114: What is a Premium Deposit Fund?

114 - Premium Deposit Fund

[00:00:00] Hello, everyone. I'm John Montoya and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life podcast.

John Montoya: Episode 114. Today I'll be discussing premium deposit funds. What is it? Pros and cons and why and when is it used? This episode comes as a request from Brody out in Ohio. Thank you very much for your request here. Happy to discuss this topic. It's one that we don't really use a whole lot. And the reason why is a couple of reasons.

Number one, you have to have the accumulated assets. Set aside to even think about starting a premium deposit fund. Premium deposit fund, think of it like a turnkey solution to pre fund your premium for a set period of time. So for most people, I'll use the typical person where they are funding their whole life policy from [00:01:00] their income.

And each year, as you earn money, you're allocating a portion from your savings budget. To pay premium. With a premium deposit fund, you already have that capital set aside. You've accumulated it somewhere else, and now you have made the decision to use that accumulated capital to fund your policy and.

Because of the nature of the tax laws you want to make sure that when funding a whole life policy, specifically for infinite banking, or even if it's not infinite banking, you just want the tax free access to your cash value via policy loans. You want to make sure that your Staying within the MEC requirements for your whole life policy.

That means you don't surpass the maximum annual premium. And what the premium deposit fund will do is it'll ensure that your policy is funded properly. So it avoids that MEC that [00:02:00] MEC alarm or. Alert that gets sent out automatically by the life insurance companies. If you, for some reason ever do send in too much premium, that the, that, so that's an advantage of the premium deposit fund.

It's a one convenient to, it sets it up so that you're prefunding the policy without worrying about triggering that MEC alert system and I guess another advantage is that you're getting a slight discount towards the premium as well, because within your premium deposit fund, you're earning a competitive interest rate.

It is taxable. Now, any interest that you do earn, you're going to receive a 1099 the following year, but that additional interest is going to Be additional premium. And this is all solved for within the software that life insurance companies give us as producers to, to figure out, what [00:03:00] your annual premium is going to be without creating a MEC event.

But that additional interest basically think of it as additional premium. That's going to be allocated each year into your policy and the more premium that you put in one of the things that we've discussed here on the podcast is that this is a place where your capital is going to improve, it's going to get better every single year.

So if you're earning a little bit extra interest that gets added in addition to your premium each year, that just means more cash value, more death benefit over the long run. And that is a good thing. So you got automatically funded premiums, no need for personal administration. This is all done for you if you have the accumulated capital set aside and wish to put that money into a premium deposit fund to allocate towards funding your policy for a set period of time.

Set period of time, meaning the premium deposit fund can be used to fund premium [00:04:00] over typically two to 10 years. Ultimately, optimally, I will say that the best way to to use your premium deposit fund is to allocate over a seven year period. That way you are staying within the MEC guidelines and you don't really have to worry about anything for those first seven years.

It's not that you have to really worry about anything with a whole life policy, but what I mean there is you don't have to worry about triggering a future MEC event once you get into year eight because your policy is funded really perfectly. Now, does it make sense for you to use a premium deposit fund if you already have the accumulated capital?

It all depends. Here's the thing. If you like having access to your money at any time, depending on convenience, that convenience factor, you may choose to forego setting up a premium deposit fund. Because you simply like having [00:05:00] access to that money and it's earning a comparable interest rate to what you could get in a premium deposit fund.

And I'm recording this July, 2024, the average premium deposit fund, it fluctuates but I'll say it's somewhere around four and a half to 5% between the insurance companies today. And once you have it set up, it is guaranteed. For the length of that period that you choose again, between two and 10 years.

The premium deposit fund interest rate it does get locked in once you have it set up. Now funding it requires that you write a check. It's not anything that can be done online at least not yet. Maybe that will be something that the insurance companies will work on and make an improvement.

But you do have to break out that checkbook. And once you have done that you are set for the length of that premium deposit fund period that you choose.

I will say [00:06:00] that one of the main questions that I get on premium deposit funds is in regards to can it be canceled? If you need funds and, without a doubt, yes. The life insurance companies are working on your behalf. So if you need access to the remaining amount of money that is in the premium deposit fund, all you need to do is call them up, cancel it, and they're going to return that money to you.

No problem. No questions asked. Again, it just comes down to convenience, really that's the whole point of this premium deposit fund. Is it convenient for you to write a check one time, set that money aside where it can earn additional interest again, taxable interest. You get that 1099 at the end of the year, but it's additional premium that will be used to fund your policy for a set period of time. And there you go. And to reiterate, it is completely optional. You don't have to use this, [00:07:00] but it is nice to have. If you've got that accumulated capital and that's pretty much it. There's not really a whole lot to these premium deposit funds.

I will just end with this thought just a reminder that these insurance policies are contracts, they're not investments. Always keep that in mind. This premium deposit fund, again, it's not an investment. It is part of your contract. It's a separate side account and use it to your advantage.

If you've got the accumulated capital or don't, it's completely up to you. So if you have any other questions about premium deposit funds, certainly let us know if you have any requests about other subjects or topics that you would like us to talk about in regards to whole life policies. Convertible term or really anything else.

Be sure to reach out. You can always contact us at Strategic Whole Life. And I want to thank you for joining us. Really appreciate it. Talk to [00:08:00] someone today who again said they've listened to every single episode of this podcast and that just blows me away. We are super honored that you were all. So committed to learning more about this subject that really is hiding in plain sight.

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All right, everyone. Thank you again, and we'll catch you on the next episode. Take care.