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

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.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.

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