Video Transcript: What is Life Insurance? Part 2

Video transcript - What is Life Insurance? Part 2

Welcome back. This is Alex Barron with Wealth Heritage and Financial Freedom and Success Institute, discussing the concept of financial security How to Become Your Own Bank, I thought it might be helpful to show you at this stage and example, you can see basically how this works when we do a one on one consultation with you. 

So here, I've gone into the illustration software. And I'm going to just put here seminar example, a person who's 21 years old, I just going to consider a male for example, just to give you an a sense of how this would work for somebody like that, I'm gonna change it also to somebody who was maybe a little bit older, but for now, let's just start with the young person, somebody who was able to put in money, let's say, for 30 years. 

Now, you don't have to, they don't have to be the ones who's putting in the money could be you putting it in on your son or something like that. I'm just gonna assume for example, standard health. And I'm going to start off with a policy that's maybe $50,000, for example. When I'm put here monthly, and I'm starting off with $50,000 whole life policy just to get a sense of what this cost.

Okay. Let's fix this I gonna try it again, okay, great. So let's look at this policy. What it says and what it does for a young 21 year old person. See if I can get there a little faster. Here we go. So this whole life policy says that it costs for a $50,000 policy. Here it is 50,000. It's going to cost $41.48 per month. Now, if we look at this policy in more detail, what does it say here? Here's shows a couple of things that I like to show you. It shows the age, it shows the first year, second year, third year that they've had the policy, it shows how much they're paying per year, we said it was $41 times 12, that's $500 498 a month. It shows you the best death benefit that's guaranteed. 

So it's got a site that's guaranteed and it's got a site that's not guaranteed. But that's projected based on current dividends scale. And it shows you that in the early years, they may not have a lot of cash value, and the death benefit is growing little by little every single month. Now remember, this is similar to a building where it's just the the foundation on the building. Let's draw that here. Just to give you a sense of what we're talking about. Not a very good artist. So I'll apologize in advance. But let's just say that we wanted to build a building. So what's the first thing that we got to build a foundation, right? The foundation of one of these policies is equal to the base contract or the whole life contract. 

Now, a lot of agents are going to sell you one of these policies as big as policy as they can. But what's good to just have a foundation and we have nothing to build upon. That doesn't do anybody any good. Now, this base policy, we picked for our example, a $50,000 whole life permanent insurance. Right, that's gonna cost those said $41 or 4498 per year. Okay, so what do we do with this, this just enables us to start the contract. On top of this, what we're going to do next is we're going to add the term rider, the term rider is essentially what allows us to have more capacity to expand this into a bigger policy. So here we have an option of adding a 10 year, 20 year, that's the status 30 years since this is a young person. And let's say that we're going to add maybe $200,000 of additional insurance for 30 years. Now, those 30 years are going to give us a lot of time to put in some extra money. I just gonna click here on this waiver, and I'll explain to you what that is in just a second. Let's go ahead and run this and see what it tells us.

Alright, so what this tells us, is that we now have three components. We have the base policy, which is $41 a month, we have the term writer, which is for 30 years $200,000 of coverage for $30 a month. And we have this little coverage at 85 cents a month, which is called waiver premiums. Now waiver of premium is something that we typically recommend to clients. And what that does is that in the event that the person becomes disabled, permanently disabled and can no longer pay for the insurance. By taking this on as 85 cents a month payments, essentially what you're doing is you're ensuring that in something happens when you can't make this payment, they will continue to complete the policy payments for you in the event of disability. 

So the way I like to think about term insurance is like when you're getting ready to build the building. What's the first thing that you do? Right? You have to the foundations? You basically create, if you want to create higher stories, of course, you have to create some columns, right? Before you start creating the next floor, what is it that you have to create? You have to put up shoring? What is the purpose of shoring, it's temporary. It's a temporary structure. So let's just depicted here as a series of cross bracing. Right, these cross bracings are temporary, temporary protection. While you do what, while you put up maybe the next floor, right, you're gonna have all this temporary protection in here, while the cement becomes what? Permanent? Right? This next one, this next level, is what we're gonna do next, which is called the paint of addition. 

But in order to put this up, before you put that up, you first have to set up the temporary protection that's going to hold this up. Right. So this is the equivalent of our term insurance. Now we're going to have this term insurance for how many years in our example 30 years. So what that does is that means that this is for year one, we want to go another build another floor, we're going to have to put up another inch permanent temporary insurance for year two. And then at the end of year two, what are we going to do? We're going to create our second story. Right? So this is PUA for a year two, and then what are we going to do? We're going to create Another temporary structure for years three, right? And what's the purpose, so that we can continue to build a bigger building a bigger structure, right?

This is paid up addition, year, three, and so forth, for how many years 30 years. Now, hopefully you get the basic idea. But what we're trying to do is a structure that's going to last over time. So for this temporary insurance, we're going to pay $30 a month. 

Now, in this particular insurance that we just created, we're going to be able to put roughly about $4000, but about 4000 3000 to $4,000 a year in additional insurance. So let's go ahead and do that. What we're going to do is, we're going to add what's called a level premium paid up editions writer. So let's just say that we were going to do about $3600 a year.

And let's just say that every year, we wanted to put away into our savings, I'd like to call this a savings plan, let's say we were going to put away into our savings plans, about $300 per year. So let's see how this could work. Okay, so let's go through this pretty quickly here. I can make this a little bit bigger. Okay. All right. So let's kind of look at what we have here. So we have the first component, which is the whole life, we have the second component, which is the term writer. And we decided to add the third component, which is the paid up editions writer, which is essentially going to provide for us additional temporary, I'm sorry, additional permanent insurance. This is a temporary one additional permanent insurance, which is essentially the concept that I was saying of the additional floors.

Okay, now, what's the advantage to do this? If we go back here, what we're going to find is that we started off with a policy of $50,000, right? But look at the death benefit over time now. At the end of the first year, it's going to be 300,000. At the end of the second year, it's going to be 325 000. At the end of the third year, it's 349 000, and so forth, at the end of every single year, the insurance is going up by roughly 20 to $25 000. At the end of 20 years. Where are we at now 680,000. I know it's a little bit hard to see it. I mean, roll it up here. But as you can see, this insurance policy, the death benefit is growing tremendously year after year after year. 

Now, let's look at another component. The cash value, the cash value in this policy starts off at $3400 7000 at the end of the second year at 10 700 at the end of the third year, and so forth. This portion is what basically becomes your bank, quote unquote, this is the amount of money that you're able to borrow against, typically up to 80 to 90% of this money is what's available for you to borrow. So with this plan, you have the ability to put in extra money into the insurance. That extra money which is called paid up additions money is going to cause your bank to grow. And it's going to cause your death benefit to grow tremendously. 

Now, this is why it's very sad that some of the TV commentators typically don't talk about these types of plans. because they're really doing a disservice to people by limiting them to just getting either a term insurance, which is going to run out at the end of 10, or 20 or 30 years. Whereas this plan is permanent insurance, it's never going to expire, it's going to grow tremendously over time. And the money that you're putting into this plan you're going to be able to borrow against in order to pay off your debts in order to take care of yourself. 

Now, if this person reaches the age, retirement age, let's say that they started off this plan when they were 21. Let's look at how much insurance they would have. By the time they're 85 years old, they would have a million dollars of death benefit. And they would have $836,000 of cash value. How much money did they put into this plan over their lifespan, up to this point they've put in $162,000 $162,000 is projected to convert into $836,000 of cash value, let me pull down this thing so you can see it. Cash Value 836,000, the death benefit would be roughly a million dollars. So this is a way that you could set your children up for life. This is the way you can set yourself up for life. Imagine having access to this money that you can touch at any point in time, you don't have to wait till you're 59 and a half or 70. Like with a typical IRA for 1K, you can borrow against this money at any point in time. 

And if you look at this particular column, this shows you how much your cash value is increasing every single year. For example, when you reach retirement age, let's say you're 75, and you want to start drawing an income, you could start drawing $21,000 tax free out of this plan. If you wait till you're 80, you'd be drawing $23,000. This shows you the amount of money you could pull from this plan, year after year after year, depending on which year you decide to start withdrawals. But basically, you have the choice of either leaving the money in the plan and letting your cash value grow. Or you can start withdrawing the money tax free. While at the same time you can tap into this money if you need to for additional funds. 

And if you started to do that, if you started to withdraw against this money, maybe if you pull out more than this amount, this amount would start to go down. But if you don't think you're gonna live past, I don't know, let's say 90 years old. Why leave all this money just as an inheritance when you can use it to live upon in your older age, right? Whatever your borrow in these older years later years, and you don't pay back. 

So will simply mean withdrawn from the amount of death benefit that your kids would eventually inherit. So we hope that this example in a nutshell helps you understand in a better sense a specific example of how this could work for yourself or for your kids. Now, I'd like to just do this, to show you the difference between a young person in a middle class, middle aged person and an older person. 

Now, in this example, I talked about a 20, no 21 year old person right. Now what happens if let's say you're 14? Well, let's do that. So we change the example. Instead of 21 year old person, let's say we use a person who's already in the 40s. Maybe this 40 year old person doesn't want to contribute for 30 years, maybe they just want to contribute for 20 years. So let's look at a plan for somebody like that and switch the the plan here a little bit. So let's go back. And again, remember, all of these policies don't have a standard price. It really depends on your case. You could have a small policy or large policy it just depends on how you use it for yourself. So let's just go through this let me just fix a couple more things and see here okay, select this lets show you here, okay. 

Alright, so in this case, going to go with a 20 year term instead of 30 years simply because this person's already 40 When they're requiring this. And I'm going to say, I had the 20 year term writer instead of 30 years. Think in the last case, we had $200,000. Let's do that, let me just see how much money we're gonna be able to put into the paid up editions writer. Just going to check that really quickly here. Okay, for slightly older person, we're going to be able, what you the first thing that we see is that the cost is a little bit higher $102 For the base policy $36 for the term policy. But if we look at this number here, where we can see that we're able to put away more money. To me just do some quick math, it's about $1,000. So let me change that. And I'm gonna go here. And say, instead of saving only 3600 per year, I'd like to save about $8,000 a year of permanent, optional additional insurance into our savings plan called paid up additions. And I'm going to put here $1,000 here for 20 years. And let's do this and see how this looks.

So what are we done, we have a plan here, where we have a cost for the base policy of $102. For the waiver of premium in case of disability costs 353, for the temporary insurance for 20 years, for $200,000 and costs $36.89 a month. And we're not obligated, but we have the opportunity to put in a maximum of $8,000 a year, which is $666 a month. Altogether, this would allow a person to buy insurance for $800 a month. 

Now, you might be wondering, well, what if I don't have this money right now, we'll get into that in a minute. But don't worry about it for this for this illustration right now, I just want you to see that it has a similar impact, basically, for somebody who is a little bit older. And I just want you to see what it does here. So this case, we started off with somebody who's 40 years old, we're assuming that they're putting in that 800 And something a month, which is about $9,700 a year. And let's look at it, they have cash value, which is growing rapidly, right. And the death benefit is also growing rapidly. 

Now, in this case, we're only assuming that this person is going to put in extra money for the first one years and then after that, it's only going to drop down to the component of the whole life insurance. So again, in the case of this, this person, how much money would they have? Let's say by the time they're 80. By the time they're 18, they would have 500. And they've contributed 215,000. You notice after this age of 75, they're not putting any more money, zero. 

So the total amount that they put in over the lifetime was $215,000. The amount of cash value that this is projected to have would be roughly about $583,000. Right. And you notice that the minimum guaranteed amount is right here. $379. So it's more than they put in this is what they project though. And this would be the death benefit that's projected $762,000. So what about in terms of the dividend that this person could collect every year? Here, the amount of cash value that they would be receiving? is about $19,000 a year in passive income that's tax free. year after year after year from this point on. Again, if they needed to touch this $583, they could do so via a distribution or a policy loan. 

The main advantage of policy loan is simply that the money is not going to be taxed, the distribution is going to be taxed initially is gonna be tax free up until the amount of money they contribute up to $215. And beyond that, it would not be taxed. But anyway, the point is that you can touch this money to live upon in your later years, and whatever you didn't end up using that amount would be subtracted from the death benefit that goes out to your beneficiaries. This strategy is not just for older people, for younger people could be for older people as well. Death plans where you can do this for fun to fund the plan for 10 years, and contribute up to that point, which obviously would be a little bit more expensive. And that's something that we can see one on one. 

Now. I'd like to see if there's any questions up until this point, before we continue to the next to the next lesson here. Wants to student asked if they were to take out their net cash value and then die. What would happen at that point? Does the family still get the entire death benefit? Or how does that work? No, they get the death benefit minus whatever they borrowed out. So like if your death benefit is $500,000 and you borrow $200,000, then your family would get $300,000. 

Now, if you've had this money borrowed out for a few years, you have to remember that the insurance company is going to be charging you a small percentage, typically around 5% For that money that you borrowed because they were assuming you were going to return it. But if the person passes away, the family would get the death benefit minus the amount that was borrowed minus the interest that was owed on that money. Remember, the net cost to you is roughly about 2%. Why? Because on one hand, they're charging you 5% For the money you borrowed. On the other hand, they're paying you somewhere around 3 to 4% for the money that you have inside the plan. So then it costs us roughly about 2%. But the point is that no, you don't get the entire death benefit if you've taken out some policy loans that weren't repaid. So I hope that answers that question.