Does Lowest Premium Mean Best Value?
When advising clients about legacy and estate planning, many financial, legal, and accounting advisors recommend insurance solutions, generally owned by irrevocable life insurance trusts (ILITs), to provide the needed liquidity to complete stated wealth transfer and legacy objectives. WHY?
- Life insurance provides an income and estate/ inheritance tax-free cash payment when owned by an ILIT.
- Life insurance enjoys an automatic step up in basis, and hence no capital gains taxes are paid on any gain over the amount paid (basis), when owned in a trust. This cannot be said about other capital assets that may have to be sold at a taxable gain to provide cash payments from a trust to beneficiaries.
- Life insurance is completely uncorrelated to all other capital markets and pays a lump sum cash benefit exactly when it is needed for exactly the expected amount.
- Life insurance benefits can be guaranteed for life.
Life Insurance Benefits and Guaranteed Returns
Long-dated guarantees and low premiums are important to many, if not most, permanent life insurance designs. However, if the advisor is simply recommending a solution based on the lowest premium available, he or she may be missing additional value for the beneficiaries to whom the trustee owes a fiduciary duty.
Consider a 60-year-old male client, a best-class risk, who is applying for $1MM of coverage. He would like a policy that is paid-up after 10 years and fully guaranteed to age 100. The advisor obtains various quotes from insurance companies and finds that Carrier A will provide the guaranteed coverage desired for the lowest premium at $29,868 annually for 10 years. The same $1MM of guaranteed coverage at Carrier B costs $36,626 annually for 10 years for the same guarantees to age 100. Easy decision, right? Not so fast!
Carrier A’s product is the type of Guaranteed Universal Life (GUL) contract that you may be familiar with – it essentially behaves like a level premium term contract to age 100. Carrier B’s product is a protection oriented Variable Universal Life (VUL) solution that provides the same guaranteed coverage to age 100 BUT offers far more flexibility and upside than the GUL solution.
Lower Premium or More Upside
Would your client rather have the lower premium option with no market participation or upside potential, OR a contract that has the potential to accumulate significant cash values,
provide future opportunities for 1035 exchanges (to other solutions should needs change), a cash payment exit strategy or higher death benefits if the cash value growth causes a death benefit increase? Let’s look at some numbers to compare:
- Carrier A – $29,868 guaranteed level 10-pay premium
- Carrier B – $36,626 guaranteed level 10-pay premium
Carrier A certainly wins on premium and hence a higher rate of return at death. HOWEVER, the cash value, death benefit, and IRR on death benefit make a compelling case for Carrier B. The table below shows how each policy would perform under a few different market conditions – a 0% annual return, a 7% annual return, and tracking the performance of an equity fund with historical performance data (See the full comparison linked HERE).
As previously stated, Carrier A requires a guaranteed premium for 10 years with a guaranteed death benefit to age 100, while Carrier B requires a higher guaranteed premium for the same 10 years.
Illustration Rates Are Sequential
The problem with life insurance quotes, and much of the analysis used to make recommendations, is that illustration rates are sequential. In a GUL, it is an irrelevant fact because the interest rate assumption does not impact the performance of the contract. IT IS GUARANTEED – the owner pays a stated premium as due for 10 years and the insurance company pays the death benefit – period, end of story. BUT in a VUL, sub-account/ investment performance is not sequential, even though it is illustrated as such, for example the 7% sequential return as seen above. Combining the two, however, a contractual guarantee for a death benefit with a market-based upside potential, is the best of both worlds!
Historical Lookback Analysis
Many advisors are not aware that a historical lookback is available for this analysis, as seen in the chart above. The Equity Income Fund returns seen in the fourth column from the
right of the analysis is the actual performance of that sub-account. It is the combination of a guaranteed death benefit WITH this potential upside which needs to be considered in any insurance solution.
While Carrier A’s guaranteed premium refund option provides meaningful surrender values in select years, Carrier B provides meaningful cash values even at a 0% annual return. Looking at a 7% projection or the historical lookback, it’s not even close! At age 88, a reasonable life expectancy for a healthy 60-year-old, the historic lookback projects a $2.15MM death benefit – more than twice the death benefit, and an IRR which is two and a half percentage points higher than the GUL!
Maximize Upside Minimize Risk
In legacy and estate planning, the key metric for the success of any fiduciary is to maximize the upside potential for the beneficiaries of an asset, while minimizing risk. Had this client bought this asset 28 years ago, and assuming death at age 88, they would have had a guarantee of a 4.33% tax free return with actual performance of 7.73% – Tax Free.
As a final comment, because Carrier B’s contract is fully guaranteed to age 100, the client and his or her investment advisor are free to choose aggressive growth-focused allocations to capture as much market upside as possible, leading to potential future death benefit increases.
AgencyONE’s Case Designers are experts in the analysis required to ensure that your clients risk planning needs align with their financial goals.
Please contact the AgencyONE Marketing Department at 301.803.7500 for more information or to discuss a case.
*For Advisor Use Only
will face market volatility, interest rate risk, withdrawal rate risk, sequence of return risk and longevity risk… just to name a few. The list of challenges that a retirement plan faces can seem daunting, but luckily you can help your clients insure against many of the challenges that they will face during a retirement that could last 30 years or more. In many cases, a Deferred Income Annuity (DIA) or a Fixed Index Annuity (FIA) with a lifetime income rider (LIR) [also known by catchy names like Guaranteed Minimum Withdrawal Benefit (GMWB) or Guaranteed Minimum Income Benefit- (GMIB)] may be an appropriate solution to hedge against longevity. This blog post addresses Annuities & planning for longevity.
A Deferred Income Annuity (DIA) works similarly to the Single Premium Immediate Annuity (SPIA). The client purchases a policy with a lump sum, 1035 or qualified transfer which then generates a stream of income that lasts as long as the client is alive. A DIA differs in that, rather than providing an immediate income stream, the client chooses WHEN they want their payments to begin.
on a cap or participation rate. Importantly, the client’s principal is protected from market downturns with a 0% floor. A Lifetime Income Rider (LIR) creates a second bucket of values in the policy that grows at a guaranteed crediting rate. At a time specified by the client, they can choose to activate the LIR and receive guaranteed payments for life. The payments are simply a withdrawal percentage (that increases with the client’s age) multiplied by the LIR amount which continues to grow during the deferral period. Once the distributions begin, the account value is reduced, but remains available for the client to access should they need. The LIR provides income for as long as the client is alive, even after the account value reaches $0.
Jennifer is a 60-year-old female who is at a point in her life where she needs to take her retirement planning more seriously. Recent market fluctuations have caught her attention. As her planned retirement nears, she and her advisor decide that now may be a good time to de-risk part of her portfolio and purchase a policy to create a guaranteed income stream for life. She has several relatives that have lived well into their 90s and is quite concerned about the possibility of outliving her money – especially after learning that someone her age has a 1 in 5 chance of living to 93 and a 1 in 10 chance of living to age 96!
Early each morning, I usually read financial articles and recently came across one by SmartAsset™ entitled 
averaging around 2% per year, so not an insignificant amount of the total return on equities. Dividends can be taxed as qualified – at the capital gains rate, or non-qualified – at the ordinary income rate.
And annuities? Yes, they are taxed also. Accumulated gains are distributed and taxed first as ordinary income, then basis, unless they are annuitized and only then does the annuitant get a portion of each payment distributed tax free, as calculated by an exclusion ratio on each annuity payment. At death, all gains are taxed as “Income in Respect of a Decedent” and subject to the ordinary income tax rate of the beneficiary, although a 5-year stretch may be implemented.
I strongly agree with this statement, but the conversation goes well beyond just capital gains taxes, as proposed by SmartAsset™. The complexities of asset “allocation” (the prudent amount of different asset classes) and asset “location” (the prudent amount of different assets such as non-qualified investments, qualified investments, annuities, insurance) should be paramount to the advice provided by a fiduciary financial advisor.
with protecting your body from viruses, bacteria, fungi, and any other foreign invader that is attempting to do harm through infection, illness, etc. In some individuals, their immune system ends up attacking the body’s healthy cells for no apparent reason. The result of that attack is an autoimmune response by the body leading to autoimmune disease when healthy tissue is affected. Unfortunately, there is still no clear understanding as to why this happens, although there are theories, but, again, no definitive answers. However, what we do know is that there are several risk factors that can contribute to the development of autoimmune diseases. To name just a few, genetics, obesity, smoking, and even certain medications can all play a role.
Systemic lupus erythematosus
related to the body producing too little (hypo) or too much (hyper) thyroid hormone. The list of potential symptoms for each are varying, but they have quite a few risk factors in common. Women, over age 60, with a personal or family history of other thyroid problems and/or other autoimmune diseases (i.e., Type I diabetes) are at a greater risk of hypothyroidism or hyperthyroidism when compared to the overall population. 
Rheumatoid Arthritis
skin but can develop into psoriatic arthritis. The skin presentation of psoriasis tends to appear as red, patchy lesions with a silvery scale. They can be tender to the touch or itchy. If an individual with psoriasis notices joint swelling and pain, it is likely that their disease has developed into 
There are many hypotheses as to why women are more prone to autoimmune diseases than men, and there is an abundance of research available surrounding this topic. One 2020 review from 
I recently spoke with a friend whose father just transitioned into a nursing home. Since I have a parent in a similar situation, we were able to talk about the costs of long-term care coverage and the “crazy” overall expense. The 
you ALREADY NEED the coverage. Start planning NOW. The younger you start the lower the costs are to obtain LTC coverage. However, for some, the money is not available early on to buy the coverage. Other financial obligations such as kids in school, new drivers in the household, college tuition, and other expenses may take priority over funding LTC coverage. My buddy and I quickly agreed never to go into a managed care facility, dropped the subject, and switched to something more fun to discuss.
Current options to obtain LTC coverage include stand-alone products, life products with LTC/Chronic riders, and hybrid products. These options give the client a variety of ways to approach obtaining coverage. I have illustrated countless scenarios over the years and am aware of a carrier partner that offers a joint Universal Life solution that can provide LTC benefits on both clients (spouses). This product can also be guaranteed if needed (depending on client ages). Did you know that you can write this joint policy on a PARENT AND CHILD as the insureds (depending on client ages)?
