MachineGhost wrote:
Here are the key takeaways:
It's whole life insurance from mutual insurance companies. Mutual insurance companies are member-owned (i.e. you) and returns it business profits to its members in the form of dividends, so it will keep pace with inflation. Sort of analogous to modern day credit unions, except profits are redirected into lower rates for lending instead of being returned to members.
No mutual insurance company has ever failed in over 160 years of existence. Even the U.S. government can't make that claim since it defaulted in 1933. I think only Switzerland could make a higher claim.
There must be specific riders added to the policies to turn it into a "bank", called Paid Up Additions. This essentially accelerates the cash-build value so that your premiums go 70% towards the "bank" from the first month instead of paying commissions to the salesman, supporting claim payouts or whatever malarky goes on with traditional insurance.
Since commissions are dramatically reduced via the use of PUA riders, there's no greed incentive in general to push these policies on anyone. Normally the commissions in traditional insurance goes 100% to the salesman the first year and slowly decreases over time each year. This is why insurance gets a bad rap.
Since this is insurance, there are no taxes, either on loans from your "bank" or payouts. But the IRS has an upper limit on how much you can put into one contract. I think that's 70% as well. The 30% residual is the traditional insurance payoff component. But this "problem" can easily gotten around by just having more than one contract.
You can "borrow" from the cash-build up value at anytime without any forms or lengthy questions, just a simple phone call since it is your money. The interest does not even have to be paid back as it will be paid off automatically at your death.
Overall, this is a hybrid of the Tight Money and Prosperity component. So I see it appropriate for a combined portion of both deep Cash and deep Equity. The problem is, due to fees, you really need to do around $200 a month minimum and do it for 10 years straight to make the net numbers work. That's not a problem really since its a forced savings plan that you can access at anytime without penalties or government restrictions compared to retirement plans. In fact, the author claims the dropout rate is in the tenth of percents. Well, no shit Sherlock, if you stop paying just one month or whatever the grace period is, you lose everything you've built-up. Obviously, you can cash out at anytime as well.
MG,
I've never even heard of this "70% in one insurance contract" rule. Is that in Code Section 7702 or another part of the code dealing with life insurance? Are you sure you don't mean the 7-pay limit (i.e. can't put premium into a policy any faster than would be necessary to fully pay up the policy --i.e make it so no more premiums were ever required for a given face value to stay in effect--in anything less than 7 years or else it will create a MEC)? The reason I ask is that I have seen contracts (and these weren't MECs, either...they went right up to the MEC limit but didn't cross it) with close to 90% of the total premium going into the PUA rider. Granted, these all utilized term riders as well in order to stuff more money into the paid up additions and less into the base face, but I've seen non-MEC policies that used the abovementioned base/term/PUA blend from MassMutual, Penn Mutual, NWML, and MTL that all had anywhere from 76% to almost 90% of the total premium going into the PUA rider and the rest going into the term rider and base policy.
The only other thing I could think of when you talk about a "70% limit" is how much death benefit (vs cash value) there has to be for it to qualify as a life insurance policy and not a MEC or a pure endowment, but that is getting into corridor testing and DEFRA and CVAT and GPT (WL uses CVAT testing ; UL can use either CVAT or GPT) but doesn't really have to do with PUAs per se.
Oh, and why would anyone pay one of these monthly? Monthly modal premiums will almost always end up being higher than paying the whole thing up front each year (i.e. a policy might cost $10,000 per year if paid on the policy anniversary date all at once but would end up costing maybe $916 per month if paid monthly).
Also, if these things are set up right, you should have use of significant cash value in three to five years (sometimes with up to 85 or 90% of the cash value available in year 1 as soon as the first premium is paid) rather than having to wait ten years or so.
Finally, these policies (again, if the agent knows what he/she is doing) will NOT lapse if you stop paying most of the premium for one month or even several years. A properly structured policy will have a total premium of (for example) $20,000 total that consists of maybe maybe a $1,000 per year term rider, perhaps $1,000 or $1,500 per year in base premium, and the rest in PUAs. Once the first year is paid, the only thing that HAS to be paid to keep it from immediately lapsing is the term rider cost of $1,000 or so plus whatever the base policy costs (to be fair, on most policies you also do have to pay a minimum PUA amount in order to keep that rider in force but that's usually $100 to $300 a year or in some cases every two or three years...and even if the PUA rider does lapse, the base policy and term riders stay intact and the already paid in PUAs are still there). You can even (in the worst case scenario...say someone bought one of these policies then lost their job a month later) have the policy go into APL mode and borrow from the PUA CV (again, if set up right these things will have 75% to 92% of the first years total premium as CV) and that will pay the minimum premiums (the term and base and the minimum needed to keep the PUA rider in effect) for a year or two or three....eventually it will lapse due to interest on the loan but hopefully the person would be back on their feet after a year or two. While IMHO someone should not even think of buying on of these if they can't afford the minimum worst case premium (term plus base plus minimum PUA) to carry the policy for a year or two if something bad happens to them financially, even if they did lapse it they would still have from 75% to 92% of what they paid in.
DISCLAIMER: I am not an insurance agent, actuary, rate maker, accountant, or tax attorney but I did see those contracts and if you need proof I can post at least one specimen contract--the MTL one...it was one I looked at a few years back...all the others belong to another member on this board and I would have to get their permission before posting them.
You heard it here first, folks! The Next Big Financial Fad. But seriously, it actually had a heyday back in the high tax-high inflation 70's as a tax shelter until the IRS slapped on contribution limits (i.e. if you go past the limit, it becomes taxable). But from what I gather, the limit is only per contract. You can have as many insurance contracts as you desire. As people are so desparate for yield nowaday, the hucksters are smelling blood like chum in the water. It won't be long now before the seminars and infomercials start happening...
