A Tale of Two Policies

Charles Dickens begins A Tale of Two Cities, with the following words.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…”

And you could begin this same way with A Tale of Two Policies. That is because the two policies depicted below tell the tale of despair and hope, the dark and the light, the incredulity of foolish belief versus the wisdom of understanding. Simply because they unabashedly represent the worst of policy designs and the best of policy designs.

You will study the following examples and understand how participating whole life insurance policies, on the same person, paying the same exact premium, over the same exact period of time can so drastically differ from each other.  In other words, as you study the details below, you will realize that the purchase of a participating whole life policy can become your worst nightmare or your best financial tool.

For this story you are going to take the role of a 36-year-old, extremely healthy male.  You have heard about the Perpetual Wealth Code™ and believe that participating whole life insurance would be a good idea for you to add to your financial tool belt.  But instead of learning more about how that whole life policy should be engineered and structured you simply ask a good friend, family member or worse yet a business client or patient who also happens to be a life insurance agent to sell you a policy based on what you’ve heard about the Perpetual Wealth Code™.

Naturally, your friend, business client, patient or family member, tells you they know all about the Perpetual Wealth Code™ and can sell you a policy that will work exactly as those used in the Perpetual Wealth Code™.  You are a trusting person, and you sign the application and submit to your physical examination without a doubt in your mind that you are doing the best thing in the world for your financial future.

Seven years down the road you realize that something isn’t exactly working as you thought it should. Maybe the friend, business client or patient is no longer in your life, or worse yet they are, and that’s why purchasing from a family member that doesn’t understand the Perpetual Wealth Code™ makes this time the worst of times for you.

You’ve tuned into Wealth Talks, the official Podcast of the Perpetual Wealth Code™, and you’ve noticed that your policy isn’t working as well as the ones described by those being coached and mentored by the Life Benefits Team.  Maybe you’ve also noticed that you keep paying premiums but that your cash values are lagging way behind the cash values produced in policies more closely following the Perpetual Wealth Code™.

Or maybe, you have taken a policy loan and heard that you don’t need to worry about the interest because the dividends of the policy will pay your interest charges on the policy loan, and now your loan balance is out of whack.  There are a lot of things that you may or may not have noticed, but one thing you have noticed for sure is that the policy you purchased isn’t doing what you expected it to do when you bought it 7 years ago.  And now you feel it is the worst of all times!

You decide to call Life Benefits and find out why this has happened to you and your policy.

And this is what you discover.

Friendly voices that want to help you succeed!

A friendly voice explains that your policy was sold to you for the purpose of producing the highest death benefit as possible with the smallest premium possible.  And though you are earning dividends, the cost of your life insurance is preventing you from seeing the cash value growth that you had expected when you purchased the policy.

What?  How can the price of insurance be too high, preventing high cash value growth, when you paid the lowest amount of premium possible?

Good question.

As you explore further with your Life Benefits agent/mentor you are disturbed to notice that after paying premiums for 27 years, the growth in your policy is going to face taxation!  That certainly wasn’t something you had expected.  In fact, you vaguely remember that participating whole life insurance was something that could help you avoid taxes NOT create more taxes for you to pay.

By this time, you are probably kicking yourself and wondering, “How in the world did this happen to me?!”

Well, this is what happened.  Your policy currently looks like this 7 years in.  And this is also what it is going to  look like in 20 years

YearPremiums PaidTotal Cash ValueTotal Annual DividendAnnual Cash Value Increase
7$24,990.00$22,722.00$1,000.00$3,178.00
20$71,400.00$73,658.00$3,079.00$4,562.00

Now, I don’t know about you, but I like things to happen the way I planned on them happening.  And to have paid $24,990.00 over the last 7 years, I can’t imagine you being any too happy about having only $22,722.00 of cash value to show for it.  But you are someone who always looks on the bright side of things and you see that your dividend was $1,000 for year 7.

You also note that this $1,000 dividend purchased enough paid-up insurance to boost your overall annual cash value growth by $3,178.00.  Doing the math, you realize this is a 9.67% annual return on your dividend.

But then your Life Benefits agent and mentor shows you what could have been if you had purchased your policy with a better design.  This design would have maximized your cash value from the beginning using the same premium you have been paying into your current policy all these years.

This is what your policy could have looked like today, 7 years in, and what it would have looked like in year 20.

YearPremiums PaidTotal Cash ValueTotal Annual DividendAnnual Cash Value Increase
7$24,990.00$23,643.00$   268.00$8,288.00
20$71,400.00$101,181.00$1,527.00$8,425.00

Wow! For the same amount of premiums paid, you could have had $921.00 more in cash value today, 7 years after you began ($23,643 – $22,722 = $921).  Wouldn’t that be nice?

And, by year 20 you could have had $101,181.00 instead of only $73,658.00 of cash value.  That fact might stir a few emotions because you see for the same price of $71,400.00 you are only good for $73,658.00 in year 20, when you could have had $101,181.00…which is $27,523.00 more than what you do have. Ouch!

Finally, this second policy doesn’t become a modified endowment contract, ever!  That means you won’t have to pay taxes on the growth it creates for you, now or in the future.  Simply follow the rules, which of course your Life Benefits agent and mentor will help you follow precisely.

And of course, even though the dividends have been shockingly lower in this second policy, compared to your current policy, the annual cash value increase that those dividends are responsible for creating, are much higher in the second policy.  In fact, where your current policy showed a 9.67% return on dividends ($1,000 of dividends to $3,178 of annual cash value gain), this second policy shows a 28.94% return on dividends purchasing paid up insurance and increasing your annual cash value in year 7 ($268 of dividends to $8,288 of annual cash value gain.)

By now you are feeling pretty low, if you’re like anyone else who has made what they thought was a great decision only to have discovered it to be less than optimal.  Don’t feel bad.  Failure paves the path of success IF you use failure to alter your course.

  • It has been said that money doesn’t make you wealthy, the freedom to make it does.

In the life insurance world, you don’t have to be punished forever because you made one bad mistake IF you do something to correct that mistake sooner than later.  And because you have the freedom to exercise your IRS gifted option and complete a 1035 exchange, you can alter your course now and still create some great results.

A 1035 exchange allows you to account for all the money you’ve paid for your current policy and start making premium payments on the second policy in one smooth transaction.  And you get to make that transaction (1035 exchange) without ever losing your life insurance coverage.

Oh, and speaking of your life insurance coverage, by year 30 your second policy will have more death benefit than your current policy will have.  And when do you really think your death benefit will most likely be paid out, sooner or later?

Clearly, it is the best of times for you because you began something years ago that you thought was going to be great and now you have the opportunity to make it as great as you thought it was going to be.