Policy Design

Policy design is everything, you can have the same life insurance product from the same company, but if you have a poor design you could have drastically different results.

Design Objective

The goal of good policy design is to maximize cash value both upfront and long-term, while not creating a Modified Endowment Contract (MEC) by exceeding the tax favorable limits.

Where Do Premium Payments Go?

Some whole life insurance policies out there that market themselves as “High Cash Value Policies” don’t actually provide the most cash value and only provide a 50/50 premium split!

Increasing Your Cash Value – Paid-Up Additions Rider (PUA) and Term Rider

To get a better understanding of how we maximize the cash value in the policy with riders, let’s look at the following example:

The mortgage for a house is a required payment in order to keep the house. Mortgage payments slowly build up equity over time.

If you were to make upgrades to the house like updating the kitchen/bathroom, that would immediately increase the value of the home. 

With life insurance, the base premium is like the mortgage, in order to keep the policy in force, you must make these required payments which slowly build up the cash value. 

Paid-up additions are an optional payment that immediately contributes to increasing the cash value.

Term riders increase the death benefit for a set amount of time (i.e. 5, 10, 20 years) depending on how long of a period you would want to max fund the policy. Think of term riders as the foundation that allows you to add on paid-up additions, the stronger the foundation (larger the death benefit), the higher amount of paid-up additions you can add. 

When utilizing paid-up additions, dividends should still be used to purchase additional PUAs to keep the compounding from being interrupted.

Scheduled vs Unscheduled (PUAs)

Scheduled

Pay PUA at the exact same time as the base premium.

Unscheduled

Flexibility to pay PUAs at leisure. Depends on the company, but payments may be limited to a certain number of transactions per year (i.e. quarterly, once a year). 

This table shows approximately how death benefit you could receive based on your age and income (whether that is W2 or self-employed income).

Understanding the Underwriting Process

FAQs