Blog #50: The Cost of Waiting

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To be certain of having life insurance when you need it, you should acquire it before you need it.  So an important factor to consider involves the advantage of acquiring your policy now -- while your health may be the best it ever will be.  Of even greater importance, should something unexpectedly happen to you in the short term, your family will be protected.

Here is another reason for acquiring life insurance early:  Harvey Pierce, MD, is an internal medicine physician.  He is age 45 and has determined that the participating policy loan features of an Indexed Universal Life (IUL) policy can provide him with a superb retirement supplement.  The death benefit of the policy, while certainly valuable to him and his family, is not the primary reason for his interest.

His adviser is encouraging him to purchase the policy now.  Dr. Pierce asks, “I will commit to this, but does it really make much difference if I do it now or in a couple of years?”

This question can be easily answered using the Cost of Waiting module available on the Personal Insurance tab in the InsMark Illustration System.

We’ll compare the following two alternatives:

  • $500,000 increasing death benefit IUL issued at age 45 (max-funded with 20 annual premiums of $23,717 -- just short of a MEC -- with policy loans starting at age 65).
  • $500,000 increasing death benefit IUL issued at age 47 (max-funded with 18 annual premiums of $25,384 -- just short of a MEC -- with policy loans starting at age 65).

Here are the results:

Insured: Harvey Pierce, MD
Current Age: 45
Indexed Universal Life

Plan A: Buy Now

Indexed Universal Life

Plan B: Wait Two Years to Buy

Initial Policy Death Benefit: 521,414 Initial Policy Death Benefit: 522,779
Policy Premium: 23,717 Policy Premium: 25,384
Number of Premiums to Age 100: 20 Number of Premiums to Age 100: 18
Cum. Premiums at Age 100: 474,340 Cum. Premiums at Age 100: 456,912
Cum. Loan Proceeds at Age 100: 4,068,766 Cum. Loan Proceeds at Age 100: 3,425,677
Cash Value at Age 100: 727,776 Cash Value at Age 100: 608,174
Death Benefit at Age 100: 1,227,776 Death Benefit at Age 100: 1,108,174
Cash Value Gain at Age 100 by Buying Now: $119,602
Cumulative Loan Proceeds Gain at Age 100 by Buying Now: $643,089
Death Benefit Gain at Age 100 by Buying Now: $119,602
Premiums Saved by Waiting Two Years to Buy: $17,428

In this example, Dr. Pierce would have to earn a pre-tax equivalent rate of return of 15.19% year in and year out on the difference in premiums and loan proceeds to match the results of buying now.

Click here to review the full illustration.

Dr. Pierce asks, “Does it only work out this way when you run it to age 100?  How does it look at my life expectancy -- age 85 for example?”

Here are those results:

Insured: Harvey Pierce, MD
Current Age: 45
Indexed Universal Life

Plan A: Buy Now

Indexed Universal Life

Plan B: Wait Two Years to Buy

Initial Policy Death Benefit: 521,414 Initial Policy Death Benefit: 522,779
Policy Premium: 23,717 Policy Premium: 25,384
Number of Premiums to Age 85: 20 Number of Premiums to Age 85: 18
Cum. Premiums at Age 85: 474,340 Cum. Premiums at Age 85: 456,912
Cum. Loan Proceeds at Age 85: 1,948,876 Cum. Loan Proceeds at Age 85: 1,628,362
Cash Value at Age 85: 953,993 Cash Value at Age 85: 920,175
Death Benefit at Age 85: 1,453,993 Death Benefit at Age 85: 1,420,175
Cash Value Gain at Age 85 by Buying Now: $33,818
Cumulative Loan Proceeds Gain at Age 85 by Buying Now: $320,514
Death Benefit Gain at Age 85 by Buying Now: $33,818
Premiums Saved by Waiting Two Years to Buy: $17,428

In this example, Dr. Pierce would have to earn a pre-tax equivalent rate of return of 14.06% year in and year out on the difference in premiums and loan proceeds to match the results of buying now.

Click here to review the full illustration.

Conclusion

In Dr. Pierce’s case, the Cost of Waiting analysis shows that the attractiveness of a short-term delay in funding is more than offset by a significant increase in after tax cash flow which is his primary reason for acquiring the policy in the first place.

It makes little difference whether you are presenting a very large or very small amount of insurance -- Cost of Waiting is very useful in helping clients understand that acting now has very favorable financial consequences.  It’s a point that is difficult to convey without the mathematical comparison illustrated in this Blog.

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One thought on “Blog #50: The Cost of Waiting

  • May 13, 2014 at 6:11 pm
    Permalink

    “Bob

    I have another idea similar to the one you have demonstrated. I was wondering whether you have a template for.

    Client desires to purchase a 500K Term policy with the idea of converting in a couple of years.

    Looking for a template that will provide a side by side spreadsheet showing the cost of a 500K IUL along with the cost of conversion in year 3, 5 ext.

    The purpose of the spreadsheet would be to for the client to see the favorable economics in obtaining the IUL in the first place.

    Louis”
    ——————————————-
    Louis,

    Our Comparison of Insurance Plans in the InsMark Illustration System will do it. This module does a side-by-side comparison of two different policy illustration producing a year-by-year net and pre-tax equivalent rate of return for each policy.

    For discussion purposes, let me assume you want to compare Policy A at age 45 with permanent premiums with Policy B also at age 45 which has term premiums for three years with permanent premiums thereafter. If you are cutting and pasting illustration data from a non-linked carrier into our Source Data Storage, for Policy A you would enter the permanent data year-by-year from year 1 on. With Policy B, you would enter only term premiums and term death benefit for the first three years, and starting at age 48 (year 4) you would enter the year-by-year permanent data at that issue age thereafter.

    If you are using data from a carrier that links its data to InsMark, your data entry for Policy A would be simple via the link; however, I don’t know of any link deal we have where you can calculate term for X years, permanent thereafter, and have the data transferred to InsMark. If this is an option on your carrier’s illustration and it is linked to InsMark, it might well work OK. Otherwise, enter data for Policy B as described above.

    Click here for a link to my Blog #52: Participating Loans vs. Fixed Loans where I used the module referred to above — not as you requested, but comparing two different IUL policies, one with fixed loans and the same one with participating loans. It will give you an idea of the type of comparison I am describing. There are two sets of graphics in that Blog, and underneath each set is a “Click here” to bring up the illustration. Do that to see the illustrations. The rate of return comparison start on Page 7.

    Thanks for taking the time to comment, and I hope this helps.

    Bob Ritter
    InsMark President

    Reply

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