Blog #122: Term Insurance for $1.00

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Consider asking a client this question:

“Assuming you have the cash flow to buy whatever kind of life insurance you want, if you could acquire $500,000 of term insurance for $1.00, would that be a good deal?”

That’s not $1.00 per thousand, that’s $1 a year.  And it’s not a good deal for your client.

We all know that cash value life insurance can almost always compete with term provided the following factors are considered:

  • The time frame for the insurance need;
  • The available cash flow;
  • The alternative uses for the cash flow;
  • The income tax considerations.

But how about term for $1.00.  Let’s see . . .

Case Study

Cliff Havers, age 35, wants to acquire $500,000 of life insurance.  Here is the comparison he is reviewing:

  • $500,000 of indexed universal life (IUL) with five scheduled premiums of $16,703 illustrated at 7.00%.  After tax policy cash flow is scheduled starting at age 65.
  • $500,000 of 30-year level term with annual premiums of $1.001 coupled with a taxable side fund2 at 7.00% for the difference in premiums.  (Cliff is in a 30% marginal income tax bracket).  After tax cash flow from the taxable account is scheduled to match the cash flow from the IUL for as long as possible.
  • 1 The best “real” rate I could find was $450.
  • 2 Management fee of 1.50%.
  • See Blog #100 for a discussion of “mysterious” management fees from an article published in Forbes.
Indexed Universal Life
vs.
30-Year Level Term Insurance and a Side Fund
Image #1

Indexed-Universal-Life-vs-30-Year-Level-Term-Insurance-and-a-Side-Fund image

Click here to see the detailed numbers.  The term insurance expires at age 65; the side fund collapses at age 70.  The IUL does not expire, and the difference in its retirement cash flow of almost $1.5 million is enormous (over 7.6 times as much as the term/side fund combination).

The side fund would have to earn 13.32% in order to match the IUL, 6.32% more than the IUL’s 7.00% interest assumption.

I also ran the comparison using the term insurance at $1.00 coupled with an equity account with 7.00% growth and a 2.00% dividend as shown in the graphic below.  Fee and tax drag assumptions are conservative:

  • 25% short-term capital gains; 75% long-term capital gains;
  • 30% marginal income tax bracket;
  • 25% capital gains tax;
  • 25% dividend tax;
  • 25% portfolio turnover;
  • 1.50% management fee.
Mortality costs retard the growth of IUL. When you include the costs associated with owning an equity account, the IUL easily outperforms it.
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After tax cash flow from the equity account is scheduled to match the cash flow from the IUL for as long as possible.

Indexed Universal Life
vs.
30-Year Level Term Insurance and an Equity Account
Image #2

Indexed-Universal-Life-vs-30-Year-Level-Term-Insurance-and-an-Equity-Account image

Click here to see the detailed numbers.  The term insurance expires at age 65; the equity account collapses at age 76.  The IUL does not expire, and the difference in its retirement cash flow is almost $1.2 million (over 3.2 times as much as the term/equity combination).

The equity account requires growth of 9.46% plus the dividend of 2.00% for a total yield of 11.46% in order to match the IUL, 4.46% more than the IUL’s 7.00% interest assumption.

Note:  The performance of the IUL gets an additional nudge due to the arbitrage associated with its participating policy loans.  See Blog #52 for a discussion of participating vs. fixed policy loans.

Conclusion

If you can outperform term insurance for $1.00, term doesn’t stand a chance — so long as the cash flow exists to buy want you want.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog122.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials:

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

“InsMark is the Picasso of the financial services world — their marketing savvy never fails to amaze me.”
Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“InsMark’s Checkmate® Selling strategy is still one of the most compelling tools to bring a client to a definitive decision, based on their best case alternatives!!!  Solid mathematical comparisons that prove the validity of our insurance solution!”
Frank Dunaway, III, CLU, Legacy Advisory Services, Carthage, MO

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

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More Recent Blogs:

Blog #121: We Don’t Need the RMDs

Blog #120: How We Open and Close 30 to 35 Premium Finance Cases Per Year

Blog #119: Which is the Best Policy for My Clients? (Part 3)

Blog #118: Which is the Best Policy for My Clients? (Part 2)

Blog #117: Which is the Best Policy for My Clients? (Part 1)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #119: Which is the Best Policy for My Clients? (Part 3)

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations in this blog were created using the InsMark Illustration System.)

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presentation

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The InsMark Compare™ illustrations in Blog #117 have generated questions among some readers as to how Indexed Universal Life at 7.00% can outperform Variable Universal Life at 8.00% — particularly in later durations.

Blog #117 compares Whole Life, Universal Life, Indexed Universal Life, and Variable Universal Life.  Let’s review just the Indexed Universal Life vs. Variable Universal Life to address the questions.  The following graphic illustrates the issues:

Summary Analysis of Net Rates of Returns at Age 100

Bob Ritter's Blog #119 img 2 Indexed Universal Life vs Variable Universal Life graph

Click here to review the entire illustration comparing IUL with VUL.

Problem:  How can IUL have a long-range, net rate of return of 7.72% which is in excess of the 7.00% rate credited to the policy?

Solution:  Interest rate arbitrage — the difference between the interest paid and the interest earned.

The 7.72% net return is caused by the arbitrage created by participating policy loans.  This is one of the unique characteristics of IUL in which the cumulative loans on the policy continue to participate in the credited index rate less the loan interest charged.  Such arbitrage does not occur with loans on a VUL policy (or any other policy generally available).

There is, however, a potential risk associated with participating loans involving an extended term of years in which the credited rate of the selected index is less than the loan interest rate charged.  This will cause a drag on policy performance during later durations when policy loans represent a substantial percentage of policy cash values.  This is best handled if the carrier has a guaranteed loan interest rate.

Riskier IULs are those with large policy loans in which the loan interest rate is tied to a floating index such as one of Moody’s bond indexes.  While this may guarantee the source of the loan interest rate, it does guarantee a cap at a reasonable rate.  Assuming a policy owner intends to access policy values by way of substantial loans, it makes sense to acquire IUL with acceptable cap on loan interest rates.  I understand why an issuing life insurance company might not want to offer such a cap, but under these circumstances, a prospective client is well-advised to purchase IUL from a company that provides it.

For a more detailed study of these issues with some powerful examples, see my Blog #52: Participating Loans vs. Fixed Loans.

Conclusion

The best long-range illustrated rate of return is not the only consideration.

  • A client may decide that VUL’s edge at shorter durations is preferable;
  • A client might prefer IUL at any duration due to the 0% floor on performance (1% to 2% with some companies) during years if an index goes negative;
  • A client might prefer the upside possibilities of VUL unencumbered by a cap on an index;
  • A client might prefer the guarantees of a Whole Life chassis.

Note:  Many of you are rightly concerned about the potential tax bomb in a life insurance policy with large policy loans that can accidentally be triggered by a careless policyowner.  See my Blog #51: Avoiding the Tax Bomb in Life Insurance for my analysis of this issue.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog119.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Licensing

To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275) or go to insmark.com.  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials:

“InsMark has increased my production by 10 fold.  It clearly communicates to the client the best financial scenario to take.”
Gary Sipos, M.B.A., A.I.F.® InsMark Platinum Power Producer®, Sipos Insurance Services, Freehold, NJ

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Make certain you have the appropriate state and federal licenses if you include variable universal life in the product type comparison in an InsMark Compare illustration.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #118: Which is the Best Policy for My Clients? (Part 2)

Blog #117: Which is the Best Policy for My Clients? (Part 1)

Blog #116: Advisor Marketing Break Through: How To Have Qualified Prospects Contact You

Blog #115: Part 2 of Leveraged Deferred Compensation (Is Arthur Better Off With Term Insurance?)

Blog #114: Leveraged Deferred Compensation (Part 1)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #118: Which is the Best Policy for My Clients? (Part 2)

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations in this blog were created using the InsMark Illustration System.)

Getting Started with InsMark Training Video

Bob Ritter's Blog 118 Which is the Best Policy for My Clients? Indexed Universal Life image

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Zero-Split-Case-Premium-Financing-click-here-to-receive-more-information
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In Blog #117, we examined how our new InsMark Compare™ module presents clients with a clear choice of the available policy types in order to help them determine which policy — and what interest or dividend assumption — best reflects their risk profile.

Now for the other half of that suitability map . . .

The InsMark Compare™ module in the InsMark Illustration System contains an optional FINRA-approved Questionnaire which helps clients self-identify their personal risk profile.  The Questionnaire is provided in our system courtesy of Back Room Technician (BRT) by Advisys, Inc.  You do not need to be licensed for BRT to use it; however, you should be certain that your compliance department approves its use.  (If you aren’t licensed for Back Room Technician, you are missing a terrific piece of software.)

Click here to review the Questionnaire.

In Blog #117, we compared Whole Life, Universal Life, Indexed Universal Life, and Variable Universal Life.  While many unsophisticated clients might decide that bigger numbers are better, this is not the way to determine suitability.  Recall the graphic below from Blog #117.

Bob Ritter's 117 which life insurance policy type is best for you? Indexed Universal Life IUL is image

So let’s review some results from Blog #117 — and think about this:  How is a client supposed to self-identify the most appropriate policy other than guessing at its suitability?  Bigger numbers are not necessarily better than smaller ones — they are just different.

Bob Ritter's Blog 118 Indexed Universal Life IUL is the best choice graph image

Many of you have your own suitability procedures, and I am not suggesting you abandon them; rather, we are providing the BRT variation for you to consider as a coordinated part of InsMark Compare™.

Licensing

To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275) or go to insmark.com.  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials:

“InsMark has increased my production by 10 fold.  It clearly communicates to the client the best financial scenario to take.”
Gary Sipos, M.B.A., A.I.F.® InsMark Platinum Power Producer®, Sipos Insurance Services, Freehold, NJ

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

 

Important Note:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

 

seperator bar

More Recent Blogs:

Blog #117: Which is the Best Policy for My Clients? (Part 1)

Blog #116: Advisor Marketing Break Through: How To Have Qualified Prospects Contact You

Blog #115: Part 2 of Leveraged Deferred Compensation (Is Arthur Better Off With Term Insurance?)

Blog #114: Leveraged Deferred Compensation (Part 1)

Blog #113: Life Insurance Alternatives to a 401(k)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive