Whole Life Self-sustaining?

Can one of the more knowing please tell me how the whole life policies truly become self sustaining so that you no longer need to pay premiums?

I've seen it mentioned several times that after say the 5th year cash premiums aren't necessary. But how does this actually work?

Does the amount due become a policy loan?
It doesn't look like the dividend amounts alone can cover it, so I'm very curious because it just doesn't look obvious.

thanks again :)

the term "self-sustaining" usually refers to when the dividends plus interest gained on the policy is greater than the premium itself. dividend amounts CAN become big enough to cover premiums but usually in later years (>12+ years). typically, dividends are used to purchase PUAs (paid-up additions) which in turn will contribute to increasing the dividend in future payouts.

as far as self-sustaining after 5 years, i believe you must overfund a policy to the max (ie. just below the MEC level) to even consider the possibility of self-sustaining that early. i do NOT overfund my NWM policy and it will be self-sustaining after 13-14 years.

Thanks but can you clarify something you said.
Even if it's after 12+ years, you say the dividends + interest is greater than the premium. What interest are you speaking of?

The only annual payments that I see that can go towards premiums is the dividends themselves. Maybe I missed something.

This is one of those mind-boggling things for me because every agent says it and most people on this board say it but it's just not appearing true.

thanks

blastAway, this is form another post that i believe you were partcipating in...whole life grows cash values (and pays premium) with two components; interest + dividends.

From the other post:

"I have seen several times that people are confusing "dividends" with the TOTAL cash values increases.

There are TWO components to cash value growth in a life policy. Dividends are usually the SMALLEST and least important component. Alas, people speak of "dividends" as the driving force behind a policy's growth. The Infinite Banking nut j(ac)ob was constantly doing this. They are an enhancement, not the meat and potatoes.

It is quite normal for a dividend rate to be only 1 or 2% per year, which is nowhere near an illustrated return. What folks fail to take into account is that it is not dividends alone that make cash values grow. In fact, dividends are typically the smallest part of the growth component. In any participating policy there will be an additional PRIMARY method growth. It may be an interest rate (whole life/Universal Life) or appreciation (Variable Life/Market driven).

The cash values in a policy are the sum of BOTH parts. So, a whole life policy that guarantees a 4% return will do so...PLUS an additional 1 or 2% dividend rate. This equates to a combined crediting rate of 6% (interest + dividends). It would be completely normal (and expected) that any whole life policy would never pay for itself if it relied on dividends alone.

A variable life insurance policy may have a positive market rate of 8% + a 1% dividend rate for a net cash value credit of 9%. Or, it may have a negative market experience of -8% + a 1% dividend rate to net an annual decrease in cash values of -7%.

In short, the dividend is completely seperate...and IN ADDITION to...the PRIMARY method of growing the cash values in a policy."

Also BTW (and I have mentioned this before as well), the fact that you are going to be "paid up" in 5 years is troubling. By current tax law, paying up your policy under anything than 7 years will create a Modified Endowment Contract (MEC). Once a MEC is created, it cannot be reversed and your cash growth will be treated like an annuity with the proceeds taxable as income. It will no longer be subject to tax free growth and withdrawals. You may want to ask your agent about this.

Pricespector, I think you misread my post.
I am not saying that my policy is paid up in 5 years, but that others have mentioned 5 years as the point of becoming selft sustaining. (and maybe it wasn't 5 but more than that).

Your repost still didn't quite answer the question but thanks anyway. I wasn't asking about cash value growth of a policy but more of how a policy becomes self-sustaining. Or more accurately, where does the premium payments come from.

You mentioned "interest" again but where is that. My policy doesn't pay any interest payments. The only $ payments I get from the policy are in the form of dividends. If I want to use the cash value growth as part of payment towards the premiums then it becomes a policy loan. Nobody has mentioned that in order for a policy to become self-sustaining that it requires a policy loan.

I wasn't asking about cash value growth of a policy but more of how a policy becomes self-sustaining. Or more accurately, where does the premium payments come from.
If you check your cash value increases for the prior year, they SHOULD show dividends and interest plus the annual premium you paid for the year. A policy becomes self-sustaining when the annual cash value increase MINUS the premium you put in equals an annual premium. For example, your annual premium is $5000. You put int $5000 premium for the year, and your interest + dividends equals $5000 for a total annual cash value increase of $10000. Next years premium is paid by forfeiting the $5000 of interest and dividends to pay your premium. It does not require policy loans, just a decrease in annual cash growth.

You mentioned "interest" again but where is that. My policy doesn't pay any interest payments. The only $ payments I get from the policy are in the form of dividends. If I want to use the cash value growth as part of payment towards the premiums then it becomes a policy loan. Nobody has mentioned that in order for a policy to become self-sustaining that it requires a policy loan.Please re-examine your policy again. Any PAR whole life will have a minimum interest rate applied (usually 4%) to cash values + dividends. If you don't have this feature and your policy will require policy loans to self-sustain, you have a substandard whole life and it is not considered investment grade.

Also BTW (and I have mentioned this before as well), the fact that you are going to be "paid up" in 5 years is troubling. By current tax law, paying up your policy under anything than 7 years will create a Modified Endowment Contract (MEC). Once a MEC is created, it cannot be reversed and your cash growth will be treated like an annuity with the proceeds taxable as income. It will no longer be subject to tax free growth and withdrawals. You may want to ask your agent about this.

My guess is that the policy isn't technically paid up at year 5, but rather, there will be enough PUA's that they can be sold back to cover the premium.

Thanks all for the info. I looked back at the policy and there isn't a stated interest rate but there is a guaranteed cash value (which is probably coming from such interest).

There's no mention anywhere in the policy of being able to apply any such "interest" towards the policy premiums though. The only thing discussed that is able to be applied to premiums are the dividends.

Rats...

Also, the point of growth in the CV + dividends that covers the policy premium won't happen until about year 13 or so according to the illustration which is currently about 28,000 off in actual CV vs predicted CV.
Shame I didn't have the same results as the most recent posters 3rd year anniversary.

Also, the point of growth in the CV + dividends that covers the policy premium won't happen until about year 13 or so according to the illustration which is currently about 28,000 off in actual CV vs predicted CV.
$28k off of projected could be a lot off (if say it's 50% difference say for a $56k CV) or not much off (if say it's a 5% difference say for a $500k CV). If the former, i would want an explanation from my agent as to why it is so far off.

Well, sadly I can tell you exactly.

As of Feb 2008 the CV was supposed $262,881 but it's actually $234,400. I guess that's about 11% off of projections but the %age difference has increased progressively worse each year. My estimate (if same condition continues) is that it will eventually be nearly 50% at year 30.

Hence all my questions about dividends, CV etc.
Just today I sent out a formal complaint to the insurance company in writing. This is after at least 3 phone calls and 3 emails with no response.

After that I'm going to have to raise it to whatever agency oversees insurance companies. And nope my agent/advisor is useless. I forwarded to them that I have issues the other day and they haven't even responded with a reply. AMAZING !!

perhaps you can go about it a slightly different way:
1) ask for an updated illustration (may give you more realistic figures than what you were originally given)
2) speak with another reputable mutual insurance company (NYL, NWM, MassMut all have been touted here as being good) and ask for a 1035 exchange illustration.
3) compare the two and see which one is best for you and your goals for this policy.

Thanks for the information. I hadn't heard/read about any sort of exchange option. That would be great since I don't want to shut down the policy overall.

I did recently ask for a new illustration but my requests have gone unanswered in so many ways. You all would NOT believe the lack of customer service I'm getting where I'm basically just ignored. In writing, in email, on phone.

A 1035 exchange is a way to keep the tax-protected status of insurance/annuity policies by effectively rolling over the assets from one policy into another. They have to both be similar (insurance or annuity product) so one cannot, for example,exchange a Whole life policy into another investment account. One major difference is that the new carrier will stil go through the underwriting procedure to validate the exchange and the benefits of the policy (ie. growing dividends and/or interest) will effectively START OVER. however, your assets can be used to immediately buy PUA and CV in the new policy which should accelerate its growth compared to starting from scratch completely. but it is important to carefully look at the illustrations to compare. good luck.