The Catch Up Provision of a Whole Life Insurance Policy

- Episode number 56, Understanding the Catch Up Provision of a Life Insurance Policy and How That Applies to the Infinite Banking Concept. So in this episode, we'll talk about what a catch up provision is, how it works, and how it can be a very important component to a policy structured to implement the infinite banking concept.

- Hello everyone, This is John Montoya,

- And this is John Perrings.

- We are infinite banking authorized practitioners and hosts of "The Fifth Edition." Awesome. Well, this will probably be a pretty short but informative episode. This is not something that typically gets a whole lot of mention, but I think it can be really impactful for IBC policy owners to really understand how it works, and to, for their situation, maximize the full benefit of the PUA rider when they do have a catch up provision. So this is basically how it works, some but certainly not all life insurance companies will allow unused paid-up additions to be carried over to the following policy year thus creating a whole life policy that really acts more like a savings account where you have the freedom to save additional capital into your policy on your own schedule. Now, this feature of a PUA rider is a more recent update, having this catch up or carryover provision within the PUA rider. And when I say recent, keep in mind whole life policies have been around for over 150 plus years. So when I say recent, you know, it's really over the past decade or so that we've started to see insurance companies make this PUA rider provision more flexible for policy owners. And I'll add that, you know, it really wasn't until Nelson's book, "Becoming Your Own Banker," the black book, which all of you really should have a copy and reread every, I'd say, you know, 6 to 12 months, read a chapter. But this is the book that really started to promote the idea of broadly overfunding your whole life policy and especially that PUA rider to create immediate cash value growth. But back to the catch up provision, most life insurance companies, you should be aware, they still restrict the period of PUA contributions to one year, it's what I call a use it or lose it type feature. So you gotta be very cognizant that you are maximizing this rider each and every year because not all of 'em allow you to take that unused PUA contribution and carry it over to the next policy year, so that's why I call it the use it or a lose it. Ideally for IBC policy owners, in order for you you to be most effective in capitalizing your policy, it is a nice provision to have, but it's certainly not a make or break. If Nelson were around, I mean he'd tell you there was no such thing as a carryover or catch up provision with his whole life policies when he started doing, you know, what essentially was IBC with his IBC policies decades ago, this didn't exist, so it's not like you absolutely need this in your IBC policies, but knowing that it is out there, certainly is a benefit that is a nice to have.

- Yeah, totally agree. And, you know, it's one of those things that allows you to, it's not required, but it does give you some additional flexibility to really take over the banking function, right? And so another little kind of caveat to understand about the catch up provision is when you take advantage of it, you're going to, and, you know, there may be some carriers that do it differently, but in general, you're going to have to pay all of your current policy year's premium before you can take advantage of the catch up provision. Otherwise, you know, the insurance companies would always sort of be in a position of like being in arrears with the PUA that you pay, and so that becomes difficult for the insurance companies to plan for that. So like for instance, if you have $10,000 of catch up money from the previous year that you didn't pay and paid up additional life insurance, and you have, you know, as part of your scheduled premium, $10,000 for the current year, well, you're gonna need to pay that $10,000 for the current year and any additional room that you, quote, unquote, "room" that you have in the policy for PUA for that current year, and then if you still have capital leftover, you can then go back and take advantage of that catch up provision, but there, it's not gonna be one of those things where you can sort of sandbag it , you know, and do the catch up provision first and then pay for your current policy year's PUA. But what it does allow you to do is really have the additional kind of structure or, you know, an easy way to think of it is just room inside your policy that can accept income that's coming through the implementation of the infinite banking concept. So if you've gone through and created your IBC policy and now you're strategically accumulating capital, what do you do with that capital? You can either buy liabilities that we're gonna, you know, redirect some of the interest that you would, you're going to pay for that liability, and that will go back into your system, your financial system, so that's, we need room in the policy to do that, or we're gonna buy assets that will also create hopefully an income. Where does that income go? There's a certain amount of that can go in the policy in any given year if it's structured in the way that, you know, John and I typically structure policies, but then what if you hit a windfall, right? Where you have a larger lump sum that comes your way? Can your policy accept a windfall? And that's, a lot of times where this catch up provision can come and be very useful where you've got a lot more room to work with it in the case where you experience a windfall.

- Yeah, I think also where it's helpful is for business owners who have fluctuating incomes where maybe one year they don't maximize the PUA contribution, and so it carries over to the following year, or maybe depending on the policy, to the third year or the fourth year, and cumulatively you have the ability to catch up on the unused PUAs. So that's, it's ideal for business owners but also too for wage earners who potentially have the ability to receive a large year-end bonus, well, maybe some years, you know, your bonus isn't what you thought it would be, but in other years it is. Well, if you have this catch up provision, it does allow you the room and the ability to catch up from previous years. So it is definitely a nice extra feature to have within your policy for sure.

- Or, you know, I can give you a personal example, when I changed careers and got into this business from, you know, as a lot of you know, I was in the tech industry for a long time and then I got into this business, well, there was a period of time where, you know, it takes a while to get a business up and running, and so I was only paying the base premium for a period of time because I just didn't have the income to, you know, fully fund my policy. And, you know, now I'm in a position, well, really starting more like a year or two ago where, you know, the income was starting to happen, and so now I had the ability to go back and take advantage of that catch up provision, you know, fully fund my policy for the current year, and then I was able to go back and catch up for the year or two that I didn't, you can only go back a year but there was a couple years where I was not able to fully fund the policy but I was able to go back one year and catch up with that piece of it. So, you know, again, if COVID taught us anything, it's nice to have options. A lot of people are experiencing layoffs right now in the tech industry. And so just having a structure that allows you to go back in time a little bit and sort of catch up which is the catch up provision, catch up with what you missed out on because you just needed the flexibility to not have to do it at that time. Now of course you're not going to be earning any kind of growth on the PUA from the previous year, right? You're not catching up on any type of growth that would've happened, but it just allows you to at least catch up with the principle that you are, you know, capitalizing inside your policy.

- Now, one of the questions that I've received over the years is in regards to should you prioritize maxing out the PUA rider or repaying a loan? And I think that's a pretty good question to share with all of you. My rule of thumb is if you have the ability to contribute additional capital, you should prioritize the PUA rider first, first maxing out your current year, and then obviously any unused PUA beyond that. And the reason for my thinking on this to prioritize, making the contribution to the PUA rider before repaying a loan is pretty simple. There is no schedule for loan repayments when you take your policy loans. You can pay that back, I always say, over two months or 10 years or potentially if you're using it for income later on, never at all, but with the PUA rider as we've discussed, there is a time limit where the life insurance companies will essentially at the most extreme level use it or lose it in your current policy year or there's gonna be that catch up provision, but even then it's not, you know, you can catch up forever. Most of the companies out there will limit the catch up provision to a number of years, and that may be up to a handful of years. But that's the reason why I always say, if you have the option of contributing to the PUA rider or repaying the loan, I will recommend to maximize the PUA rider first because you have a much longer runway to repay a loan.

- That's a great point. And, you know, this just gets into the options that we always talk about. And, you know, when we design a life insurance policy for IBC, there's a lot of hype and noise out there about what's a correctly designed policy. And I think, you know, we take the stance, there's no such thing as like a truly correctly designed policy other than what's correct for the insured or the policy owner, but there are some principles that we work on that I think are important to discuss, you know, one of the tradeoffs, you know, you'll hear people talk about maxing out the PUA, and that's the main focus of their policy design, which is really kind of a one size fits all approach, number one. And number two, there's very significant offs, if you max out the PUA in those early years of the policy, what you're doing is you're taking up all of the room where your scheduled premium is using up all of the PUA payment capability, including the catch up provision because everything is going to be maxed out completely as part of your scheduled premium payment. So you'll really already have kind of filled that bucket up, and you won't have, if you pay your scheduled premium, you won't really have any room to address what do you do with income, you know, and what do you do with windfalls, so I think it's a really important thing to think about in terms of like designing a policy where you create the scheduled premium as what you want to have happen as your ideal scenario and what you can commit to for a long period of time, and then building in that room so that you can take advantage of some of these options and kind of either roll with the punches or take advantage of opportunities as they come our way without being locked into a certain kind of scenario where, you know, the trajectory is already set. When you use a policy designed the way John and I do, you have that room to take advantage of those opportunities and roll with the punches. And if you do take advantage of the opportunities and you do end up max funding this thing, it ends up being a much much bigger policy than what you even, you know, have on your illustration because you're going to be contributing all this additional PUA down the road.

- And that's a good thing 'cause like we've said before, you'll never be in a worst position by having access to cash. So definitely as much as you can, and, you know capacity allows, you do wanna overfund your policies, and if you have the provision, take advantage of it as much as possible. One final thought from me, some of the listeners may be wondering which company has the best PUA catch up provision, and I want to answer that very carefully because I think you and I both are on the same page that the purpose of this show is really to educate and promote infinite banking and not in particular hit one life insurance company as the best against all others. I think doing so, you know, we see this happen quite a bit, it's really shortsighted for a couple reasons, one, it's, you have to realize that it's self-serving to the advisor to steer potential clients their way by marketing one company as the best. And in truth, we wanna be agnostic and we truly believe that there isn't one life insurance company that is absolutely the best because what it all comes down to is your own personal situation. And each company is going to underwrite just a little bit different. They're gonna have a little bit different product features, and what's right for one person is not necessarily gonna be right for the next person. So we're not here to promote the best catch up provision, to pit one life insurance company over the other. And also too, you know, someone listening to this episode next week, next month, or a couple years from now, the information would be outdated because life insurance companies do update their products, if not on an annual basis, you know, it's every couple years, and they're gonna update their PUA rider, and if the past is any indication, these provisions are going to continue to add flexibility to it. So it's always a ever changing field even in the life insurance industry. Even as old as these whole life products are, things do evolve over time.

- Absolutely. That's a great point. And, you know, one of the things that's constantly changing is people's life expectancy, you know, so the, that's just changing and people are living longer, and so all the insurance companies are updating their products, and things do change. So I think, that's a great point, and I think that probably wraps up what we were gonna talk to about the catch up provision today, John.

- I think it does.

- Well as always, if you like what we're talking about and want to learn more about how it could apply to your life specifically, you can always head over to the fifthedition.com and you can schedule an appointment right there with us, no obligation, or you could get educated further if you are one of those people that likes to just get educated, educated, we have a, an online course that you can take that's a soup to nuts course on whole life insurance as it applies to IBC. All right, John, thanks a lot.

- All right, take care, everyone.