Should I contribute a lump sum, or pay over time?
You might think that if you immediately contribute a larger sum of money to a policy, you begin earning interest on it right away and you’ll have more money right off the bat. While that is the case with most other financial vehicles, it works a little differently with life insurance! What you are earning and your insurance expense need to be balanced. We always want our policy interest to outweigh our insurance expenses.
- The video shows 3 examples for a 65-year-old male:
- $300K put in the first year
- $30K insurance premium (10% of your total contribution.)
- Very high death benefit as a result of its relationship with the MEC limit. ($304K)
- This policy has been max funded.
- The cash value is less than your total contribution year 1 and actually decreases.
- The $30K premium is still due each year, but nothing is being paid into the policy.
- The premium is, therefore, paid from the policy itself: first from dividends earned, then from the cash value since the interest is not enough to cover the premium cost.
- The cash value will not begin to climb back up until the death benefit can be reduced.
- $300K split between the first 2 years
- $150K will be going in per year, so the base premium will be $15K.
- The death benefit can be much lower since the MEC limit is half the amount of the first scenario.
- Since this policy is funded for 2 years, that is 1 fewer year the policy will need to fund itself.
- Slightly better cash value than the first scenario because of these factors.
- $300K being paid in over 5 years
- $60K will be going into the policy each year, so the base premium will be only $6K.
- The death benefit is being set at whatever amount is required to generate a MEC limit of the total contribution desired. In this case, the MEC is exactly $60K.
- This policy has a break-even point of year 4!
This concept works regardless of the contribution amount. It is all about finding the appropriate ratios to always maximize cash and lower the insurance expense while staying within the insurance company and IRS limits.