Whole Life (WL) is the most complex product ever developed by the life insurance industry.
I would urge anyone who intends to read this write up to first read the “How it Works – Whole Life Box” write up first.
STANDARD INTRODUCTORY COMMENTS
Whole Life (WL) is the most complex product ever developed by the life insurance industry. Complex in the sense it cannot be broken down into its parts. It is a bundled product.
What complicates matters with WL is the fact it is a bundled product. One where all the moving parts are obscured. No individual income or expense information is ever made available to those who sell it, or those who buy it. Only a few company executives and actuaries have access to this information.
Those who favor selling WL often base their understanding on a handful of half-truths and misunderstandings shared with them as fact by other under informed or misinformed (albeit well intentioned) mentors or peers. A bold statement perhaps, but sadly one that all too often has proven to be true.
Only when a properly educated individual who really has a grasp as to how WL works asks detailed questions of the ill-informed (the answers to which they already know) does the validity of the above statement become painfully clear. Those who understand how WL works are endlessly amused (or saddened) when witnessing the floundering efforts of those who do not attempting to explain it. Since they usually are answering the questions of potential clients who are even less informed the resulting scenario is akin to the time honored “blind leading the blind” result.
Sadly, the client is in no position to evaluate the accuracy of the answers they receive. This gives the under or ill-informed sales associate a wide degree of latitude resulting in obscure or over simplified replies. The client is all too often left to assume they are just too under informed or “insurance ignorant” to understand the answer they’ve been given. Most are also too nice to assume the often professionally attired and earnest person giving them an answer they can’t understand is just as clueless as they are.
Offsetting this lack of knowledge, or perhaps because of it, WL is often sold with an almost evangelical fervor. Assertions surrounding its guarantees often make the product sound as if it embodies all that is good and holy. A biblical level of enthusiasm often prevails among those devoted to the sale of WL. Ignorance can be a very powerful thing.
Unfortunately, even those with the best of intentions and deeply held beliefs can end up making blatant misrepresentations that can be every bit as damaging as the falsehoods shared by those with ill intent. Or even worse considering the level of sincerity typical of the WL devotees who share misinformation. Sincerity goes a long way in selling. People can sense it and they like it. It breeds trust.
The WL product itself is neither good nor bad. It’s just a design developed before the advent of computers which are needed to track the myriad of assumptions and details involved in the WL products structure. Imagine the challenge of attempting to do so with a manual hand based calculation and posting system when there are hundreds of thousands of in force WL policies outstanding. Only with the advent of computers did it become possible to create an alternative policy design (universal life) that allows for tracking and reporting each and every income and expense factor on an individualized policy owner basis. Prior to that it was simply impossible to do so. Hence the WL design.
The decade’s old design of WL was actually miraculous. It allowed for reporting cash values accumulating within a policy and death benefits covering tens of thousands of policy holders. Its “unallocated” design was the key. This avoided the need to breakdown and assign general account assets, earnings and expenses to individual policies. Said differently, the total of the cash values of all of a company’s inforce WL policies does not equal the balance in the general account. While clearly in some way they are related there is no direct relationship. If that makes any sense.
With WL all of these factors are “bundled” together and less formally allocated based on formulas embedded in the WL products design. This collection of interrelated formulas is often referred to as the “master” WL formula. It (the master formula) differs for every series of individual WL product ever sold by every company selling them.
As with any product design WL has its plusses and minuses. What makes WL good or bad at any given point time is very often a function of what is, or has transpired in the real world economy since its sale. Certain economic realities (like high interest rates) favor WL while others do not.
So, at any given time and depending solely on economic and assorted other realities, WL may or may not be the best product for any given person. Which also depends on the intended use of the product, the actual life span of the insured party and the focus of any given purchasers goals or needs.
As noted earlier it does not require ill intent to misrepresent a products features or benefits. Ignorance works just as well. Perhaps even better. Most of those who sell WL have nothing but the best of intent. It’s their lack of actual knowledge that creates problems. They tout the WL product as rift with guarantees that work to eliminate all of the elements of risk. Which sadly just isn’t so.
Economic trends, in particular those pertaining to interest rates, have a tremendous impact on WL products. The reason being, WL is an interest sensitive product. Whatever is and has happened since a WL policy was issued with interest rates has a tremendous impact on the products ability to deliver on illustrated dividend fueled cash values and its death benefit.
Regulations also have a tremendous impact on the value a WL product can deliver. Among a great many other things regulations prohibit investing general account funds in equities (stocks). They allow only a modest single digit percentage level of stock ownership which usually relates only to stock owned by the general account in subsidiaries of the company selling the WL product. Regulations also require reserves be set up for different asset classes. A fact that drives the company’s investment behavior since the establishing of reserves creates reportable expenses impacting reported profits and capital levels.
The reality of interest rates today could not possibly be more different than the reality of interest rates that existed decades ago in the heyday of WL product sales. In fact, the realities of today are literally 180 degrees the opposite of what existed then.
Which brings us to the topic at hand.
EVOLUTION OF THE WHOLE PRODUCT
It is fair to say the WL product of today differs in many ways from the WL product of decades gone by. The further back in time one goes, the truer this statement proves to be.
If there was ever an “apples to oranges” situation pertaining past versus current comparisons I would lobby the evolving difference in WL product features over time, in particular the advent of the two riders discussed in this write-up is surely one.
Aside from these riders, past versus current factors that have a major impact on the value previously versus currently offered by WL include two “macro” factors. One being economic in nature, primarily relating to interest rates (addressed in the “How it Works” write-up discussing economic factors impacting WL). The other relating to the regulatory rules creating reserve requirements imposed over the last few decades (addressed in a WL “How it Works” write up discussing regulatory issues).
OVERVIEW OF WL PAID UP ADDITIONS (PUA) AND TERM RIDERS
Aside from the two “macro” topics noted above the two riders discussed below are also a major game changer relative to the ability of WL products to deliver desired benefits.
These riders have been actually been around for several decades in one form or another, but are in more frequent use today than in decades past. They are critical to the WL sales concept known as “Infinite Banking”, a topic addressed in yet another separate “How it Works” WL write-up.
These riders are used in combination to allow large added early year premium payments to be made into WL policies. The goal is to create liquid and available cash values far sooner than would otherwise be possible.
The “paid up additions” (PUA) rider itself allows for making large added premium payments into a WL policy in its early years at levels far above the policies base WL premium level. These added payments create far less death benefit per dollar of premium paid than do the base WL premium payments. Over the long term this also allows for more growth in cash value “per dollar of premium paid” than the base premiums alone create.
The “term rider” creates a temporary added death benefit amount above the base WL policy face amount. That added amount is needed to allow for meeting the IRS tax code dictated relationships that must exist between premiums paid and death benefits in a WL policy at any given age.
The term rider has a cost. That cost directly offsets the earnings benefit gained by the additional PUA premium amount. As does the manner in which PUA rider payments are typically invested by WL companies. More on both of these issues later.
The intent in using these two riders “on top of a base WL policy” premium is to create higher levels of early year liquidity (accessible cash values). This is possible for two reasons.
First, these PUA rider premiums are not invested by the insurance company in longer term, illiquid assets held in the company’s general account. Instead, they are invested in far shorter term and highly liquid alternatives.
Shorter term, illiquid assets (usually bonds and treasury bills) do not have a principal risk if interest rates rise. Longer term bonds or mortgages, purchased with base WL premiums, and less liquid assets like directly owned real estate do have this and other risks. As such, there is no need to restrict access to PUA premium payments.
Second, the commission paid on PUA riders are minimal. Unlike the commissions paid on base WL premiums which are extremely high in the first year. WL first year premiums result in large commission amounts being paid to selling agents and sales managers. These payments are advanced out of a company’s capital base and must be recovered over time. It literally takes ten to twenty years for the insurance company to recover these funds from future premium payments and earnings thereon. Which is why the WL master formula contains very large surrender factors which effectively suppress WL policy cash values.
Since PUA riders generate minimal commission payments and they are invested in shorter time frame maturities there is no need to suppress access to the cash values they create. This is dramatically different than the situation with base WL premiums.
This immediate PUA premium liquidity allows for borrowing from cash values in early policy years, which would otherwise not be possible.
This borrowing approach is the key to making a sales strategy referred to as “infinite banking”, which is based on a book written many years ago by a fellow named Nelson Nash, workable. Please consult the separate WL “How it Works” write up on that topic for more information.
I will mention here that it would be more apt to refer to this strategy as “infinite stupidity” than “infinite banking”. Sadly, while Mr. Nash is a very nice man, with nothing but positive intent, he is hopelessly under informed on the inner workings of WL. As is (are) his dedicated band of devotees.
So, let’s take a closer look at the two riders and review how and why they are used.
DISECTING THE TWO ADDED RIDERS
The base WL policy of today would require the better part of a decade for policy cash surrender values to grow to a level where a material cash value total would be available for borrowing. It might even take two decades with many of the WL products sold by various companies today.
What this means is there is little or no cash value liquidity in a WL policy for many years for those who make only base premium payments. This is a potential disaster for those whose economic fortunes change (a job loss, sickness, etc.) after purchasing a WL policy after paying one, two or three year’s premiums. Which create zero or near zero cash values.
Those who make only base premium payments who find themselves unable to afford to make the subsequent mandatory required base premium payments will find their policies lapsing. At which point they forfeit most, or all, of the premiums they have paid to date.
This is a major problem with WL. It is a result of how a WL policy is designed and operates as relates to base premiums. Please consult the “WL Box” and “Design” write-ups for more information on why this is so.
If payments are missed in the first three to five policy years with a policy sold without a PUA rider, meaning it is illustrated with base premium payments only, it means:
- All, or most of the premiums paid to date will be lost, and
- There will be no further life insurance protection provided.
The Infinite Banking concept, which focuses on the use of WL cash values to allow for loans to be used for various purposes in early policy years requires cash values be available almost immediately. So there must be a PUA rider added to the policy. Which also means there must be a Term rider added as well. The larger the PUA rider, the larger the required Term rider.
Suffice it to say for purposes of this write-up the “infinite banking” strategy requires borrowing from the WL policy a few years after it is issued. Clearly, from a WL policy buyer’s perspective (all else being equal) the ability to accumulate cash values sooner than later is desirable. Having a large cash value build up in a matter of a few years is far more attractive than having to wait a decade or two.
The bottom line is, at least from a strictly sales perspective, it’s a lot easier to sell a concept when the associate isn’t asking the client to wait ten or twenty years or more to benefit from the strategy being presented. That is the reason some WL devotees find the “infinite banking” concept irresistible to present to their clients.
Clearly, the “infinite banking” strategy won’t work if a “base” premium only WL policy is sold since cash values resulting from the payment of base premiums are suppressed for many years. Only by adding a PUA rider to the base WL product can accessible cash values in early years be made available.
Another reason large cash values are possible relative to PUA rider premium payments is they create only a bare minimum amount of death benefit. So, the likelihood any material amount of death benefit will be paid out in the early pertaining to those premiums is minimal. This is in dramatic contrast to base premiums which create large amounts of death benefit per dollar of premium paid.
That said, the offsetting issue that limits how much in PUA rider premium can be paid into a WL policy pertains to the IRS regulations which define life insurance for tax purposes. The regulations (7702) require a certain relationship exist between premiums paid, cash values credited and death benefits put in force. These rules are complicated and involve formulas best left to actuaries to decipher.
Suffice it to say, adding a large PUA rider also requires the use of a term insurance rider to increase the policy face amount in its early years by using temporary term insurance to meet IRC the IRS rules.
You can consult a separate “How it Works” write up devoted to discussing 7702 and 7702A realities for more information on how they apply to WL or UL products. It may not be added to this website for a number of years.
Relative to Mr. Nash’s “infinite banking” book it’s interesting to note these two riders were not in common use when the first edition was written; at least in the context they are being used today. It was actually impossible to implement the strategies preached in his book until a decade or two later. At least as written.
Some added info on both riders follows:
- PAID UP ADDITIONS RIDER: As noted this rider allows for the payment of excess premiums above the base WL required annual premium. PUA premiums have a nominal death benefit value and pay an exceptionally low commission rate versus base premiums. This allows them to be available in policy cash values far sooner than base premiums since there are no valid reasons to restrict access to them. They are also far more flexible than the base premiums in that they can be reduced or stopped entirely at any time. PUA premiums are optional at the client’s discretion while base premiums are mandatory in all years for the life of the policy.
- TERM RIDER: The term rider is necessary to increase the policy face amount for a certain time period. This is necessary for two reasons. First, it is necessary to allow the policy to avoid IRC 7702A Modified Endowment Contract (MEC) status; which would mean loans would be taxable to the extent of gains in the policy. That would effectively destroy the intended longer term use of the product which invariably involves accessing cash values (and deferred gains) at some point in the future. There are also rules which must be followed governing how much cash value can exist in a WL policy in any given contract year as a percentage of the death benefit; specified in IRC 7702’s CVAT rules.
Absent the use of a term rider, which has a very real and material cost that works to reduce the WL policies overall rate of return level on cash value build up, the WL product would fail the MEC test once a large PUA premium rider was added.
While term rates are relatively cheap “per thousand dollars of death benefit” depending on a client’s age, it often takes a very large term rider to fit in the payment of a large added premium amounts under a PUA rider. And those premiums typically are intended to be made for a number of years. So the cost of this term rider can be large depending on how long it must remain in force to allow these premiums to be paid while avoiding MEC status.
HOW A PUA RIDER WORKS
The PUA rider is intended to create the cash value liquidity needed to allow for borrowing to occur in the early policy years of the WL policy. Without the PUA rider there would be no ability to borrow funds at any meaningful level for a decade or two. So that’s the singular purpose of the PUA rider with a WL contract.
This is made possible by three PUA design factors that differ from how base premiums (those pertaining to the base WL policy without the term rider) operate within the WL design. The combination of these factors allow for minimal surrender charges (if any) to be built into the PUA cash value accumulation projection formula, which in turn results in far higher early year cash values. The cash value in a policy that has a PUA rider is literally being created by two different premium flows governed by two different formulas.
The three reasons are:
- COMMISSIONS: Minimal commissions are paid on PUA rider premiums versus base policy premiums. That means the life company does not have to protect itself from the negative consequences of an early surrender, as it does with base premiums. As noted earlier, the base premium commissions are advanced from the capital of the insurance company. They are then recovered over an extended period of time from future premium payments and earnings thereon. Commissions and overrides on WL, and the costs associated with issuing a WL policy (medicals, etc.) can literally exceed 120% of the initial base premium amount. As such, it can take a decade or more for the life company to recover the cost of having paid these amounts “up front” out of capital. As such, a substantial portion of premiums paid in the first few years of the policy are essentially removed from cash value calculations (based on surrender charge factors in the WL formula) and are only then gradually allocated back into policy cash values a decade or two later.
- RESERVES: PUA riders have a very low level of death benefits created per dollar of premium paid. While not exact, a typical ratio might be $3 of death benefit per dollar of PUA premium at older ages, versus $6 to $8 created at much younger ages. The death benefit to base premium dollar ratio might be 100 to 1 or more. This differential means there is very little in death benefit that will be payable if an insured that used a large PUA rider dies on those premiums, versus the large amount paid relating to the base whole life premiums paid. This means very low death benefit reserves are needed “per dollar” of PUA premium paid.
- INVESTMENT HORIZON: The average maturity of a bond or mortgage portfolio dictates the yield of that portfolio. The longer the maturity duration, the higher the yield. The shorter the duration the lower the yield. The longer the duration the higher the risk of possible loss.
The reason for this relates to the fact existing interest sensitive assets (bonds and mortgages) with a longer maturity date decline dramatically in value when market interest rates go up. The longer in the future the maturity date, the greater the potential decline in current market value.
This means a loss will be incurred if and when longer term maturity assets are sold to produce the cash needed to allow a WL client to make withdrawals, borrow from their policy cash values created by base premiums, or surrender their policy for its cash value.
The practical implication of this fact is the dramatically higher early cash values associated with PUA premiums requires the underlying general account assets supporting them to be invested in shorter term maturity durations (versus base whole life premiums). This allows the insurance company to avoid the risk of principal loss that would exist if PUA premiums were invested in longer term maturities (should interest rates subsequently rise) and a WL client then accessed PUA cash values. However, it is a fact assets with shorter term maturity durations pay far lower coupon rates or yields than their longer term counterparts.
So that’s why and how PUA riders are used. The combined result is threefold.
First, there are lower earnings rates and credited dividends on cash values tied to PUA premiums.
Second, the policy must absorb the cost of the term insurance needed to allow the PUA rider to be used (to avoid MEC status). This is a bit of a misstatement in that an added premium is actually charged for the term rider. That added premium isn’t part of any formula driven cash value calculation since it does not end up in the general account; meaning no part of this term premium is actually invested to produce earnings and credited dividends. The best way to think of it is as if the term element is a totally separate term policy with its own death benefit and premium amount and no cash value. Which is not clear or obvious in the sales illustrations.
Third, since the longer term value delivered by the WL product is a function of the actual long term IRR result, the added term premium lowers the overall long term IRR delivered. The reason being we have a higher total premium amount to use in calculating the final dollars “in” and “out” of the WL policy.
This drag on the IRR delivered is clearly a negative.
POSITIVE RIDER BENEFITS GAINED
These two riders have dramatically altered the nature of the WL product sold today versus sales made 20, 30 or 40 years ago.
LIQUIDITY: A major plus is the creation of immediate liquidity (cash surrender value) that reduces the risk of lapse inherent in the WL policy design as relates to base premiums.
The reason being the immediate cash value created by a PUA payment creates a cushion should the policy owner fall on hard times and not be able to pay a required premium (especially in the first few years the policy is in effect). The PUA payment creates “additions” that can be surrendered to create funds to pay subsequent WL policy base premiums.
NOTE: Surrendering PUA additions to pay a base premium will effectively eliminate the ability to make additional PUA premium payments going forward. Scheduled (illustrated) PUA’s must be paid as illustrated. If a year is missed the right to make subsequent PUA payments is suspended.
The cash values created by PUA payments that create “additions” are also available for borrowing. This allows for the liquidity needed to implement the Infinite Banking concept. This is true even if the concept itself is badly flawed and makes no economic sense whatsoever. It does nothing to increase the overall savings results as the misguided devotees of that sales strategy incorrectly believe occurs.
CASH VALUES ARE ENHANCED: Another positive note is PUA riders allow policy owners to use a WL product to fund savings they can access sooner than later. While a thirty year old has decades for premiums to grow inside a WL policy, the same cannot be said for a fifty year old. The use of a PUA rider can allow a fifty year old to draw dividends from a WL policy decades before they could with a base WL policy only.
This is not to say it increases the rate of earnings. It simply increases the amount that is earning in the general account so more earnings are produced for future use. This is not to suggest it increases the rate earned. Just the amount of earnings is increased versus paying the same premium into a base WL policy only alternative.
Over time, and especially after the term rider is no longer needed and it is dropped, the larger cash values held in the general account allow for far higher policy dividend amounts to build up.
Whether paid into a WL policy by a thirty year old or a fifty year old the fact is added PUA dividend cash values can be used in later policy years for funding retirement distributions. They increase the supplement future income levels available to those who plan to use a WL policy for that purpose.
While a WL policy may not be the best vehicle for funding future retirement needs relative to alternative life product designs, many people buy WL with that use in mind.
PAID-UP WL BY ITS TERMS: It is possible to pay a large enough amount of PUA premium for a sufficient number of years to actually “pay up” a WL policy.
Relative to the base WL policy itself, the premiums must be paid for life for the policy to remain in effect. That said, the dividends created by general account earnings and credited into a WL policy can be surrendered to pay required base premiums. That is the normal scenario that is illustrated to WL buyers.
When a PUA rider is added it creates added dividends that will be credited into the WL policy. The larger the PUA amount and the longer it is paid, the truer this statement is.
The phrase “per its terms” refers to the guaranteed elements of the WL policy. The base policy is always considered “paid up by its terms” if premiums are illustrated and paid for life. Which is rarely the intent of a WL policy buyer or what is reflected in a WL illustration.
When it comes to adding a PUA rider, the end result can be enough in dividend additions cash value is created after five or ten years that the guaranteed increases in cash value alone are sufficient to fund all future base policy premiums until the policies maturity date. At that point the WL policy is effectively “paid-up” per its guaranteed terms. Which means no added “out of pocket” premiums need ever be paid to keep the policy in force until its maturity endowment date.
This scenario is rarely illustrated in that it is not the intended use of the typical WL policy. It can occur in reality over time and not be “known” to be the case by the policy owner. Only by obtaining an “in force” illustration, one showing no further out of pocket premium payments, would this become known to the policy owner.
While not typically the goal of the person paying the added PUA rider premium, this is a potential added positive benefit gained by using a PUA rider. One never knows what might befall them financially over time. Having a policy “paid up” under its guaranteed terms assures it will remain in effect and deliver a death benefit at some point in the future.
Depending on a person or their family’s actual future situation that alone can be a very positive benefit.
PUA TO BASE PREMIUM RATIO
Those who buy WL solely for the death benefit it offers will typically favor paying only the base premium amount. The reason being base premiums create the most death benefit per dollar of premium paid. So if that is the desired end result no PUA rider will typically be used.
However, when it comes to those who desire to create a well-funded and immediately liquid savings vehicle to be used to generate future income distributions (or a source to borrow from) the use of a PUA rider is a virtual must.
Once one decides to use a PUA rider the question then becomes how much of the premium budget they have available to spend should be used to create the base WL policy and how much should be dedicated to the PUA rider.
Decades ago a classic illustration ratio was 1 to 1. If a base premium was $5,000 then the PUA was illustrated as $5,000. Today the ratio is more likely to be illustrated as 2, 3 or even 4 to one. Meaning if $2,000 is used to create the base policy the PUA premium on top of that amount might be as high as $8,000.
The second question is how many years the PUA premium will be paid. It might be for only the first year. Or it might be for five or ten years. There are practical formula driven limitations that impact this. And, there are company based decisions on how much PUA premium the company selling the WL policy is willing to absorb.
The reason companies may limit PUA rider amounts relates to how WL companies cover their overhead. They do so by taking large amounts of the base premiums paid and or earnings thereon to fund their operations. They cannot do so with PUA premiums or the earnings on them. The reason being a very high percentage of those values are liquid and available to the policy owner. The very reason that a PUA rider is purchased in the first place.
The typical WL company prefers to have as high a ratio as possible relative to base premiums it collects versus PUA premiums. Base premiums stay in the general account for decades. They strengthen and stabilize the company from an economic and financial perspective. PUA premiums are likely to be removed sooner than later to fund loans or dividend surrenders. Therefore they do little to strengthen the company from a long term perspective.
As a result, one WL focused company might allow a higher PUA ration than another. It’s a business decision as to how much PUA premium they are willing to accept to encourage buyers seeking early liquidity to buy their base WL policies. Said differently, PUA premiums are used as an enticement to have people buy the base WL policy itself. But there are limits beyond which most companies don’t care to go.
Keep in mind, the higher the PUA ratio to base premiums, the higher the amount of the term rider that will be needed to allow that amount to be paid. IRS testing is incredibly complicated and formula driven. The only way anyone can figure out the required amount of term rider, and how long it will be needed, is to allow the WL illustration software to sort it out.
THE WL REALITY TODAY
The fact is the overwhelming majority of WL policies in force today are 100% base premium policies. They were illustrated and designed during a time interest rates were far higher for the combination of long term accumulation and maximum death benefits per premium dollar paid WL could then be assumed to deliver.
They were not designed to facilitate borrowing in early policy years as is the case with the infinite banking sales community today. That said, it was possible decades ago to illustrate the use of PUA riders and from time to time people did use those riders to create added dividend growth and early year liquidity.
The “infinite banking” sale is a more recent phenomenon driven by the fact a WL policy can no longer be illustrated to create reasonable levels of retirement distribution in later years using base premiums alone. Based on how general account assets are invested today a base WL policy simply can’t earn enough to produce meaningful accumulations above the rate of inflation. Frankly, most WL companies are struggling to earn enough to even pay the guaranteed rates promised in their WL contracts.
The “retirement” funding sale was always the main driver behind WL sales in decades past. Rarely did someone buy WL with only death benefits in mind.
The problem today is it’s no longer possible to illustrate an economically beneficial future stream of retirement income with a base premium only WL policy. The truth is, based on the low level of general account earnings and resulting dividends credited, is it possible to do so even is a PUA rider is used.
The earnings rates today, especially net of the term rider cost, are simply too low to produce an attractive “dollars in versus dollars out” end IRR result. Basically, making the use of a WL policy a “nonstarter” for meeting retirement income needs.
The few companies that have gambled their futures on the continued sale of WL to fund their bloated overhead and operating needs have been forced to find alternative reasons to entice someone might buy (or sell) a WL policy. More than a few companies have therefore latched onto Mr. Nash’s “infinite banking” book touted the benefits gained by early year WL policy borrowing to fuel the sale of their WL products.
Unfortunately, the book is a quagmire of misunderstandings, overblown statements and product level design confusion. While this statement is utter heresy to infinite banking devotees, it is 100% accurate.
For those inclined to better understand why this statement is true a good starting point would be reading all of the “How it Works” WL write-ups. Then, and only then, they should read the write-up titled “Infinite banking pros and cons”. There will be no doubt as to the accuracy of this statement once that is done.
WRAP UP COMMENTS
It only takes a casual review of the general account makeup of the nation’s insurance companies thirty years ago versus today to understand general account yields have plummeted.
It’s not complicated, nor is the reason for this a mystery, nor is it going to change.
Clinging to the past returns earned in WL products as a basis for selling todays WL policies is foolishness. The reality has changed behind how the assets supporting WL policies are invested. The returns are now very low and unable to generate the results enjoyed decades ago by those who owned WL policies.
Those who own a WL policy today, and who still have the illustrations they were shown when they made the purchase, have an easy way to verify this is so. All they need to do is call the insurance company and ask for an “in force” illustration (assuming whatever recent premium payment scenario they have in place, if any).
The resulting “in force” illustration will show dramatically lower cash values than were originally illustrated when the product was sold. It will also very likely show the policy will lapse many years before the likely mortality of the insured person.
Meaning all the payments made over the years will have been wasted and there will be no death benefit paid when the insured party dies.
Even worse, if the owner of the policy at one point or another transitioned to a loan based approach to making paying premiums (as many policy holders do) and usually the interest on the loan as well, the balance of that loan will be fully taxable to the owner when the policy lapses.
This is an economic disaster that unfortunately is befalling a great many WL policy owners around the nation on a daily basis. And that slow drip of lapses is destined to become a flood in the years to come since the general accounts no longer produce meaningful levels of return.
Not only is WL no longer a “good value” from a product standpoint, versus alternatives now available (even with a PUA rider) many of the existing “in force” policies are a financial time bomb waiting to explode any day, to the detriment of the owner of that policy and the family of the insured who believes it will one day provide them with a death benefit. This is why it makes sense to understand the products one owns. Especially, when the reality of the world as it exists today differs so dramatically from the reality that existed when the policy was sold.
