Large Whole Life, Best Way to Structure?

[Learning]

Hi, this is my first post so I'll try and include as much info as possible about my situation and myself. First, thanks in advance for the forum and responses... I've already learned a lot reading through the posts.

Next, about myself: male, 36, good health (already did blood test/urine, got the select preferred medical classification). I am looking to purchase a $2.5mm whole life policy mainly to accumulate tax-deferred cash value growth as quickly as possible. (I am in a high tax state.) Through an independent agent, I've already gotten quotes from NY Life at about $30K/year (premium) and Guardian at about $33K/year (Whole Life 99). I'm going to try and get Mass Mutual and Northwestern quotes just to round out the "best" big mutual companies.

But I have several questions and am not sure if I'm getting straight answers from my agent. I know agents live off commissions and I have nothing against that, but I want to make sure I'm getting clean advice:

1. If I have the cash already on hand to make a lump sum payment but obviously want to avoid an MEC (but want to "fund" this as quickly as possible), what do you guys recommend as the best prepay option or strategy?

2. I'm not trying to get into a religious war over companies, but why such a big difference in premium? Isn't 10% significant? Of course past results are no indication of future performance, so I "value" these four big mutual companies about the same.

3. Are there other structuring options that might cheapen this up? Some have suggested term + layering in a lot of paid-up additions. But this seems contrary to my goal of building up a large cash value as quickly as possible for maximum tax-deferred growth.

4. Nothing against agents or commissions here - everyone has to eat. But obviously commissions can eat up a lot of your potential return... as much as the first year of premiums! What are the best options to structure such a purchase to minimize commissions so they don't eat into the cash value accumulation and growth, which of course is my objective?

5. I'm somewhat inclined to decline the "waiver of premium" rider, since I have separate disability insurance. Any thoughts there?

Thanks in advance for any thoughts, suggestions, answers to these questions. I'm a newbie and learning about insurance products but definitely see the value of both term and whole life... I just want to make sure I'm doing the right thing before purchasing the policy!

-LearningAboutInsurance

 

[BNTRS]

Hi and welcome, several things:

If it's the big 4 only that you are looking Guardian is the one that would have most of my attention. NYL has been sucking wind on the dividend scale issue for a long time (and there are some who will miss-read this and start quoting their div crediting rate, NYLife has has expense issues for a long time), Mass has a decent product and can illustrate really nicely, but they have a huge PUA load and an extremely inflexible product, NML is just terrible and doesn't deserve to be mentioned again for the rest of my post. On the topic of Guardian, the product you want is 10 Pay not L99. L99 is not the cash accumulating work horse 10 Pay is, especially when blended, which is the approach you want to take with this.

Now, you're questions:

1. Out of the 4, nay 3 Guardian has the best prepaid account offer. It's a discounted premium offering based on an interest rate that is established when you deposit the money. It dropped pretty significantly last year due to low interest rates, but remains one of the best looking options for someone with a lot of money on hand to dump into this sort of thing, and for whom avoiding MEC status is prudent.

2. You are focused on the wrong thing here. This if looking at a product like L99, you should be minimizing the base WL db relative to blended term and making up all the difference in PUA's. That will give you the best performance cash wise. This isn't necessarily true of 10 Pay since it's a high early cash value (HECV) product meaning base premium is no where near as taxing on cash value performance.

3. If what you are talking about as the suggestions to you is simply semantics and we're talking about the same thing (i.e. blending with lots of PUA's) that would absolutely not be counter-productive to what you are trying to accomplish. PUA's will grow cash quickest, have the best guaranteed cash performance, and will supercharge rate of return as they too earn dividends. Additionally, if you blend, add a lot of flexibility to have the option to put a lot of money in when you have it, and not so much when you don't.

4. It's not that commissions eat into your cash value (commissions on base WL do not come from what you pay, i.e. the insurance company isn't taking money out of the money you pay in premium and giving it to the agent like a commission paid to a stock broker, instead the insurance company pays based on a percentage of newly issued premium out of their own pocket to the agent). What is killing your cash performance is guaranteed WL death benefit. You can either max guaranteed WL death benefit (which is granted from base WL db) or you can max cash growth, you have to choose between the two. The good news is, guaranteeing term db as part of your policy, is really easy, and you aren't giving up much to do it.

5. Yes I do have thoughts here, two depending on what your next answer is. You mentioned placing all the money in at once. If this is the case, waiver of premium would be both necessary and potentially unsuitable (though, no agent is going to get rich off selling waiver of premium on an insurance policy). If, however, you intend to put a lot of money in over time, then waiver of premium would be highly recommended. Keep in mind that your stand alone disability insurance policy covers a certain percentage of your gross income; waiver of premium is not factored into this calculation, and specially covers your base WL premium, and term premiums, and the scheduled PUA's you place into the policy (funds the plan if you can't).


Lastly, I'd ask why not take a look at WL products from the non-traditional mutuals, like Ohio National Life and Lafayette Life?

 

[Learning]

BNTRS,

First, I wholeheartedly agree with your "VIP" decal below your name. I have read dozens of threads after discovering this forum, and I very much appreciate your insight and responses.

Second, I tried to send you a PM but I'm too new on this forum. I'll try and contact you through other means.

Finally, I think I understand all of your points:
* It's disappointing NYL has expense issues. To be up front, I don't look at any insurance projections/illustrations - I mean, who can forecast dividends for 20, 30 years out? And past results are no indication of future performance... I was more interested in NYL because (a) their premiums were lower, (b) the firm seems to be on strong financial footing, and (c) their PUA loads were pretty low. Guardian has also been strongly recommended by my agent, but that's because I think he's an independent. Mass Mutual in interesting, so I'll investigate. NML I think is not possible because agent is independent. I haven't looked at other firms like Ohio National or Lafayette (I don't even know those names!) because I feel if I didn't whittle down the possibilities I'd never get done, so I tried to limit to the "big" mutual companies. Perhaps this is dumb, but I had to set some initial constraints.

* Totally now understood you can't have both, meaning fast CV buildup and huge death benefit. I'm definitely zero-ing in on the 10 Pay with the various PUA options and other term riders.

* I've read a lot about the premium waiver... yeah, and I have to say I'm coming around. It's not a huge added cost, and it does keep things clean. I guess it's a fairly low probability (the disability thing), but then you start up the whole circular argument of insurance in the first place. So I'm definitely zero-ing in on the premium waiver as well.

Final questions:
1. So a whole life single premium (that would trigger MEC) seems to be about $225K per $1mm of coverage. So I translate that roughly into $24,500 per year for 10 years assuming a 1.5% annual discounting rate (just 1/1.015^t for example). So pound for pound, assuming ~$25K in premium per year just as a baseline, what WL structure or 10 Pay + PUA/Term rider do you suggest to get the biggest "bang for your buck" when trying to max CV accumulation?

2. Also, I'm not sure if anyone is comfortable answering this... how does fee-for-advice insurance guys work? I've seen some guys who run these operations and who have written great articles and web site primers who "charge" for advice. But when you go an purchase the policy, you still have to go to a commissioned agent. (It's not like you can call up Guardian and say "I want this product, here's a check." What's the most efficient way to finally purchase the product when you've settled on a structure?

 

[BNTRS]

To be up front, I don't look at any insurance projections/illustrations - I mean, who can forecast dividends for 20, 30 years out?

Good, you have a good outlook on this, and it frequently takes people a long time to grasp this.

However, there's one thing an illustration can do when compared within one company. If you compare numbers from one company on different products, you will understand how one product can beat another (an insurance company isn't going to reduce the dividend for one product but not another).

Concerning disability waiver and the probability of being sick or hurt and unable to work, the probability is much higher than a lot of people assume. And it's certainly higher on the probability list than other things that might wreak havoc on your financial life. Now I know we like to temper broad statistics by speaking to our specific situation and proclaim that we are better situated to not have to worry about a certain thing. Keep in mind, though, that taking care of yourself, working in a low risk occupation, and having a favorable family history is not a one-to-one increase in your probability of ending up just fine. Remember what Baye's Theorem tells us about conditional probabilities (I get the feeling you might know a thing or two about math and that I can pull out a reference like that).

Now, your final questions:

1. Not exactly, and you are misapplying time-value of money here. It's not a PMT solve for PV it's a PMT solve for FV so with your discount rate the PMT solve would be c. 21k given your assumptions.

The way MEC avoidance calcs are done is to determine the cash value required to sustain the policy up to age 121 after 7 years. So first, you'd need to find PV beginning in year 7 to accomplish this. Then you'd need to solve PMT for FV (which would be equal to the PV needed to sustain the policy). Now, this isn't a calculation you or I would be able to do on our own since we don't have all the facts about the internal mechanics of the policy (this is where the non-transparent criticisms come from). However, the insurance company has done the calc and give us the PMT answer, it's the 7 pay premium.

If you are looking at an illustration with a single premium payment this is likely a DEFRA limit for classification as life insurance, not for MEC purposes (it's rare to find these on WL since the db increases to avoid reclassification as an investment, this is usually a UL issue).

As for biggest bang for you buck. If using a full pay WL product (something paid to age 100 for example). The lower the WL base premium the better in most cases. When it comes to 10 pay this isn't always true. Often 10 pay will perform better dividend wise when the base is higher, and you're only paying base for the first 10 years. After that it's 100% PUA.

2. I'm not a big fan of fee-only insurance advisors. I have found them to pander to telling people things they want/expect to hear in order to build credibility.

The established ones typically make most of their money charging both consumers and insurance agents by being the being the hired independent party (i.e. they sell their service to insurance agents to be the authority or final sale's pitch to a client).

I've been approached on numerous occasions to offer my advice for a fee. I've never collected on this, and don't plan to. If you want what many have come to regard as pretty good impartial advice, I'll give it to you for free.

As far as efficiently selecting an insurance policy, I call upon Search Theory every time I hear this question. And a lot of people's eye's turn to blank stares. Too much effort will be more disastrous than having a bad agent.

 

[lovin the job]

You should definitely check into Penn Mutual. Until March 30 they have their premium deposit account at 4%
Also take a look at our IUL, maybe a blend of that and whole list. I would glad to answer any questions.

 

[MIM]

You should definitely check into Penn Mutual. Until March 30 they have their premium deposit account at 4%
Also take a look at our IUL, maybe a blend of that and whole list. I would glad to answer any questions.

Not to be mean, but you do realize that you have recycled a thread over 2 years old ? If you're doing this intentionally, perhaps you might want to indicate so. I usually just say, "bump". Welcome to the forum. :-)


MIM

 

[lovin the job]

I didn't realize, I apologize.