87: Don't Separate Base Premium and PUA When Buying Whole Life Insurance

087 Don't Separate Base and PUA

John Perrings: [00:00:00] Hello, everyone. Welcome to the Strategic Whole Life Podcast, formerly The Fifth Edition. This is episode number 87. Don't separate base premium and paid up additions when buying whole life insurance. And so in this episode, we're going to talk about the dangers of considering base whole life premium and PUA or paid up additional life insurance as separate buckets or categories during the buying process of life insurance.

 So what I'm referring to here is the idea of viewing base premium as kind of the baseline commitment and then adding PUA on top of that as sort of like a stretch target, that you don't have to commit to.

And so. we're going to discuss what happens in the real world and the likely effects of adding PUA as a kind of stretch target. So let's jump into this.

 One of the things that I've seen circulated a little bit out there is this idea of "getting comfortable with being [00:01:00] uncomfortable." And that definitely has its place. Um, my opinion is that place does not belong when you're determining how much premium you should be paying on a whole life insurance policy when designing for the infinite banking concept.

John Perrings: There are some folks they'll sort of advise you. They'll say, you know, you should feel a little uncomfortable, um, with the amount of premium that you're paying. And, and in some ways I kind of agree with this idea because mostly just in the context of pushing yourself to save more.

 But where I think the idea gets a little offline is, when buyers commit to a premium that ends up being unsustainable. And I've, I've seen it many times, um, where, you know. They'll get uncomfortable with being uncomfortable about the amount of premium they're paying. And then it turns out they were uncomfortable for a reason because they just, they committed to more than what they were ready to commit to at that time, in my opinion, is, um, you start [00:02:00] where you are and we can, you can build from there.

But starting where you are and creating a sustainable, platform is the most important piece of this. And so, , let's define our terms a little bit. When you buy a whole life insurance policy, there's, there will be different components, right?

There's going to be your base whole life insurance. You'll have maybe a PUA Rider on there, especially if you're designing for. IBC, and then also if you're designing for IBC, there likely will be a term rider that helps us raise the death benefits so we can pay more in PUA and stay within the IRS Modified Endowment Contract limits.

When you add all those components together, you get the, what I would call the scheduled premium that you're going to be paying every single month or every single year. So, you know, if it's, uh, 12, 000, it wouldn't. Work out exactly like this, but if it's 12, 000, you maybe you'd say the base is 4, 000, the term is 4, 000.

It doesn't, it's not [00:03:00] like that in a real policy, but I'm just trying to keep the numbers simple here. But that total would be 12, 000 a year or 1, 000 a month, right? So that would be our scheduled premium. So what often happens is, people will be advised to, make the base portion, maybe the base and the term rider. They'll make that portion kind of their, like, I can definitely pay this. I'm super comfortable. And then they'll make the PUA portion sort of that stretch target. That stretch target being sort of the PUA portion where you're going to, you know, quote unquote, push yourself and feel uncomfortable, right? There are. I mean, I guess the positive to this is you're pushing yourself to save more, as I mentioned earlier. In the real world, things happen, right? Things work well until they don't.

So, if anything, if any one thing goes wrong, and all of a sudden, you're no longer able to kind of hit that stretch goal, [00:04:00] because your income is what it is during those early years of the policy, You're more likely to not be able to hit that stretch target in the early years, just by definition that that's currently the stretch.

Now, later on as your income grows, that stretch becomes less of a stretch and then it becomes very easy. But the biggest risk is in those early years. Because if the PUA Rider drops off, or I should say, if you don't pay the PUA portion of your policy, that policy is going to perform, especially from a cash value perspective, very differently than what you saw in the illustration when you were buying the policy.

So if you've designed a policy, let's 000 base and a 6, 000 PUA. Well, in the early years, it's that 6, 000 of PUA premium that's really doing all the heavy lifting in terms of building cash value. And so during those early years, when [00:05:00] this is actually a stretch for you, um, And you don't pay that portion of the premium, you're building almost zero cash value, especially in those first couple, three years.

So, that's a real problem in my opinion. This is especially a problem for these policies that are designed for very high PUA to base premium ratios. So you hear, you know, like people will talk about what should the, what should the split be? Like, should it be 60? PUA, 40 base, uh, 90 PUA, 10 base, the higher you go on the PUA and that, and you're, and you're, and you're being advised to make that PUA your stretch.

Well then if you, if you can't make that stretch, you're now down to this very small base premium. That's really doing very little for you. It's not adding a lot of value to your financial life, right?

Some other considerations here are, depending on where you buy the policy, some life insurance carriers have what are [00:06:00] called these blended term PUA riders. Different carriers work them in different ways. Some of them, If you don't pay the PUA, it's actually not covering the term rider costs on your policy, and so you have these kind of rising costs that are never getting covered, and if the cost of that term starts to increase and then you're not paying your PUA, you could run into a situation where or the If you don't pay the additional premium, it could blow the whole policy up.

 Other carriers do their blended term PUA different where it would just reduce the death benefit. You wouldn't risk blowing the policy up, but either way, this is another factor that not paying PUA. Because you've made that a stretch goal and you weren't able to make the stretch, not paying that creates some other compounding factors in the form of that, term Rider insurance, where we're using that term again to increase the death benefit in the, at least in the short term so that we can pay more PUA and [00:07:00] stay within the MEC limits.

So it. That is another factor. You also have things like accelerated death benefit riders. So, if you're not building up that death benefit with the PUA over the long term, you're going to have less death benefit in the future and lower, accelerated benefits in the form of that death benefit.

One final thing here to think about is like the motivation of the, of the agent. Let's say my budget is 12, 000 a year and my agent says, well, why don't we do a 12, 000 a year base premium, and then we'll design it so that the PUA is the stretch over and above that?

Well, as opposed to designing a total, 12, 000 scheduled premium that includes both base and PUA. I'm not real big into like commission bashing or anything like that. We all, you know, should get paid for what we do. And I have no problems with people getting paid a commission. But if someone, um, Advises someone to pay a 12, 000 base commission and then make the PUA the, [00:08:00] you know, the, the stretch on top of that.

There's a question there that, that agent might be trying to earn a higher commission on the policy because that base premium is going to earn him a much higher commission. Again, I'm not bashing base premium at all. I own an all base policy, so there's nothing wrong with it, but I think if someone is really wanting to design a policy for cash value, , You know, you really just can't get around it.

You need a PUA rider on there, probably a term rider. And so if, if you're being advised to buy more base premium and make the PUA your stretch, there might be something else going on there in terms of the incentives for that agent.

So, I don't really believe in the idea of designing a scheduled premium with the idea of making the base your sort of comfort level and then making the PUA your stretch goal. In my opinion, if you want to push yourself to save more, I think that's [00:09:00] Absolutely great. But if, if you're kind of pushing outside your comfort level, just make the whole scheduled premium slightly higher than what you would do.

That way, if you need to come down a little bit, your comfort level still includes a respectable amount of PUA so that it's coming at least close to the way you've wanted to design this policy. Instead of just dropping the PUA altogether, we're just making the whole thing a little bit more as a stretch goal, and then if you have to come down from that a little bit more, you're not completely, cannibalizing the policy, right?

Well, now that we've talked about that, what should a correct premium look like, right? And if you want to, you can go and check out episode number 48, How Much Premium Should You Pay? We talk about this in that episode as well. . And the way you should account for this is in, in two ways.

The first way is the easy one. If, if you don't have a whole lot else going on in your financial life where there aren't any, [00:10:00] any like strategies, it's really just you. Getting serious about saving in a strategic manner, then it's really just something that's sustainable, meaning the entire scheduled premium is something that's sustainable for you so that your policy will be as close to what is illustrated as possible, right?

We all know the illustrations change the day after the, policy goes in force because we don't know what the dividend will be. And we don't know how much you'll pay less, how much extra you'll pay. You know, the idea is we want to have as much control as possible, but I think that control, one of those factors is deciding the full scheduled premium should be something that you can commit to and you feel very comfortable being able to pay for a long period of time, especially if you're young.

So that's the first way. The other way is, um, there are strategies that you could look at where. Cash flows could be redirected either temporarily or permanently to [00:11:00] cash value life insurance, whole life insurance. And so, if those strategies exist, well, that's already a cash flow that you're accustomed to paying.

And so that's a way you can, get to a number of how much whole life insurance premium you should pay. So those are the two basic ways that one of them is strategy. The other one is just how much can you save? So. As we wrap up this episode, again, I think we should pay premiums where the full scheduled premium is sustainable.

And by the way, any good whole life insurance policy would be designed, that you can actually pay more premium, more PUA over and above the scheduled premium, which includes some PUA already. And so we don't actually need to make. The scheduled part of our PUA premium, the stretch, we can include PUA as a sustainable, total scheduled premium.

And then if we have that stretch, we should be able to pay [00:12:00] more PUA over and above that scheduled premium, right?

alL right, everyone, that's the end of this episode. If you like what you're hearing and these ideas are resonating with you and you'd like to learn how they could apply in your life specifically, you can head over to StrategicWholeLife.Com. You can book a free 30 minute consultation with us right there, or if you're the type of person, like I was, that just likes to do All the research they can possibly do to feel very comfortable with what's going on with whole life insurance and infinite banking. You can get access to our online course made just for you called IBC Mastery. You'll see it right there at the top of the page. All right. Thanks. And we'll see you next week.