Whole Life Blending, Does Cash Value Life Insurance Design Really Matter?

Whole life blending, as we've discussed before, is a process for designing cash value life insurance to maximize cash value available to the policyholder/client and income potential.

Still, there are those who like to suggest it doesn't matter. Those who would spend time arguing against a policy that is designed to maximize paid-up additions when it comes to your annual outlay.

We recently realized that we made a big mistake when it comes to how we talk about this. And today, we'll fix that mistake.

A Common Problem I Have

I often find myself apologizing to people as I have a knack for taking what I know for granted. I dive into long discussions throwing around information like the person on the receiving end of the conversation knows this stuff as well if not better than I do. Oops.

It's hard to understand exactly what is going on, and certainly hard to appreciate what we're telling you, when you have no basis for the alternative.

Life Insurance is a Terrible Investment

You don't have to look hard to find oodles of people who will tell you life insurance is a lousy investment option–contrary to what life insurance salesman will tell you. I've spent a considerable amount of time refuting this claim, and constantly stating that what I talk about and what they talk about isn't the same thing.

The problem, though, is that what other agents talk about and what I talk about also isn't the same thing.

Quantifying What I mean

Cash Value Life InsuranceLet's take a look at an example to bring some concreteness to this whole idea. We'll take a make age 35 who plans to place $50,000 per year into a whole life policy.

If we take the traditional approach, some agents would simply specify the planned premium at $50,000 annually and solve for the corresponding death benefit. For the company I chose to run this example with, that comes out to $4,659,832.

We'll assume this individual is going to retire at age 65 and begin taking income from his whole life policy from age 66 to age 100 (most agents will assume something in the neighborhood of to age 80 because it'll show dramatically better income, I'm incredibly conservative so I build income scenarios that assume everyone lives at least to age 100).

At age 65 assumed cash value (the cash value based on the dividend) is $3,587,846, not too bad actually. By my math, that's a 5.16% rate of return on a Compound Annual Growth Rate basis. Keep in mind tax-free. And it also already factors in all of those nasty insurance fees you'll hear about from the opposition. This will generate an assumed income from age 66 to 100 of $160,831.

The death benefit has grown to $7,626,233, that's a 9.13% annual rate of return, again tax-free when paid out at death.

This isn't too bad, but we can do better.

Enter the Blend

Policy blending, as I've discussed before, is a way to ensure most of the annual outlay is made up by paid-up additions. The exact reason for why this design is necessary in order to accomplish out goals is a tangential discussion that goes a little too much in one direction to conveniently take place during this article, so we'll revisit it in the near future to ensure we do it justice.

For a quick primer, skip to the end of this episode of the Financial Pro Cast.

When we blend the policy, it morphs into a different sort of product with a different purpose. That purpose is focused primarily in cash value and income generation, but death benefit only takes a back seat in the beginning.

We start with a much lower death benefit, just $1,708,895. But we can still squeeze all $50,000 into the policy. At age 65 our cash value is $3,807,505 for an annual return of 5.48%. This design provides us with an assumed income of $170,586, or a 6.07% increase over the non-blended design.

Also, our death benefit, which began $2,950,937 less than the non-blended design grows to $7,664,540 at age 65. That's $38,307 more than the non-blended design. Notice also, as a swipe against those who bemoan the notion that “when you die the life insurance company takes your money and pays you the death benefit” that our death benefit on the blended design has grown by $5,955,645 by age 65. I'll gladly take that over the $3,807,505 in cash surrender value.

For those who appreciate quick graphical comparisons on the numbers. Here's a table to help you out:

Cash Value Life Insurance

Notice also the guaranteed cash values for blended policies vs. non-blended policies. We don't talk much about the guaranteed column.

It's nice to know it's there. But no company in the participating whole life arena has spent a lot of time skipping dividends. In fact, none of the big names we tend to look at have ever skipped a dividend payment since they began paying them, and that time period stretches back over 100 years–including some really tricky financial times for these companies that shadows the current financial crisis.

Still, I point this out merely to show you that on a cash value basis, blending is guaranteed to do better.

On the death benefit side, there's a slight advantage to the non-blended approach, and this would make perfect sense. If you want to guarantee death benefit, best to go with the approach that is primarily focused on the death benefit.

Want More Help?

I recently had an “aha” moment when I realized that blending for cash value purposes isn't something someone taught me to do; it's something I figured out after running countless iterations with insurance company software and having a deeper knowledge of Modified Endowment Contract mechanics.

For the last several years I've taken this knowledge for granted and just assumed everyone knew how to do it. I was reminded, however, that very little specific (and almost no advanced) training is ever given to an agent about the products they sell.

In fact, it's usually strongly discouraged. So, I can the reason your agent isn't talking about it is that there's a good chance they never even heard about it.

However, you can always contact us. And we'll be happy to help you sort out ideas regarding cash value life insurance.

2 thoughts on “Whole Life Blending, Does Cash Value Life Insurance Design Really Matter?”

  1. Bravo! You did exactly what I was wishing for with this explanation!

    Now the questions it brings to mind are:
    1) How does the blending effect the amounts available for policy loans vs non-blended (I think I know the answer since I read the blog and listen to your podcast). At what date in the policy does the amount you an borrow equal the amount you have paid in? (Is it different between blended and non-blended WL?)

    2) Does it scale? How does it compare if someone has a fixed amount to put into a WL policy (and wants to spread it over 10 pays or some other schedule, but cannot expect a long period of deposits into the policy) Is there anything comparable with UL?

    3) What about using a blended WL policy for the purpose of “becoming your own bank” as Nash would say. This looks like it would work like his ideas on steroids. Am I missing something here?

    4) Why not do this for a WL policy on a child? It seems to me you can help three generations this way. You can borrow from the policy in your own life, at some point the child owns the policy and can continue to use it and borrow from it, and eventually there is death benefit to take care of my grandchildren’s needs. (of course, assuming policy loans are repaid). If I teach this to my kids, it looks like a great way to create inter-generational wealth from humble beginnings.

    5) Can you do some sort of “domino” and accelerate this further? Take a policy loan from one policy and use that to pay for an additional policy?

    I’m not an agent, but I have friends who are, and I think they grasp some of these ideas, but no one thinks this way. Feel free to rip apart any of my ideas here, you wont hurt my feelings. I’m just trying to wrap my head around the power of this thing!

    Thanks for a GREAT post!

    • Hi Jeff,

      1.) The blend give us more cash surrender value which increases our total amount of available money for a policy loan since that a function of total cash surrender value. Since blending builds cash surrender value more efficiently, the blended policy would reach the time when the total mount available to lend out equals the total outlay would be reached more quickly with the blended policy than the non blended policy. Typically speaking we target under 10 years to have the cash surrender value equal and exceed the outlay, in some circumstances we can reach a point where it equals the outlay in as little as 3 years.

      2.) It does scale (i.e. we can achieve even greater results the larger the income amount). And we can very easily take a lump sum and spread it over a period of time. We can even make use of what are known as premium deposit accounts to augment the overall value of that incoming money by earning a competitive interest equivalent on the lump sum if one hands it over to the insurance company from day one.

      3.) This works very well. The whole idea behind IBC and BOY is that one focus on placing as much cash into a policy as possible, and there’s not other way to maximize cash with your available premiums on a whole life policy than to take advantage of blending

      4.) The idea has potential, but usually works out best when the the parent (or technically grandparent in our hierarchy) has a policy on his/her life and perhaps also purchases a policy on his/her child. The two obstacles that come up for owning it on the child specifically are 1.) a limit on the available death benefit which is limited by the amount of death benefit in force on the parent and 2.) the fact that all children are issued at standard best case scenario

      5.) While it’s entirely possible, it’s no doubt very tricky. Theoretically if you had a policy with a very low loan rate moving into a policy with an exceptional dividend rate there’s reason to believe the arbitrage could work in your favor.

      Thanks for the feedback. And if any other questions come to mind, don’t hesitate to bring them to us.


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