One question is about the guaranteed vs unguaranteed
portion in the illustration. The general reaction to it is that since it is
unguaranteed, we should not believe it but only look at the guaranteed portion.
It is fine to do so for your risk assessment as the guaranteed portion is
indeed the absolute minimal return that one can expect from a WL. But this is
really a drop dead scenario that assumes that the company cannot make any money
for its unguaranteed dividends. It is possible for poorly run companies but for
good companies, it almost never happens. Actually the unguaranteed portion is a
more realistic return one can expect. Why so? Believe or not, insurance
companies are in general much safer than banks since by law they have to keep a
huge amount of money as reserve to handle policy claims. As such, they
generally have sufficient cash in place for emergency. Then due to the nature
of their business, overall they have to be very conservative and cannot perform
too much risky investment. Rather overwhelmingly they put majority of money
into very secured investment like bonds. Therefore in general insurance
companies are routinely earning about 5-6% per year from their business. Not
fancy but very safely. If you are working with an insurance company, like a
mutual insurance company that treat policy holders as partners, they are
committed to passing all the leftover profits to the policy holders as
dividends. With that you can safely expect some dividends for your policy. If a
company like mine which has never missed its dividends since its birth over 160
years ao, is it too much for me to expect that I can continue to count on them
to reward me with dividends? As I have explained in my previous blog, actually
this is the time one should expect higher dividends moving forward (see dividend history) as we are
entering into a high interest era and I truly believe that I’m going to see a
lot higher return from my policy due to increasing dividends in the years
ahead. Currently I’m earning 4% guaranteed plus 1% floating dividends. If I’m
right based on the history, it won’t surprise me to see 5-10% dividends within
the next 10-20 years on top of the minimal 4%. That’s how I’m reviewing my
policy’s future.
The starting death benefit (DB, the face value of the
coverage) is about $3.7 mil with a $50K premium. Too low isn’t? That’s why I’m
so much in love with this type of WL! My
purpose for this type of WL is to maximize my saving capacity via CV and
minimizing the death benefit (to cut down the cost to minimal). In other words,
about 70% of the $50K premium is my saving portion going into the CV and only
about 30% is for the life insurance portion minimally required by the IRS in
order to qualify the policy as an insurance product. That’s really the key to
differentiate this WL from others! Have you noticed the power of this strategy?
With a moderate contribution/saving each year, this young man can realistically
become financial free in 50s and will have over $10 million CV available for
him to use already in his 60s. All can securely be reached without him to do
anything beyond contributing to his premium ($50K per year for 10 years and
$15K for the remaining years). That is what “time is money” means!
Given the high CV accumulation over time, one can easily
use the CV to pay the annual premium if so desired. Of course, this will reduce
the CV growth and the DB obviously. But that’s the available choice one can
take. From the wealth building perspective, I certainly don’t want to do so as
more money I put in, more wealth I’m building up via this strategy.
Will a WL ever go
down to zero in its CV or death benefit? Definitely not! As long as you pay
your minimal premium either out of the pocket or via CV and as long as the
company is still doing its business, by law and legally bounded, the WL will
protect you for life and the CV will only grow year after year. There is zero
chance to go down with the above condition in place. I notice the DB is going
down a bit over time for the guaranteed portion while the CV keeps going up.
For the nonguaranteed portion, both CV and DB are growing over time. It is a
bit difficult to explain the declining DB part as it is something related to
how the policy is structured. A good agent can help to clarify. But definitely it is not going down to zero.
It is going towards its initial face value for the DB by year 121, the last
year for this policy illustration. As I said, I’m more interested in the
nonguaranteed projection which is more realistic and is growing substantially
over time. That’s why it is so safe for
retirement planning and also it is so important to choose the quality good
company with a long track record of performing well in this business!! But
overall, you hardly hear bankruptcy of any insurance companies as they are
generally much safer than banks with more protection in place by regulations.
Actually there would be much bigger issues for me to worry about before I ever
need to worry about my insurance policy!
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