Bank on Yourself®

The IRS places a limit on the percentage of premium that can be channeled into the cash value of a life insurance policy – without jeopardizing its tax benefits. If the policy exceeds this limit, it becomes a MEC and loses a key tax advantage. The limit is based on a complicated formula that compares the cash value to the death benefit. The higher the death benefit, the more money can be channeled into the cash value.

Why add a term rider to a whole life policy? Hasn’t Bank On Yourself been saying term insurance is a bad idea? As a substitute for permanent life insurance, generally yes. But term coverage has a place as a rider to a permanent policy. Here, the term rider allows you to purchase more paid up additions, and thus build cash value faster, without running afoul of the modified endowment contract (MEC) guidelines.
 

Because the term rider increases the death benefit, the IRS formula allows Martin to plow more money into his cash value without turning the policy into a MEC.The term rider is designed so that it can be jettisoned sometime between the end of the seventh and the twentieth policy years. (The first seven years of a policy are the most critical years in determining whether or not a policy will become a MEC.)

Getting back to Policy 3, you’ll notice several interesting items. First, look at the circled amounts on the line for Policy Year 1.At the end of the very first year, Policy 3 has almost eight times more cash value than in Policy 1 (the policy with no riders at all). A properly applied Paid-Up Additions Rider and term rider provide that powerful turbo-charging effect.
 

Now check out the circled amount on the line for Year 4. The Paid-Up Additions and term riders have caused Martin’s annual cash value increase to exceed his annual premium beginning in the fourth year – one year earlierthan Policy 2, and three years earlier than Policy 1. (His $12,337 cash value increase is greater than his $12,000 premium.) Go, Martin!

Your reward for patience in the early years of your policy is a growth curve that gets steeper every year you keep the policy.Go back to the chart and look at the line for Year 20 in Policy 3. Beginning this year, Martin’scash value increases by more than twice the amount of premium he pays ($26,077 cash value increase, compared to $12,000 premium paid). And beginning in year 30, his cash value increases by more than three times his premium ($37,994 cash value increase, compared to $12,000 premium paid.) Martin’s doing his happy dance now!

Even more exciting: Look at the line for Year 40. That’s the last year Martin is scheduled to pay any premium at all, and the policy keeps on growing, but without any premium payments. See the line for Policy Year 50? The premium paid was zero, but the cash value grew by $59,425 – no luck, skill or guesswork required.
 

One more thing to keep in mind – it’s possible to have even more cash value than shown in this chart, depending on how you use your policy for financing major purchases. That’s another reason it’s important to work with a Bank On Yourself Authorized Advisor who can show you ways to maximize the value of your plan.

Each policy is custom tailored – there are no cookie-cutter plans – so your plan won’t look like Martin’s. However, you can find out what a plan designed for your unique situation, goals and dreams can look like when you contact Odalis Lopez, your Bank On Yourself Advisor.

More Cash Value Plus More Death Benefit?

But what about the death benefits of these policies? Are these policies building up much death benefit? That’s a good question, and Table B below shows you the answer. As you see in that table, all three policies build significant death benefits over time. But ultimately, Policy 3 actually builds the largest death benefit of them all. (FYI – the policies Suze, Dave and others talk about have a level death benefit that never increases.) Let’s take a look:

Death Benefit Growth*

Let’s compare the death benefits in Year 1. In the early years of Policy 1, the cash value was relatively small while the death benefit was relatively large, right? In the first year, the death benefit in Policy 3 is a little more than half of the death benefit in Policy 1. For Martin, this is a good thing. He’s paying for roughly half the death benefit, but he’s building almost eight times more cash value, with all the financing power, control, and tax advantagesthat a Bank On Yourself-type life insurance policy offers him.
 

Something significant happens in Policy 3 in Year 7. In this particular example, the death benefit drops from $580,440 to $506,010 the following year. Huh? This happens because the term rider is jettisoned. But now Martin’s policy is positioned for maximum cash value growth and the death benefit in Policy 3 is growing evenfaster than in either Policy 1 or Policy 2. In fact, by Year 24, Martin’s death benefit in Policy 3 exceeds what he would have had in either Policy 1 or Policy 2.
 

In Year 40 in each of these policies, Martin’s premiums will stop, because the policies were designed to be fully paid up at age 75. However, both his death benefit and his cash value will continue to grow each year. By Policy Year 50, the death benefit in Policy 3 tops $2,000,000, even though he didn’t pay any more premiums after Year 40. If Martin passes away at age 75, Policy 3 could allow him to leave a legacy of $1,646,123 for his family or favorite charities. And that gift can pass income tax-free under current tax law, and without going through probate.
 

Should he live until 85, Martin’s legacy can grow to more than $2 million, and should he live to 95, it could grow to more than $2.5 million.

Like Martin, you can enjoy a wealth-building and retirement income strategy that comes with guaranteed, predictable growth, safety, tax advantages, and more. It’s a step-by-step process that’s designed just for YOU.