Storing Your Cash Inside Whole Life Insurance FAQ

What Is Whole Life Insurance?

Two accounts in one. The first is the death benefit or immediate payment of cash upon death of the insured and the second is the living benefit or liquid cash that builds up along the way and can be used for your emergency/opportunity fund.

What is an Opportunity Fund?

wo accounts in one. The first is the death benefit or immediate payment of cash upon death of the insured and the second is the living benefit or liquid cash that builds up along the way and can be used for your emergency/opportunity fund.

How Does a Life Insurance Plan Offer Liquidity?

Life Insurance policies that are Whole Life (and not term life insurance) turn an expense into an asset by building “cash value” inside the policy. This cash is liquid within 7-10 days via a withdrawal or a loan. Many people learn to borrow against this cash, rather than withdrawing it, so that it can keep growing inside the policy as collateral while the owner of the policy is using that cash to solve emergencies or take advantage of opportunities.

What is a Paid-Up Addition (PUA)?

A paid-up addition is extra cash that you can put into your policy that goes to increase cash value and death benefit. The insurance company sends you a letter annually stating the minimum ($250) and the maximum PUA. It’s your choice every year how much you contribute.

On most policies, the minimum PUA is $250, the maximum is whatever is specified by the terms of the policy, usually about equal to the base premium. If your base premium is $10k/year, your maximum PUA will be about $10k a year, or a total of approximately $20k per year for “mid-age” folks. This is affected by age. (But do pay attention – the allowable paid-up additions will fluctuate as the death benefit rises.)

Since it is the Paid-Up Additions that really super-charge the accounts, remember to aim to fund the maximum contribution rather than the minimum base premiums. Every dollar above the premium becomes a PUA dollar, and it is very advantageous to overfund your policy up to the MEC limit.

What is a MEC (Modified Endowment Contract)?

A MEC is a Modified Endowment Contract, and if an insurance policy is funded too quickly or with too much cash, it becomes a MEC, which means that you cannot borrow against or withdraw the funds without tax consequences.

What is the Internal Rate of Return on the cash value?

From birth to age 40 to 45, the internal rate of return on your cash value would be approximately 4.0%, according to the 2020 dividend. If you are older, the return decreases since insurance costs are higher, so your cash value is 3.8% for age 50 to 60, and lower for purchase ages 60-80. There is not a specific year or cut-off, just a gradual change.

Think of this calculation: $100,000 cash at 1% for 20 years = $122,019 but at 4% it will = $219,112 because 1 to 4 is a 300% difference.

What is the interest rate on the loan?

Some companies charge variable rates (currently 5-7%) some fixed (6-8%). This interest rate is paid back to the insurance companies annually. You pay back the principal in your own time frame.

If you want to pay a loan back with extra interest, then that “extra” interest goes to your cash value in the form of a PUA (paid-up additions) contribution. Your gross cash value continues to earn the dividend, unaffected by the loan, offsetting the impact of the policy loan interest, but not “netting” it. These are 2 separate accounts, cash value, and loan.

What are the guarantees?

There is a guaranteed premium that never changes and should be paid for as many years as possible, but there are options to stop paying it. There is a guaranteed cash value that is a dollar figure (not an interest rate). And there is a guaranteed death benefit. That being said, since most insurance companies have paid dividends annually for decades, you can be confident in focusing on the non-guaranteed columns.

Are dividends guaranteed?

They aren’t guaranteed to be paid, but once a dividend gets paid it becomes a part of the guaranteed cash value. That means there is a new floor set every year for your cash value.

How does cash value grow?

The guaranteed cash value grows based on the schedule in the illustration. 100% of the dividends get added to that when the “applied as paid-up additions” option is selected. Then, starting the second year of the policy, your premium gets added to your cash value, and of course, your PUA rider, too. All these things cause your cash value to grow – yes, even the premium!

Are there taxes?

Life insurance is a “tax on the seed” account (versus a “tax on the harvest” account like a 401k or IRA). So while you pay taxes going in, there is no tax on the growth of the cash value (or the dividends when purchasing PUA’s) or the death benefit. However, the death benefit is included in your estate, and subject to any estate and inheritance taxes that may apply.

How safe are insurance companies if this is my place to store my cash?

Mutual insurance companies (owned by their policyholders) have been around since the mid-1800s. Remember the insurance industry is a 100% legal reserve environment, unlike the banks that operate on fractional reserves. It is also state-regulated.

What if I’m not approved?

There are many different levels between “approved” at preferred rates and completely “declined.” Depending on their perception of your health, you may be approved for one of these in-between levels. If you qualify for less than preferred or standard rates, your policy is said to be “rated,” which means that you are approved, but you will pay a higher premium (slightly higher to much higher, depending.)

If you are not approved, or not approved at desirable rates, consider insuring your child, grandchild, or business partner. Unfortunately, nieces and nephews aren’t an option.

Are there other issues besides health?

Yes, there is the issue of Human Life Value, which has to do with the formulas Life Insurance Companies use to determine how much they can insure somebody for. You can’t insure someone for a ridiculous amount of money, for instance, a 20-year-old making $20k can’t get approved for $5 million.

For more on Human Life Value and also supplementing with term insurance, see our post on “How Much Life Insurance Do You Need?“

Can I backdate 6 months, and why would I want to do that?

The first year is the worst part of the policy. You can get through those 12 months in 6 by backdating a policy for 6 months. Anyone can do this at any company. Sometimes it even moves your “insurance age” back one year, though it’s fine if it does not.
Please read or re-read our 50-page book Live Your Life Insurance as it will be a great “owner’s manual” for your whole life insurance policy with the PUA rider added. It is available as a kindle, paperback, or audiobook.

I’ve had health issues – will I qualify?

We won’t know until you get a physical exam done by the life insurance nurses. This exam is ordered by our team, and then the life insurance companies will send someone out to your home or work for a brief physical. (No, you can’t use your doctor, sorry.) You will also sign an application to get approved. (This does not commit you, this just gets you qualified so that you can choose to move forward if you wish… we recommend you get qualified for the highest amount as you can always come down.)

What is the qualifying exam like?

They will take a blood sample, a urine sample, ask medical questions, and measure your blood pressure, height, and weight. They may possibly want a resting EKG (especially for older clients or higher amounts.) For each new policy, you get a new physical.
Note: They DO contact people’s doctors. They are sent a form the client has signed, giving permission for their doctor to send their medical records to the insurance company. This is called the APS, or Attending Physician Statement, and the Doctor’s office is paid for it by the insurance company. This is a non-negotiable requirement.

How long will it take?

It takes 2-6 weeks to get approved which allows for both the health exam and the paperwork process. We can’t tell anything with just the exam, it must have the paperwork as well, which is an actual life insurance application.

How do you pick the insurance company?

As long as you are looking at Whole Life Insurance with a PUA rider, from a mutual life insurance company that is over 100 years old, it does not matter which insurance company you buy from, because they are all the same – same actuaries, same actuarial table, all invest in the same things, and the bulk of their dividend-paying ability is from their business model of lots of people buying term life insurance and never making a claim so the insurance company keeps the premiums and pays dividends from that business model.

We consider these strategies to be a part of Prosperity Economics, however, we don’t stop with whole life strategies, we aim to help you make the most of all of your dollars.

How do I borrow against my cash value?

Call us or the company. There is no paperwork unless the loan is greater than $50,000. You’ll have the money in 7-10 days. The interest is charged upfront for the first year and then billed to you annually thereafter. You’ll receive back a pro-rated portion of interest if you pay the loan off mid-year. You may pay back the principal as you want. Note: You borrow “against,” not “from” a whole life policy

We say “against” to remind you that while you have the insurance company’s money in your hands, your gross cash value is still earning dividends uninterrupted by the loan.
For more detail about this, read our articles: “Borrowing Against Life Insurance: Why It Pays to Become Your Own Banker” and “Should You Borrow Against Your Cash Value or Withdraw it?“

How long should I contribute to the policy/cash value account?

As long as possible. Remember the goal is to get as much money in as possible. You can stop premium or PUA (paid-up additions) payments if needed, but your goal should be to keep funding. However, one can stop in about 7 years if maximum PUA’s (paid-up additions) have been added during those first 7 years.

YES! If you have insured a child or grandchild, you can give the life insurance policy to the insured – the person who the life insurance benefit is on. This would transfer the cash value as an asset and of course the future death benefit as well. The beneficiary can be changed at any time. Grandparents may be the beneficiary of a child or grandchild, or the beneficiary can be parents. If you want to give a portion of your estate to grandchildren, taking a life insurance policy out on their parents is a savvy and efficient strategy to benefit your grandchildren.

Can I insure my children and grandchildren?

Yes, you’ll be the owner, they’ll be the insured. Just remember that you can only get about 25% of the death benefit the parents own (not the grandparents) on a child. Example: A Parent owns $1,000,000 (term and whole life) so their child could get about $250,000, and either the parent or the grandparent can own this child’s insurance.

What’s the benefit of insuring children or grandchildren?

There are three main motivating benefits. First, qualification. People like to own insurance on children sometimes because they cannot qualify themselves. It also ensures that their grandchildren will have some life insurance, regardless of health or circumstances.

Secondly, a better internal rate of return. If the grandparents do qualify, and they are older, the internal ROR may be 3% on their policy, but their grandchild’s return might be 4.5%. Typically the grandparents are the beneficiaries, but the motivation is to improve the internal Rate of Return on the cash value. The grandparents could be 65 or 70, but expect to live decades longer.

Thirdly, life insurance policies are also a fantastic estate planning and asset transfer strategy. Although there are limits to the insurance you can get, once you have the insurance, you can gift life insurance (both cash value and death benefit) to the insured in unlimited amounts. Life insurance is the ONLY ASSET you can give income tax-free, to the insured (the person the insurance is on).

The caveats: The policy would be small in most cases unless there is substantial family wealth. The child’s parents have to get involved because you can’t take life insurance out on a minor without the parents’ approval. And generally, the parents of the child have to be insured for at least twice, preferably 4 times, what the child is insured for. If the children are old enough to work, they can be insured for 15-20 times their salary.

How much can I put into a child’s policy?

The death benefit, premium, and PUA rider are all proportional. Meaning that since the child’s death benefit is low, the premium is low, so the PUA rider is low. Example: A 5-year-old boy (gender does matter, though not by much) might have a $100,000 death benefit, an annual premium of $700, and a maximum PUA of about $700.
As the policy owner, you’ll have full use of the cash value. And, of course, you can make anyone but the insured, the beneficiary.