How Policy Blending Works and Why You Want to Know about It

People know that I'm generally a pretty big fan of policy blending.  It's essentially a process of combining term insurance with a whole life policy to increase the MEC limit on a whole life contract so that more paid-up additions can flow into the policy.  This means more of your outlay goes towards PUA's which means the policy has a higher cash value from the start.  This is the design feature that really separates whole life used primarily for death benefit from whole life used for cash accumulation purposes.  It requires a little deeper understanding of what's going on, and so isn't always a first choice method among newer or less skilled agents (and there's a big difference between an agent who has been in the business for 10 years and an agent who has had 10 first years in the business).

Let's Talk about Modified Endowment Contracts

If you've never run into the concept before, a Modified Endowment Contract (hereinafter MEC) is a limit of cash that can be placed in a life contract before it changes from a life insurance contract to a MEC.  MEC's were put in place by Congress as one way to prevent people from placing limitless amounts of cash into life policies so they could avoid taxable liability of the money as it grew over time (it was also put in place in part as an anti-money laundering provision to prevent certain members of organized crime from using life insurance contracts as a means to launder money, oh how times and sophistications have changed).  The MEC calculation is based on the the amount of money that would be required as net Surrender Cash Value in order to make the contract paid up based on the contracts guarantees.  For a more in dept discussion on what a MEC is, we'll be posting something a little later and link from here.

So What to do if I want to put more Money in, but I'm running into a MEC?

That's the question blending answers.  As we've already stated, blending is simply adding more death benefit to the policy in the form of term insurance (really cheap term insurance) so we can place more cash into the policy.  What's happening is, you're setting the policy up with an extra term death benefit that one day will either be replaced with death benefit created by the extra cash you place into the policy, or surrendered.  But this extra term death benefit increases the MEC threshold to allow for more money to enter the contract.  And all of that extra money is that goes in, goes in as that super charger of a whole life contract we refer to as a Paid-up Addition.

Why Didn't My Agent Tell Me about This?

This is a frequent question, and one thing camp Yellen gets right is the mention that blended policies pay much lower commissions.  Pam refers to this in a horrendously confusing manner.  She claims that Bank on Yourself policies are designed in a way that pay significantly lower commissions to the agent.  What this means is, because the base whole life portion of the policy (the part that pays the bulk of the commission) is held low, and the majority of the money going in is PUA's (which pay really low commissions relatively speaking, typically between 2 and 4% of the money going in) agents who design policies this way make far less money off each new client.

Finding new clients is hard enough for most insurance agents, and a lot of them are more interested in taking half of the year off, than doing a good job, so they'd rather focus on convincing you that placing all your money into base premium is a good idea: “I have no idea why this is a good idea, Mr. Client, but I know I'm going to make a lot of money off this so I'm super excited, and you should be, too!”

However, let's not hang all of the insurance agents out there just yet.  There are, after all, even more nefarious souls lurking about.  Most insurance company would much rather you spend that money on base premium, too.  It turns out that poorly designed cash value policies are good someone (as it turns out not you, but the insurance company) and they don't intervene when they see a policy design that could be improved with a few tweaks (it's non of their business apparently).  So, regretfully, it's also true that many times insurance agents are more the pawn in a sales manager or wholesalers mission to get a promotion to a fancy sounding title at the Home Office, this is why experience and know how matters.

Believe it or Not, that's really it.

There's really not much more to it than that.  Blending is simply a way to keep the MEC limit higher, so more of your premium can go towards PUA's than towards base insurance premium.  There are, of course, a few different considerations that one should weigh when starting this sort of plan.  For that, you'll need a little one-on-one time with your agent.   However, it's not nearly as complicated as some people make it out to be.  Keep base insurance death benefit low, and load with PUA's.  There is one exception, which we'll be touching on later.  It has to do with High Early Cash Value products and shorter pay products like 10 and 20 Pay products.  More on that later.

17 Responses to “How Policy Blending Works and Why You Want to Know about It”

  1. Justin says:

    You mentioned in the Penn article about Penn only doing a 4:1 term blend ratio and that other companies are significantly higher.
    Does that mean that with other companies you can achieve higher CV with a blended policy than with Penn? You did mention that you didn’t see many scenarios where this became an issue..
    Good Article!

    • Brandon Roberts says:

      10:1 is common among several others. This is one of the reasons I used to hate a little on Penn, but in practice, we’ve yet to find a situation where it put them at a disadvantage.

  2. Ben says:

    Did you use a variable loan rate or fixed? If Var. what was the loan rate used?

  3. miriam says:

    Love this stuff. Great Article! I’ve been doing it all wrong – too much face value, too little cash value.
    I’m subscribing to this blog NOW 🙂

  4. miriam says:

    p.s. I do have a question though… My (can’t call it a 7702 plan now haha) whole life policy was sold to me in lieu of a retirement plan. It’s still good for that, though, right? It looks great on paper, and I love the fact that I’m paying into it with after-tax dollars and that the growth will not be taxed when I withdraw it. I couldn’t really ask for more, in theory…
    Is there a down side I need to know about?

    • Brandon Roberts says:

      Hi Miriam,

      It really depends. It might be okay for retirement planning so long as the policy was designed properly. If it wasn’t and this is relatively new, you might be better off redesigning with a new policy and walking away from this one. Again, it really depends on how well the one you have was designed.

  5. Dan Fittro says:

    Can you mention the companies who have the 10 and 20 pay options, and, if any also offer a Paid-up at 65?

    And,do these policies offer any benefit for cash value acccumulation?

    • Brandon Roberts says:

      Hi Dan,

      Sure thing. Presently carriers with a bona fide 10 pay product are:

      – Guardian
      – MassMutual
      – MetLife
      – National Life Group of Vermont
      – New York Life
      – Ohio National
      – SBLI

      20 Pay Products:

      – Guardian
      – MassMutual
      – National Life Group of Vermont
      – New York Life
      – MetLife
      – SBLI

      Paid to age 65 Products

      – American United Life
      – Guardian
      – Lafayette Life
      – MassMutual
      – MetLife
      – Mutual Trust Life
      – National Life Group of Vermont
      – New York Life
      – Northwestern Mutual
      – Ohio National
      – Penn Mutual
      – SBLI

      Check out this post for carriers that we would recommend for cash value accumulation.

  6. Ynev says:

    Tried to setup the blended life insurance based on 500K 20 Pay Custom Wholelife (NYL) (100 K Base + 400K Term) – however, I am not sure I am seeing big differences – runs into MEC limits very quickly – what am I missing?

    Thanks in advance for your guidance..

    • Brandon Roberts says:

      NYL is largely your problem. Their restriction on the OPP rider (what they call PUA’s) is going to make this difficult. They also tend to report possible MEC violation way sooner than other carriers (probably a conservative measure on their end).

  7. Justin Watt says:

    My wholesalers have no clue when I ask them about how to illustrate this. Is there an illustration tutorial on your website? I mostly use Guardian and Ohio National. Are you using Guardian’s Q option? I now feel that I incorrectly wrote my own policy. As I wrote a 1.25mil with 500k of Q option L99. Sounds like I should have wrote 250k base and 1.5mil Q option on a 10 pay. However, when I illustrate this given equal total premium I end up with more cash at age 65 with the L99 that I wrote. I really want to do this right for my clients. I would love a tutorial on how to run these illustrations. I am in Colorado, so hopefully you will not view me as a competitor. Thanks for the great blog!

    • Brandon Roberts says:

      Hi Justin,

      Guardian is a tough one since there’s a lot of variation and a lot of different products. Generally speaking, the 10 Pay or L99 will work well when blended. Guardian has imposed new rules on new policies issued for the ratio of allowable paid-up additions to base whole life premium. This has significantly dropped their competitiveness, but their not alone in doing this. MassMutual, Ohio National, and New York Life have long imposed limitations of this ratio, which has caused us some degree of frustration.

      As far as a tutorial goes. There isn’t one…yet. Keep an eye out later this year for more information on something that might prove helpful to you.

  8. K says:

    Hi Brandon:

    Thanks for putting together such a great blog, its truly a phenomenal resource. Having been frustrated with my dealings with agents in the past, I got my license so I could help friends and family on the side when they ask for help after having bad experiences.

    I generally really like AUL’s Liberty Select product for certain folks, but they have a 3:1 blend limit, the PUA fees are high, and anyone who isn’t preferred plus can’t even achieve a 3:1 blend without it becoming a MEC, and illustrating the policies, the cash value in early years just doesn’t look good with the lower blend ratios.

    There’s a couple I’m helping that has had a really rough go of things in terms of market losses… Early 60s, can re-purpose ~$40K/year for the next 5 years, but they have no insurance or retirement savings, just some money tied up in property (would probably net about ~$250K if they sold their investment properties).

    I want to set them up with a reasonable death benefit, but to also maximize early cash value in case they need to borrow against it to support their aging parents, so I want to get the blend ratio up as high as possible. Looking at your PUA Guide/Load guide, you rank Penn Mutual, MetLife, and Mutual life the highest on PUA quality, but above you said Penn Mutual has a 4:1 blend limit… I want to make sure I’m setting up this family with the best solution for them, and want to maximize early cash value and minimize the amount of fees they need to pay, and they both want to make sure the other is covered in case something unexpected happens, but the death benefits aren’t great for people their age, even with $30K/year going into a 5-,7-, or 10-pay policy… Would love you hear any suggestions you may have on what company/product I should look to to be able to maximize their blend ratio and help put them in a better situation for the future. Thanks in advance for your help, and for putting together such a great educational resource 🙂

    • Brandon Roberts says:


      You are focusing on the wrong thing as term:WL blend isn’t always the primary driving factor behind a higher initial cash value. It’s far more complicated in terms of product design than that.

      By the information you’ve provided, I’m not convinced that these people should own cash value life insurance given their circumstances, so I’m afraid I can’t offer up any additional thoughts on what to do.

  9. Gin says:


    I have a question about policy blending. I currently have a policy with AUL which that is whole life and includes a 10 year $100K term policy as well. This does indeed allow me to considerably overfund via PUAs.

    So I’m currently maxing out my premiums as I’m allowed to pay 3 times my base premium into PUAs. I’m contributing less than my MEC limit, however my question is the following:
    After year 10, the 100K term policy expires and my death benefit drops by $100K, when this occurs would my policy fail the 7 pay test since the new MEC limit on my policy would now be based on $100K death benefit less without the term….however my premium payments for the previous 7 years were made against a death benefit that was $100K higher?


    • Brandon Roberts says:

      Hi Gin,

      Maybe. It’s possible to fail the MEC test if the death benefit is lowered and this applies to automatic termination of term riders on a whole life policy. It’s for this reason that we dislike several whole life products for blending that have such a term life rider provision. Your best bet is to contact AUL for the in force projection on what the reduction in death benefit will do Re: MEC compliance. Chances are good that if you are not funding at the MEC limit you’ll be okay, but I would double check this with them.

Leave a Reply


  • Archives

  • Categories