68: How Much Life Insurance Can You Have?

[00:00:00] John Montoya: Episode 68, IBC Policy Design and Human Life Value. In this episode, we're gonna talk about how much life insurance you can have, and we'll cover the concept of human economic value or human life value, the total underwriting amount of whole life insurance policies. The effect of PUA, Paid Up Additions on the total underwriting amount, and how human life value and the Modified Endowment Contract, what we know is the MEC level are related with policy design.

[00:00:32] Mr. Perrings, good to see you again. Let's go ahead and jump right into it. Yes, sir. And start with human life value. What is that all about? Human life value?

[00:00:43] John Perrings: Yeah. When we're talking about policy design, one of the crucial concepts that we need to understand is the idea of human life value or human economic value.

[00:00:55] For example, if If here's the basic [00:01:00] calculation. If you take how much you make right now. So let's say make a hundred thousand dollars a year and you've got 20 years left of working. You're in your mid forties or something. Then you take a hundred thousand dollars times 20, and that's $2 million.

[00:01:14] That's your. Technically your human economic value. And this is a very standard way of calculating, the underwriting amount, how, which means how much the insurance company will insure you for. And the reason it's important is because, Remember all insurance is designed to indemnify against a loss.

[00:01:36] So life insurance is there to indemnify your family against the loss of your future income or the future consumption of your assets, like in retirement, for example. And This concept is super important because if you make a hundred thousand dollars a year, the insurance company's not going to write an insurance policy for 20 million.

[00:01:58] Because it just wouldn't make any [00:02:00] sense. You would be over indemnifying the family based on what reality is. Just if you drive a, 19 or maybe I won't go that old, but let's say a 2010 Honda Civic, they're not going a car. Auto insurance company's not going to underwrite you for a hundred thousand dollars vehicle, right?

[00:02:21] Because that's not what you're driving. So it all works the same way. And What we have to understand is the effect that some of the different policy design components have on these underwriting limits, underwriting amount, limits and so that, that kind of ties into the, what we would call the total underwriting amount.

[00:02:47] I don't know if you wanna jump on that one, Montoya,

[00:02:51] John Montoya: before I do I do wanna share. One thought on human life value and yeah, how important it is [00:03:00] because it's really important that we think about our most valuable asset. In fact, just take a moment and think about all the assets that you've accumulated in your life.

[00:03:12] Which one is the most important and right. I'm gonna mention something that you probably didn't think of, and that's your ability to produce. Income, right? That's the value that you create for yourself. And if you have a family, the value that you create for your family. And so if you have on average, let's say 30 to 40 years in the workforce, You need to have a place where you can warehouse your wealth and what a whole life policy is essentially doing.

[00:03:48] Think of it like a savings account, working backwards, because if you start off in the workforce in your twenties, let's say, you got 40 years to go to [00:04:00] accumulate this wealth. There's no guarantee, especially, if you're gambling your money before you even come home. And what I mean by that, Put money into a 401k money that you don't even touch for 40 years.

[00:04:10] So it's off to be gambled on in the stock market. Well, you have no idea what that's gonna turn out to be. This savings account in reverse with a death benefit attached to it. Call it whole life insurance. Thi this creates your human life value and thi this is arguably the most valuable asset that you can create for yourself, and you're ensuring that what you want to have happen will happen.

[00:04:43] That's the contract right then, and right there. Just, that's the contract. Yeah. The value that you're gonna create is guaranteed to happen. Doesn't matter what happens in the market, doesn't matter what you do with other investments. If you contribute premium to this plan, there's a [00:05:00] guaranteed blueprint and it's guaranteed to work out.

[00:05:03] It's going to endow, it's going to equal that death benefit. So I just really wanted to stress. You should be thinking about the most valuable asset that you have. Your human life value and you should work on ensuring it. And there's a number of additional reasons which we'll touch on. But, I know it's something that most people definitely don't think about.

[00:05:29] And when they hear about IBC and they get excited about it, it's not because they're thinking about creating a reservoir for wealth to ensure that they're going to be able to Create this human life value. If something doesn't go to plan, this is your way of cementing that what you want to have happen will happen.

[00:05:51] So I just wanted to share that real quick.

[00:05:53] John Perrings: I'm glad you stopped me from moving on because that's such a huge a huge thing to [00:06:00] consider. So when we're, when we're looking at implementing The, Infinite, Banking, Concept, you can't just.

[00:06:09] Roll over the value of the death benefit. And we've said this before, by the way, all the cash value that everybody loves to maximize, that all comes from the death benefit, by the way. It, it doesn't make sense to ignore the death benefit. I know in the book we talk about minimizing death benefit to maximize cash value, but it's not, there are other places in the book where we, he talks about, Human life value and the importance of making sure that's taken care of.

[00:06:38] So it's not an all or nothing kind of arrangement. And when you, what you said about your ability to earn an income being your greatest asset, that's an excellent. I'm so glad you brought that up because I was just talking about this the other day. Unless you have a massive, trust fund or something already, if you're just a [00:07:00] regular person out there working, maybe you bought your first house or, whatever it is, or, you're sa putting money in the stock market, just do a simple future value calculator on.

[00:07:12] What your account will grow to in the stock market or what your house will grow to use a, find out what the, typical growth rate is on those types of assets and run that out 30 years, 40 years and see what it, see what you get. Then take the same thing using an annual income of whatever your annual income is and run that out 30 years with, and maybe include annual Increase in income, like a, whatever, three or 4% add onto that man, it will blow anything that you have out of the water, your income.

[00:07:44] So it's it's super important to understand. The indemnification that we're providing to our family. And, we, John, Montoya and I were just gabbing a little bit before we started recording and we were [00:08:00] talking about the people out there that really just dismissed the death benefit out of hand without really thinking about it.

[00:08:07] Meanwhile, these are, these people have, a wife and a kids, or they have a husband and kids, and it's do you really not care that. If anything happens to you, you're the people you leave behind. Their lifestyle will have to change. Either that or they will have to consume assets that were supposed to be for the future, and then their future lifestyle will change.

[00:08:31] And there's no way to stop that unless you have your protection set up. I actually just had a link I just posted on LinkedIn about this yesterday, so it's a good, timely thing. You just reminded me of John It's it needs to be taken more seriously by more people out there. Especially in the IBC world where people get super focused on the cash value, they get very excited about, using policy loans.

[00:08:57] The thing is, that's all great, but [00:09:00] you really have to also consider this other side of it. It's massively important.

[00:09:06] John Montoya: Yeah. And I definitely want to touch on that a little bit more towards the end of this talk. And that's the moral aspect of that death benefit component that Yes, is attached to all whole life policies.

[00:09:20] But let's get back to the total underwriting amount and yeah.

[00:09:24] John Perrings: So we're yeah, sorry, John, go ahead. Go ahead. Go ahead. Getting back to, we, we just went off and talked a little bit about human life value and the importance of the death benefit. But what we're really trying to do in this episode is tie that into policy design and talk about some of the constraints.

[00:09:44] So the hu your human life value is the maximum you can be insured for by the insurance company. And the total underwriting amount is in a life insurance policy is important to understand, to get to that human life value. [00:10:00] And what we're talking about here is when you buy a whole life insurance policy designed for IBC there are.

[00:10:09] Some components, which we talked about in a previous episode, like what does a IBC policy look like? And some of those components are of course, the PUA rider, the Paid Up Additions rider. There may be a term rider on there so we can increase the death benefit to, improve the early cash value.

[00:10:26] But what happens when you start using the PUA rider it will increase the total underwriting amount. And what I mean by that is, the face amount, like the initial death benefit that you have today, like the day you put the policy in force might be, say a million dollars, but. The insurance company has to account for all the future Paid, Up, Additions that are built into the policy that could happen.

[00:10:53] And so the, they have a total underwriting amount. Some carriers call it a different name, but they're basically calculating what that [00:11:00] total underwriting could be all together when including the future PUA. And so the total underwriting amount might be something like 3 million. I'm just using.

[00:11:10] I'm just making up numbers right now. But that's the general idea that the, you could have a, and you most likely will have with a IBC type of policy, a higher total underwriting amount than what the actual, current face amount is on the policy. And so this is a super important thing to understand because this is one of the trade offs when start designing for a lot of PUA.

[00:11:39] John Montoya: And if I could break it down a little bit simpler, at least in my head. When it comes to the total underwriting amount and death benefit there, there's three main factors that influence it. Your age at the time of issue, the rating. When you are [00:12:00] approved and then the funding, how much premium is gonna go into this policy and over what timeframe.

[00:12:08] So there are three main criteria that help influence this total amount of underwriting per policy. And keep in mind the human life value. That's how much the total amount of death benefit you can have on your life. And, some people like to Hit a grand slam right out of the right out of the gate and use up their entire human life value and, have one policy just take up the total underwriting amount of their human life value.

[00:12:42] And in other cases, it's gonna be a fraction of that. Could be half, 25%, 10%. But one thing to keep in mind too, going back to human life value and using that simple calculation where, you know, if you're making a hundred thousand dollars a year [00:13:00] and you got 30 years left to go in the workforce I.

[00:13:03] What tends to happen over time, especially early on in your working years, is that your income is gonna go up. So what happens is your human life value goes up and right, bring it back to a total underwriting amount. You know the amount that you start with your first policy, the amount of premium that you're putting into it as your cash flow increases over time, you're gonna find that you need additional policies.

[00:13:28] To park that cash flow. And because your human life value is increasing, you also wanna make sure that you're looking at ways that you can maximize that human life value by creating additional policies. And that's something that we've talked about previously, what we've called future planning potentially looking to get a separate term convertible term policy in addition to the IBC whole life plan that you may be starting.

[00:13:58] Yeah.

[00:13:59] John Perrings: Yeah. [00:14:00] And just a point of quick clarification. So we're talking about human life value. That's the maximum that the insurance company will will insure you for. And then we just talked about total underwriting. And so what we're saying is that with an IBC style policy, the total underwriting is typically going to be significantly higher than the current death benefit that you'll have on the policy starting on day one, because they have to account for all the PUA.

[00:14:32] And what I'm, what we're trying to say here is that total underwriting, that's what has to fall. Within your human life value. So if your human life value is 3 million and you buy a policy that has a total underwriting of 4 million because of the way it was designed, the insurance company will not approve that because the total underwriting exceeds your human life value.

[00:14:56] And this is this is one of the [00:15:00] limitations that we have to work with when designing policies for IBC. The two main limitations are your human life value and the Modified Endowment Contract limits. So when we're designing policies, we're always, If you go out on YouTube and TikTok and all that, there's all the, there's all this kind of noise about policy design and we wouldn't even be having the conversation about policy design if this were the eighties, cuz it didn't really matter.

[00:15:29] There wasn't the mech limit. But since we do have that. If it was the eighties, the only thing you'd be talking about is your human life value. That'd be the only limitation. Now we have human life value and the Modified Endowment Contract limits. We're, and again, because.

[00:15:47] Everything with insurance is a trade off, right? When you do one thing over here, another thing in the policy happens. So it's always a balance to design a policy based on [00:16:00] whatever principles you think are correct. For John, Montoya and myself, it's the ability to pay a premium for as long as possible giving you very good cash value along the way.

[00:16:12] Maximizing your human life value as much as possible. And so we try to and then choosing the correct amount of premium so that you can start capitalizing, right? So we're always looking at these and trying to balance them and we have to make sure that all of those things are in place.

[00:16:32] And if you only look at one thing, like the cash value, you're gonna start running into some things like. You can't buy any more life insurance cuz you've used up all your human life value with the total underwriting. If you go too heavy with the PUA, right? Or you run the chance of you have a higher risk of Ming the policy if you run too heavy with that PUA right out of the gate.

[00:16:56] So all of those things are what we're trying to [00:17:00] really balance while still providing, very good cash value accumulation without ignoring human life value.

[00:17:10] John Montoya: And if you happen to be a new listener and you're jumping in here on episode 68 and you're wondering what the heck is a MEC, right?

[00:17:18] And what creates a MEC? Basically in the 1980s there, there were so much money going into life insurance contracts and. Out of Wall Street that wall Street lobbied Congress and there were three laws that were passed. Tamara Defra Tefra. You don't really need to know these per se, just know the impact of what it did.

[00:17:41] It basically defines how much death benefit there needs to be. In a policy in order for it to be, or in order for it to have to continue to have tax free benefits. Now, the death benefits always tax free, but the cash value if you have [00:18:00] not enough death benefit per dollars of premium that you're putting into it, you're gonna MEC the policy.

[00:18:07] It's gonna tip over and it's gonna be treated and taxed. Like an investment. So when you go to take a policy loan on a policy that is a MEC Modified, Endowment Contract, you're gonna be taxed on the gains with an IBC designed whole life policy. You want it to be a non-mec, meaning you can take policy loans for the life of the policy tax free.

[00:18:33] And that's the smart way to take or access money from a whole life policy is to take a policy loan. We definitely want to achieve a balance that works for your situation while making sure that you have a non MEC status for your whole life policy for all years.

[00:18:52] John Perrings: Nice. Exactly. So we've been talking about how much life insurance you can [00:19:00] have. And so another question could be how much life insurance should you have? And of course, I think John and I agree, you should have how much you can have, but there's also some ways to, calculate that. And before we get into this we were talking last week and we were looking at some different quotes about life insurance and about the death benefit that really, resonated with us.

[00:19:27] And I just thought it'd be cool to share with all of you out there so that you can hear where we're coming from. Why don't you take the first couple, and I think the last one was mine, John. Okay,

[00:19:43] John Montoya: so I'll start with this. The only person who can take care of the person, you'll become.

[00:19:49] Is the person you are today. I like that quote because going back to what I said maybe at the beginning of [00:20:00] this episode there there's a reason why we have the death benefit and why there, why we should value the death benefit. And I talked a little bit about how a whole life policy basically works in reverse.

[00:20:15] It guarantees what you want to have happen in. We're all striving to be better in our life to produce a positive outcome for, our later years. And we do that by taking a number of different measures and a whole life policy. It is super important. It really should be part of your overall financial plan.

[00:20:43] In fact, I think it should be the foundation. So this quote resonated with me because I'm striving to be better and I'm striving to create a better situation for myself in the future and for my entire life and for my family. And that, that quote [00:21:00] really resonated with me. And then there was a second one that I'll share.

[00:21:04] And here it is when you have insurance, you know that you know that you are secured against any unforeseen events in life and this gives you complete peace of mind. And that is 100% the truth. I can really vouch for that because, Age 47. Now, I'm I think securely at my midpoint, if not a little bit past it.

[00:21:32] Hopefully, I gotta at least another 47 years to go. Good quality

[00:21:37] John Perrings: life. Your whole life policies go to age 121, so I'm assuming that's where you're going, right?

[00:21:45] John Montoya: Yes. But unforeseen events. Yes. Think about your own life. How many life events have you had? They come, they're unexpected.

[00:21:58] And one [00:22:00] of the things that we learn the longer we live is that we absolutely have a need for cash, right? You can't go your whole life. Without unless you're a trust fund baby in which case you didn't create the value yourself. You gotta create value for yourself in order to sustain yourself.

[00:22:19] And, life is going to be a rollercoaster and. In my life the foundation that I've built through these IBC whole life policies have given me the ability to really manage that bumpy road in the smoothest way possible. And I've had my wife on, on, on the show and sh I think that was episode 55, and she explains, how she benefited from, how she has benefited from her whole life policies, and you know that's, one takeaway right there that I never could have fathomed and yeah the bottom line is, [00:23:00] we've said this before.

[00:23:02] And when you talk to us, we'll probably tell you again, you'll never be in a worse position by having access to cash. And so when you have these policies, these whole life policies, you really are prepared for the unforeseen events in life. And so that, that's why I chose that one. It's, it was powerful for me and it resonated.

[00:23:22] And think about your own life experience, what you've experienced at this point. I can just about guarantee you not in the same way. A whole life policy can guarantee you values, but I can guarantee you'll be better off by having access to cash when you need it or want it. John, what was your quote?

[00:23:43] John Perrings: Absolutely. Mine's a little more modern, but it ties into, the per, the only person who can take care of the person you'll become is the person you are today. So the, that made me think of a quote from. [00:24:00] Norm Baker, who's he's passed away, but I learned it from Todd Langford founder of Truth Concepts.

[00:24:07] And then I've been lucky enough to actually meet Norm Baker's son, John. And so we've spent a good amount of time together through some of Trent workshops and and coaching. And the quote is there, we've said it on this podcast many times, but I wanna. Apply it to this. There are no deals in the insurance business.

[00:24:25] Everything is a trade off between cost and risk, and people have to understand that. They have to understand the value of the death benefit. These insurance companies have a close to 200 year track record of paying these guaranteed cash flows in the future for us. And so you have to understand the value of cash value.

[00:24:50] The death benefit is the value in cash value. And it, when we're analyzing this for IBC, [00:25:00] you either, if you can't get there from a kind of. Moral standpoint of protecting your greatest asset and protecting your loved ones, just get there. You can get there from a numbers perspective and understand that you can't get there without the death benefit.

[00:25:15] None of this happens without the death benefit. So human life value's an extremely important concept as we're going through this and looking at policy design.

[00:25:27] John Montoya: Absolutely. And so let's try to help answer that question. How much life insurance should you have? And there's a website that I use quite often, pretty much on every appointment that I have.

[00:25:41] I use this calculator@lifehappens.org. Life happens.org is a nonprofit organization and they've got this really simple. Life insurance calculator that can help you determine how much life insurance protection, death benefit you [00:26:00] should have. And it's really eye-opening for people to see sometimes because they realize when they see the number, how.

[00:26:11] Underinsured they are in protecting their family. And that's part of the moral aspect in having the death benefit. If you've got a family to protect, you definitely wanna make sure that you have adequate enough protection. But there, there's another aspect where I think people fail to see the value of the, of having more death benefit and.

[00:26:36] Th this is it made me think of the buy term and invested difference philosophy that was so popular, over a generation ago, but still persists today because of financial entertainers like Susie Orman and Dave Ramsey, who stress, you should only buy term and really I'll leave it at that.

[00:26:57] But it it's really [00:27:00] shortsighted because. People are saving money predominantly for retirement and what a 401k ira, and that provides you with one market based method of producing a cash flow in retirement. And what people don't realize is if they had a permanent death benefit, they would have a permission slip to use their 401k balance to go out and purchase a guaranteed income.

[00:27:31] That they can't outlive. But you can't do that unless you have a permanent death benefit. And think about it, how much income do you want in retirement? You want as much as you can get, right? If you're short changing yourself by simply focusing on I just want the least amount of death benefit.

[00:27:51] Or even worse, I'm just gonna buy term and have no permanent death benefit. You're stuck with a 401k, that [00:28:00] man, it's hope and prey time, and you're living in scarcity mode in retirement because you have no permission slip. Forget about the moral aspect. You've just done yourself a huge disservice to your future self because you got stuck in this short-term mindset that you were led to believe because it fits someone else's agenda.

[00:28:23] You have to be your own advocate. You have to think about where you're gonna be when you go to retire. And the death benefit is gonna play a crucial role because it's gonna allow you more options to create passive income. And I think that's one of the bigger points that people really miss. When they come into IBC, they learn about whole life policies and they want to become their own banker, and they're missing out on this additional benefit.

[00:28:57] To the death benefit that will [00:29:00] help them in retirement. So John, anything you want to add to that?

[00:29:05] John Perrings: I think that's a, it's a great point and it always baffles me how many people have somehow bought into this idea of living on as little as possible in order to avoid. Going into a higher tax bracket or in order to preserve their assets, like living on the 4% rule.

[00:29:21] Imagine that having, a million dollars in your 401k and you can only take $40,000 a year. Otherwise you, and it's actually less than that now. And in reality and, 40,000 a year or less. And Who can live on that, especially, as time moves forward. So it's this crazy idea that people have like somehow just gotten suckered into.

[00:29:46] And to your point though, if you have a guaranteed asset, like whole life insurance, you can double that easily. So it's still not great, but. When you get there, you can also end up with more [00:30:00] assets because you had use of the cash value all along the way. So anyway great points.

[00:30:04] And we've covered this pretty extensively in our, in other episodes. We'll list some of those in the show notes of this one. You can watch a presentation that we did on retirement. Great point.

[00:30:17] John Montoya: Yeah. And one other thing I would add to that cuz we're talking about people in general.

[00:30:23] Not really valuing the future death benefit fu and having a future permanent death benefit. And this goes sadly this seems to be the case with the majority of financial advisors that I've met and connected with. And most recently I had a sit down here locally with a client and his financial advisor.

[00:30:46] And it was really eye-opening again, even though I had the expectation that the advisor that I was gonna meet with didn't really have a firm understanding about life insurance and he didn't. But one of [00:31:00] the things that really baffled me is that he, he said that we're gonna be in a lower tax bracket, come retirement.

[00:31:08] And he explained that to our shared client and I asked him, what are you talking about? Do you think taxes are gonna be lower or the same, 10, 20 years from now or higher? And you're just like there, there's ways to, go about reducing your income. And we were talking about at that point, we're talking about funding.

[00:31:34] John Perrings: At that point, H reached the Zoom call. Pull him. Yeah. Yeah. I'm sorry, go ahead, John. At that point you reached through the Zoom camera, and punched him in face?

[00:31:43] John Montoya: No, this was in person. Oh. No, we're sitting in a country club.

[00:31:46] John Perrings: You didn't have to do it technologically.

[00:31:48] John Montoya: Yeah. We're sitting in a country club surrounded by people and just having a sit down to discuss my client's whole life policy because his advisor had some questions.

[00:31:56] No, it was pretty interesting conversation. [00:32:00] I in general, but I had to explain to this guy how a whole life policy worked because he didn't know. He, he, yeah, he literally didn't understand the difference between Universal and whole life insurance. And so he would, he had been filling my client with our shared client with with, with little tidbits that were confusing him.

[00:32:22] And so that's part of the reason why we were having this sit down to explain the benefits of his whole life policy. And yeah, just to stick to the main point here of this of why I'm sharing this, don't assume that you're gonna be in a lower tax bracket in retirement and. If you're making that assumption, all I gotta say is check your premises.

[00:32:45] John Perrings: That's it. Most people's plan right now is based on the best case scenario. It's like how do you have a financial plan That's all based on probabilities and statistics and the [00:33:00] best case scenario, it's that doesn't make any sense. You only get one shot, right? So make it work no matter what happens.

[00:33:08] John Montoya: Awesome. Anything else we should add, John, before we close this up?

[00:33:13] John Perrings: No, I think this has been a good episode. Appreciate all your thoughts and feedback as always. Glad we got to glad we got to talk about this important topic. So if you're out there listening to the show and you wanna, find out how this could possibly make sense in your world personally you can always go to TheFifthEdition.com.

[00:33:35] You can schedule a free 30 minute meeting with us, initial consultation with us right there on the website, the fifth edition.com. And if you're one of those types of people that really just likes to learn everything they can before talking to someone, we have a, an online course that you can get a 50% discount to at the website There at TheFifthEdition.com.

[00:33:56] And then lastly If you wanna help us [00:34:00] spread the word we'd love it. If you left us a five star review for the podcast. Really helps us get the word out. So thanks everybody. Thanks, John. All right,

[00:34:11] John Montoya: Thank you. Until next time.