A reader of one or more of my books contacted me recently to see if I could do better than an agent in his home state with regards to getting a new permanent life insurance policy to leave a bigger legacy to his sons.
I should note here that the same “shopping” process is one that I would employ for a person that ALREADY has an “old” life insurance policy and wants to find out if there might be a better option available today – even though that person is older than when the policy was purchased.
Anyway, the other agent represents a huge policy mutual life insurance company, I won’t say the name here… but they are especially well-known in New York.
The agent proposed a whole life insurance contract with this gentleman paying ten annual $17,904 premiums. So for ten years, this person would pay nearly $18,000 and then the premium payment period would be done.
Based on this man’s age and health, that whole life policy will pay a death benefit (DB) under $213,000 for the first seven years and then “might” grow to $370,000 at age 85, $437,000 at age 90 and $517,000 at age 95 (depending upon dividends that insurer may decide to pay its policyholders). If the death benefit is growing, that means the cash value (CV) inside the policy is growing too.
The potential growth of both the cash value and DB is based on the whole life company deciding to pay dividends and how much dividends they’d like to pay. In life insurance, a dividend is NOT like a stock dividend – it’s legally a refund of “overpayment” which is why it is not taxable.
The policy illustration that this man shared with me clearly states that: “Dividends are not guaranteed. Dividends have fluctuated significantly in the past, and fluctuations in future years are likely.”
Of course, the guaranteed side of that illustration shows a $210,000 for most policy years — if the company never paid a dividend. While that “never pay a dividend” scenario is very unlikely they are required to disclose it to him.
Besides using my own favorite companies to “shop” around for him, I asked two of my outside brokers (who work with a combined 50-60 top rated insurers) to also shop using their resources. Believe it or not, they come up with the same results as I did as the best alternatives to the proposed whole life contract.
Here are the three choices that I came up with from A+ rated insurers. The first, maximized the death benefit from day one, the next was a compromise between the other two options and the 3rd had the potential for maximizing cash value (in case he ever needed the cash more than the death benefit) and death benefit at the times he thought he’s most likely pass away.
Like the whole life contract described above, each of the policies has its pros and cons (like everything in life). Here is a summary of each option that I presented to him. Which option he will choose depends on what is most important to him and his wife.
Option #1
This policy, like the whole life, has a GUARANTEED DB. As long as he pays those ten premiums on time, the guaranteed DB is $484,323. This is almost two and half times what the whole life contract starts out with from day one. That same DB figure is held from day one until age 120. No potential increase and no getting less than what you paid for.
Wow! What is the con with this option? The con is that this is purely a death benefit policy. There will be NO CASH VALUE (CV). Think of it as a term policy that never expires (as long as he pays the 10 premiums on time).
Option #2
This policy has a GUARANTEED DB of $450,304 from day one until age 120. It too will never change. Again, he just needs to make the ten premium payments on time. Why would anyone choose this policy over Option #1?
Because unlike Option #1 (with no cash value) there will “likely” be some cash value along most of the way. At age 85, there could be $140,000ish in CV. But at age 90 maybe only $50,000. Of course the policy can do better and have more CV for longer. It could also do worse – but the DB is always guaranteed no matter what.
Option #3
This option is an Indexed Universal Life (IUL) contract which is 100% of how I am planning for my own retirement (tax-free income).
An IUL’s returns are based on an index like the S&P 500. But unlike the index itself, the returns have a floor of 0% when the index goes down (no market losses) but also has a cap of say 13% when the markets do well. So when the market crashes, you experience no market losses, when it goes up, you get the full gain up to the cap. So if the S&P 500 rose 20%, the policy would only credit 13%.
If you have interest in learning more, my book “Stress-Free Retirement” explains IULs in detail and why I personally depend on them for my own retirement.
Although he is not interested in getting tax-free income, he is interested in the death benefit that has the potential to eclipse the other policies should he live as long as he thinks he will. And the fact that the cash value has the potential to grow much larger than any of the other policies is an added plus (in case he ever needs the cash inside the policy more than he needs/wants the DB).
However, this policy has no guaranteed DB after age 78 under the guaranteed side of the illustration (like the whole life side DB never growing – but always there). That initial DB is $337,100. About 1.5 times the whole life DB.
Now, two bad things have to happen from DAY 1 in this IUL policy for it to lapse at age 78. One of which is that the stock market has to go down for 14 years in a row (it’s never done that for more than 4 years). And the other is that the policy charges have to be raised to the maximum level the day you get the policy – which this company (and the insurers I like to use) has never raised policy charges on any policy… EVER. But both of those things can happen from the day he’d get the policy to lapse at age 78 (another words the world is falling apart and we have bigger things to worry about).
If ten years went by before BOTH the company potentially raised policy charges and the stock market fell for 14 straight years, the policy would last well into his nineties.
So why would anyone opt for this option? Well, assuming “the world doesn’t come to an end”, the CV should grow very nicely over time should you ever need the cash more than the DB. This policy has the most potential to do two things: provide a higher DB than the whole life one from the start and provide similar CV until his mid 80’s and much more in his 90’s.
I like to be conservative, so I assumed an average indexed return of 6.5% in making projections for this option.
From 2011-2015 this IUL would have earned 9.89%. From 2006-2015 it would have earned 8.28%, from 1996- 2015, averaged 8.32%, 1986-2015 averaged 8.41% and since 1957, (the year I was born) through 2015 the index averaged 7.54. The bottom line is I’m being pretty conservative and believe this policy will average closer to 7.5% to 8% over the next 15, 25 or 35 years.
At age 85, there might be $325,000 of CV. That is similar to what the whole life “might do”. However, the IUL had a bigger DB from the start. But by age 89, this policy starts dramatically exceeding the whole life (and Option 2) in both CV and DB.
At age 95 (at 6.5% avg. returns), there might be a DB AND CV of $590,000. At age 97, maybe $650,000. Again, I am using historically conservative returns in this and Option #2.
If I run the illustration at a higher level that barely approaches the last 25 years of history, the DB and CV at age 95 could approach $700,000 (@7%).
At 7.5% the numbers get exponentially better.
So with the IUL, there is more risk of a lower DB is he passes away in his eighties than options #1 and #2 (but higher than the whole life) and more potential CV and DB than the whole life and the other two options if he does not pass away until in his mid 90’s or later.
There you have it. I realize this is a very brief overview (I explained in much more detail with this gentleman in conversation).
Although there is no right or wrong answer, based on what little you have read, which option sounds best to you?
all the best… Mark