insurance company is going to assess a small fee, just like commissions paid for mutual funds, or stocks, or any other types of investments. These fees can vary quite a bit.

That's enough for not, depending on your seriousness concerning this topic, this has generated a lot of questions.

This was very informative from a learning stand point of view of a broker. I wish more of this was expoused here.
 
I hope BNTRS has a non-res in TX, so he can sell a policy to the OP for all the time it took to type up that lengthy post.

Nah I typed that in less than 5 minutes, I could do this stuff in my sleep.


This was very informative from a learning stand point of view of a broker. I wish more of this was expoused here.

Thanks much.
 
This is what you just told that user:

"Make sure you choose the DEC Flux Capicator policy with the Dilithium Crystal conflaturation rate of return. Never buy the reverse negative dividend distribution WL mode policy."

Good Lord

John, that Dilithium Crystal conflaturation rate of return is soooo much....it's almost obscene!:swoon:
 
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