The Money Advantage Podcast

The Money Advantage Podcast

Becoming Your Own Banker, Part 13: Overfunding Life Insurance

October 23, 2023

Prepare to unravel the mystique behind funding and overfunding life insurance, and the empowering concept of becoming your own banker. This episode holds the key to understanding how to fund a life insurance policy, maximize its cash value, and reap the benefits. Our human-centric approach puts you, the listener, at the forefront as we examine how to expand your contract and build additional ones to create your own holistic financial system.

We dive right into the heart of constructing a life insurance contract that prioritizes both cash value and death benefit maximization. Intricacies of balancing ordinary life, term, and single premium by contract components are laid bare, aiming to achieve the optimal cash value to death benefit ratio. We also confront the challenges of adding a single premium paid-up addition to a contract and the complications that arise when human life value is exceeded—all in the pursuit of financial freedom and security.

Lastly, we venture into the evolution of universal life insurance over the past quarter-century, with a special focus on its transformation following the 2001 stock market crash. The allure of universal life, index universal life, and variable universal life are scrutinized, revealing their potential pitfalls and unpredictability. Before we sign off, we arm you with a list of recommended readings to further your understanding. Included is Nelson Nash's enlightening book, Becoming Your Own Banker, as we champion the importance of financial literacy and independence. Tune in and embark on this enlightening financial journey with us.

Join us for this insightful look at life insurance, infinite banking, and gaining financial control!

Overfunding Life InsuranceThe Importance of Policy DesignHow Long Should You Fund a Policy?What if You Want to Shorten Your Payment Window?What is Reduced-Paid-Up?Book A Strategy Call

Overfunding Life Insurance

When you fund a life insurance contract, there’s only so much you can add into a policy—relative to the death benefit—before it becomes something else entirely. When you overfund, or add too much PUA into a policy, it actually changes from a life insurance policy to what’s called a modified endowment contract, or MEC. 

The precedent for this is written into the tax code, and is the IRS’s way of making sure that people are not funneling al their money into life insurance to avoid taxes. After all, cash value grows in a tax-advantaged way, and you can actually experience it tax-free over your entire life if used correctly. 

When a policy becomes a MEC, it loses the tax benefits, and becomes an ordinary taxable account. Meaning that you’ll have to pay taxes on the growth of the policy, when you access the funds. While this does make a policy less efficient, some people may be okay with a policy becoming a MEC under certain circumstances. 

The Importance of Policy Design

When you’re designing a policy, it’s easy to think that the best possible design is to have the lowest premiums relative to your death benefit. However, that’s not strictly true with life insurance. The more you put into an insurance policy, the more early cash value growth you can have. And so in most cases, you want to cozy up as close to the MEC limit as possible. At the very least, you want to aim for that.

However, you also have to consider your priorities. Do you want to prioritize a higher death benefit in the early years, or higher cash value? This is going to depend on what assets you already have, most likely. But once you know the answer, you’ll know whether you want to maximize PUAs or not, and toe that MEC limit. 

The reason “base” premium doesn’t toe that MEC line is simply because it’s pure equity in the death benefit. Actuaries do a great job of calculating exactly how much you need to pay for your cash value to equal your death benefit at endowment. PUAs, on the other hand,