Good Whole Life Insurance Companies - You probably know by now that the Bank On Yourself method is based on specially designed dividend paying whole life insurance policies issued by companies that are financially strong and have a track record of impeccable dividend payments for 100 years or more. But you may be wondering about the mysterious extra rider (or option), which increases your cash value significantly faster than any life strategy most financial gurus tout.
. And you can potentially use that equity as a powerful money management tool right from the start. (For the record, the policies described by Suze Orman, Dave Ramsey, and most other experts pay no dividends and typically have no cash in the first year.)
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So let's take a look under the hood and see what riders actually are and how they make your cash value grow much faster.
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The main objective of the Bank On Yourself policy is to maximize the growth of your cash value without increasing your premiums. Cash value is a store of money that you will use to bypass banks, credit cards and finance companies to become your own source of financing. Use that money wisely and you could end up funding most or all of your lifestyle with it!
Table A below compares three whole life insurance dividend payments, all made to the same 35-year-old man. The annual premium per policy is set at $12,000, but the way the premium is allocated varies. (Don't get hung up on these specific premiums or starting ages. This is just an example. Your policy is tailored to your personal circumstances, so you can start at whatever level suits you. Plans can be effectively designed for newborns up to 85 years old.)
Certificate 1 is whole life insurance that pays dividends for a healthy 35-year-old we'll call Martin for no particular reason. All of Martin's premiums are allocated to the base policy and no riders are added. A comprehensive policy has a higher death benefit to begin with, but it comes at the expense of cash value appreciation.
See the circled amount on the line for policy year 7? This is important because, starting this year, the annual increase in cash value is greater than the premium Martin pays each year. (The $12,405 increase in cash value was more than the $12,000 premium.) This made Martin enjoy camping.
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In policy 2, only 40% of the annual premium is used to build a basic policy. The rest buy paid plugins. Paid-in supplements are the most efficient way to build cash value because they funnel most of the premium directly into the cash value portion of the policy, while purchasing a small amount of the death benefit. Paid add-ons are like small life insurance policies that only require a one-time premium.
See the circled amount on the line for policy year 5? With most additional paid premium purchases, the annual cash value increase begins to exceed the annual premium two years earlier than under Policy 1. (The $12,572 value increase is greater than the $12,000 premium.) Woohoo!
Over 90% of every premium dollar paid to riders goes directly to building cash value, very little goes to death benefits, and only a very small amount goes to financial officers as fees. A financial representative who wants to help you build your cash value by adding significant paid drivers should be willing to take a large portion in commission. Learn how to find a Bank On Yourself Professional who knows how to set up this policy properly and is willing to waive most of the commission.
Premium. You don't have to pay for it to keep the policy in effect. So in short, you can deduct and some companies will even let you catch up some or all of it later, depending on your situation. It gives you more flexibility than a traditional term life policy with no redundancy.
Voluntary Life Insurance
Under policy 3, only 30% of Martin's premium is used to pay for the basic policy. The rest buy paid add-ons and additional insurance.
The IRS limits the percentage of premiums that can be transferred to cash life insurance - without jeopardizing tax benefits. If the policy exceeds this limit, it becomes MEC and loses major tax benefits. The limit is based on a complex formula that compares the cash value with the death benefit. The higher the death benefit, the more money can be converted into cash.
Why add a driver's term to a lifetime policy? Didn't Bank On Yourself say term insurance is a bad idea? Which
For permanent life insurance, generally yes. But term coverage has a valuable place as a permanent policy maker. Here, the rider period allows you to pay more into your PUAR and thus build cash value faster, without conflicting with the Modified Endowment Agreement (MEC) guidelines.
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Because the driver's term increases the death benefit, the IRS formula allows Martin to put more money into his cash without changing the MEC policy. The validity period of the rider is designed so that it can be used between the end of the seventh and the twentieth insurance year. (The first seven years of the policy are the most important years in determining whether or not a policy will be MEC.)
It is not always possible to plan policy so that only 30 percent leads to fundamental policy.
Each policy differs based on many variables such as age, insurance needs, how soon you plan to withdraw your retirement income, etc. But when you work with a Bank On Yourself Professional, they will structure your policy to direct the lowest premium percentage to your base policy allowing you to achieve the goals you set for your plan - without changing the policy to MEC.
If you go back to strategy 3, you will see some interesting things. First, look at the amount circled on the line for policy year 1. At the end of the first year, policy 3 had almost eight times more cash than policy 1 (a policy with no driver at all). Properly used paid add-on Rider and term rider provide a powerful supercharging effect.
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Now look at the amounts circled in the line for year 4. The PUAR and period drivers have caused Martin's annual cash to increase beyond his annual premium starting in year four—one year earlier than policy 2, and three years earlier than policy 1. (The $12,337 cash increase is more than the $12,000 premium.) Come on, Martin!
Your reward for your patience in the early years of your policy is a growth curve that gets steeper each year you keep the policy. Even the supercharger policies used for the Bank On Yourself concept grew more slowly in the early years. It will take some time for your cash value to equal the premium you paid, even if your premiums were from day one
Return to the table and look at the lines for year 20 in strategy 3. As of this year, Martin's cash value has increased by more than twice the amount of premiums he paid ($26,077 in cash increases, compared to $12,000 in premiums paid). . And starting at year 30, the cash value has more than tripled the premium ($37,994 increase in cash, compared to the $12,000 premium paid). Martin is doing his happy dance now!
Even more interesting: Check out the lineup for the 40th year. It was the last year Martin was to pay premiums at all, and the policy continued to add up, but no premium payments. See the lineup for policy year 50? Premiums paid are zero, but the cash value grows by $59,425 - no luck, skill or guesswork required.
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Your strategy to finance large purchases. That's another reason why it's important to work with a Bank On Yourself Professional who can show you how to maximize the value of your plan.
Each policy is individually designed – no cookie-cutter plans – so your plans won't look like Martin's. However, you can find out what a customized plan looks like for your unique situation, goals and dreams when you request a FREE analysis. When you do, you will be referred to one of the professionals.
But what about the death benefit of this policy? Does this policy provide multiple death benefits? That's a good question, and Table B below shows the answer. As you can see in that table, all three policies build up a significant death benefit over time. But in the end, Strategy 3 actually creates the greatest benefit of death of all. (FYI – the policy discussed by Suze, Dave and the others has a death benefit that never increases.) Let's take a look:
In the early years of Policy 1, the monetary value was relatively small
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