Next question impact of the 7702 rule IRC.
This is the IRC change rule that just came out in December of last year. It goes into effect. Now, basically the insurance companies, they were mandated to provide a guaranteed gross 4% rate that will no longer apply for products in the future. The companies will be able to choose anywhere between two or 3.75% so it allows some flexibility for the insurance companies. Now, again, this is the guaranteed rate, and this does not talk about the dividend rate. So dividend rates for all insurance companies are that above and beyond the guaranteed all strong insurance companies have been paying dividends over the past 140, 150 plus years.
So no insurance company has really been operating in the guaranteed environment but the true impact may not really be seen. But the insurance company is now no longer needed to provide that 4% guarantee. The true impact is also still hazy for most of the insurance, the whole life products have not come out with their new product yet so this is a relatively big change. The insurance companies are figuring out what to do with it. What may happen and what people are starting to see is that it made decrease the cost of insurance premiums may go down and this could also increase the MEC limits which may seem good. But again, for our purposes, we’re trying to stuff in, I think, desired amount of funding if the MEC limit increases.
So that means that I can buy more death benefit with less premium when we’re qualifying for insurance, that there is that income limitation. So it’s not, if I only make a hundred thousand a year, I can ask for a $15 million death benefit that there is some qualification, as far as income with a higher MEC limit or lower premiums, someone making a hundred thousand. Typically when you’re in your thirties, you can have a death benefit 30 times that when you’re in your forties and fifties, that drops down to twenties. And when you’re older, that drops down to 10 times. For an older person, you can only get 10 times your annual income. So if I’m making a hundred thousand, the death benefit I can get is only a million now.
And because your premiums are lower, you can’t stuff in much money. So it may seem like it’s a good thing. It may limit how much funds one could put in if they’re on that threshold. But it also may not have impact to most people, that it may just have a smaller impact than what people are anticipating.
Companies do need to have a product out by the end of this calendar year. And usually when a big change like this happens, anyone who recently got a policy and it may be looking back as far as having one issued in 2021, you’ll have the choice of shifting over to the new product if you want to.
There probably be also a grace period as far as when new products come out. There’ll be maybe a month or two, where if someone applies. Yeah. In that time period, there’ll be able to choose the old product or the new product. At this point, a lot of the four major, or even with mixed plan into that, no one has come out with any product as of today.
And we’re looking at probably the end of August for the first ones to start coming out with that.
Typically these newer products aren’t as good as them?
Yeah. Typically you may add some flexibility. So for example, the P wave limitations, those are things that have dramatically got more stringent over the years, purely because insurance companies are recognizing that they’re not making a lot off of it. That’s just a cash dump. So they’ve started to limit those rather drastically. And as Lane mentioned, usually newer products are not as favorable as the older products.
Best time to invest as yesterday. It’s time to make an IBC was yesterday. My guess is like the rates are lower today. Overall people are starving for yields. That’s just my quick guess lie that grades are drop.
This helps definitely the insurance companies and so again, with a mutual insurance company that gets transferred back to you in the form of dividends. It’s not all bad. There’s bullies coming out, bank owned, life insurance products. Those have come out already on the new law and people are not seeing as much impact as what they thought it was going to be. It’s pretty much in line.
Part of that has to do with a guaranteed is just a guaranteed rate but that’s not the dividend. Maybe you can talk through when people are looking at big paper, like they’re looking at the guaranteed rate and there’s actually rate that is paid.
The guarantee is I guess the worst case scenario and like the company declares no dividend typical dividends of the insurance companies right now range between five and a half to 6%. That’s not four plus five. That’s just the difference. So like one and a half to 2% over the guarantee is the dividend. What the companies are providing above the 4% as mentioned earlier, no company has been operating in the guaranteed or only providing zero dividends since existence. And you’ve always been paying out dividends through all the, the down cycles. We did not anticipate a company saying they’re not going to be providing any dividends. So even if a company claim their guaranteed rate drops to 2%, it’s not saying that their dividend rate will drop by that amount also Dividends will probably remain pretty close to the same.
Explain this to me, some people, they show me their policy and then it’s like a high rate, but then I look at this company is like some random, like no documented medical screening company. There can be like a bait and switch right on that rate that they show on the paper.
When a company says 6% is their dividend rate and another company says 6% as a dividend rate. The actual pay out or the actual return may be different, even though the stated dividend rates are the same. The reason for that is because these are gross rates what’s embedded in, it is company expenses, mortality costs, commissions, and each company handles that differently.
And that’s really the proprietary black box that even as an agent or broker, we don’t really have privy to that. Those costs vary even though illustration may show a strong return. That’s why those four mutual companies are what we heavily use, because those have actual performance. The actual payouts have been more in line with the illustrations versus just illustration that may look good and the actual performance may not be the same.