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

Editor’s Note:  Blog #187 featured Indexed Universal Life vs. Term Insurance and an Equity Side Fund.  There were amazing results in favor of the IUL.  With Blog #188, we are comparing Participating Whole Life vs. Term Insurance and a Taxable Side Fund with the Side Fund supported by a hypothetical bond fund.  Some subscribers received an early version of Blog #187 that also included a Whole Life comparison.  Blog #187 has been changed to delete the Whole Life reference so we could develop it more thoroughly here in Blog #188.

In the February 5, 2019, issue of The Wall Street Journal (WSJ), there is a flawed and misleading article in the Journal Report section entitled The Case Against Permanent Life Insurance.  Due to the reputation of the WSJ, you will soon be fending off criticism of permanent life insurance from your prospects and clients.  We developed Blogs #187 and #188 to help you counter such criticism.

Case Study

Participating Whole Life vs. Term Insurance and a Taxable Side Fund

Jack Baker, age 45, is in a marginal federal and state income tax bracket of 35%.  As part of his retirement planning, he intends to purchase $765,000 of Participating Whole Life with premiums of $20,000 a year for the first 20 years; $0 after that.  The policy is intended to provide:

• Protection for his family;
• Annual after tax cash flow of $29,694 a year from age 65 to 95.

One of Jack’s advisers asks, “Why would you spend $20,000 when you could get $765,000 of 20-year term insurance for a little over $800?”

If that’s all there is to it, he shouldn’t.  But, as always, there is no effort to show mathematically why term insurance is a preferred choice?

We compared Jack’s $765,000 of Whole Life to $765,000 of 20-year, level term insurance costing $820 a year, the lowest term rate we could find.  We assumed the term insurance package includes a Taxable Side Fund (e.g., a bond fund) investment of $19,180 a year, the difference between the $20,000 premium for the Whole Life and the $820 premium for the term.  We scheduled a yield on the Side Fund of 4.00% as well as a 1.00% management fee.

Check out the following graphic:

Image 1

Participating Whole Life

vs.

Term and Taxable Side Fund

Click here to review the comparison illustration in detail.

The Taxable Side Fund is unable to deliver the same $29,694 from age 65 to 95 to equal the $29,694 cash flow from the Whole Life.  It doesn’t come close to doing so – and is only 59.9% as competitive, collapsing at Jack’s age 81.  To match the Whole Life, the Taxable Side Fund needs a yield of 7.37%, 337 basis points higher than its assumed yield of 4.00%.

The death benefit of the Whole Life remains in force long after the term insurance expires at age 65.  All this occurs with no life insurance premiums scheduled by Jack during his retirement years.

There is no Comparison of Plan Costs reports for this illustration as there is for the Indexed UL comparison in Blog #187 as the manufacturers of Whole Life are not particularly disclosive as to its specific internal costs. (If you get your carrier to release them, add these numbers to your data via the Comparison of Plan Costs prompt located on the Basic Data tab of the Permanent vs. Term module.

Click here for more information and a video about this new Comparison feature.

Query

Why use a taxable side fund as part of the term alternative instead of the equity side fund used with Indexed UL in Blog #187?

It is appropriate to reflect a more conservative side fund with the more conservative Whole Life policy.  If an equity account is desired, the Term and Equity Side Fund will probably outperform the Whole Life.  In this case, the recommendation in Blog #187 regarding use of Indexed Universal Life would likely be more appropriate.

Which Life Insurance Policy is Best for Your Client?

There is no “best” as that depends on each client’s risk profile.  A more conservative client may prefer Whole Life due to its guarantees; a more aggressive client may favor Indexed UL and its opportunities for higher returns.  Our InsMark Compare¹ module can be of assistance in helping a client decide which policy type is personally preferable.

1	The InsMark Compare module in the InsMark Illustration System provides you with complimentary access to the FINRA-approved Risk Tolerance Questionnaire by Backroom Technician® provided by Advisys, Inc.

Below is a graphical comparison of Jack Baker’s policy alternatives, Indexed Universal Life or Participating Whole Life, as described respectively in Blog #187 and Blog #188:

Image 2

Indexed Universal Life or Participating Whole Life

Click here to review all the reports and graphics for this InsMark Compare illustration.

One feature that amplifies the results of the retirement cash flow in favor of the Indexed Universal Life is participating policy loans in which cash values securing policy loans continue to share in the indexed return.  With fixed loans (where this does not occur), the after-tax, retirement cash flow from the indexed policy drops to $55,000 from $75,000, a 26.67% reduction.

Conclusion

“Buy term and invest the difference” continues to be a siren song of the uninformed.

Cash value life insurance is an exceptional alternative to “buy term and invest the difference”.  InsMark illustrations can help you convey this critical point to your clients and prospects – and maybe even The Wall Street Journal.

If cash flow is in short supply or if the need for coverage is for a brief period, term insurance can make significant sense; however, for longer intervals, if cash flow exists to buy what you want, a cash value policy is the only logical choice.

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.

Digital Workbook Files For This Blog

Before downloading and reviewing any files, be certain you have installed the most current updates to your InsMark System(s).  Do this using Live Update available under Help on the main menu bar of the System or this icon on the main menu bar: Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark Systems.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

If you obtain the digital workbook for Blog #188, Click here for a guide to its content.  It will be invaluable to you.

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center online or contact Julie Nayeri at Julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President — Sales, at dag@insmark.com or (925) 543-0513.

For help on how to use InsMark software, go to The Quickest Way To Learn InsMark.

Testimonials

“InsMark helps us help our clients understand their money and their choices.  I always learn something new that changes what we do and how we can do it more efficiently.  That translates to a better bottom line for us and for our clients.  It’s making more money for everyone – just by pushing InsMark buttons on the computer.”
Kay Corbin, CLU, ChFC, InsMark Platinum Power Producer®, Phoenix, AZ

“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’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!!!  It uses solid mathematical comparisons that prove the validity of our insurance solution!!!”
Frank Dunaway, III, CLU, Legacy Advisory Services, Carthage, MO

“The reason I use InsMark products is because they are so good at explaining financial concepts to all three parties: 1) the producer trying to explain the idea; 2) the computer technician trying to illustrate it; 3) the customer trying to understand it.”
Rich Linsday, CLU, AEP, ChFC, InsMark Platinum Power Producer®, Top of the Table, International Forum, Pasadena, CA

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

Important Note #2:  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.

Important Note #3:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner when policy loans are present and net cash values are so low that the income tax on the gain on surrender (calculated using gross cash values less basis) is more – often significantly more – than the net cash surrender value.

This lurking tax bomb can be present in all forms of whole life and universal life where policy loans of any type are utilized.  It can be avoided, and you, the producer, are key to making sure your clients are aware of how to sidestep it.

A tax bomb can be avoided if the policy is neither surrendered nor allowed to lapse, since the policy death benefit wipes away the income tax liability.  The foundation of this special treatment is IRC Section 101.  This statute provides that the proceeds of life insurance maturing as a death claim are exempt from federal income tax.  This applies to the full death benefit, including any cash value component whether loans exist or not.

Can your clients remember these facts years into the future?  If they are incapacitated, will family members understand the issues?  It is probably best to file a short note with the policy – something like this (although your compliance officer will likely have preferred language):

If/when you take policy loans on this policy, be sure to talk to your financial adviser before surrendering or lapsing the policy in order to anticipate unexpected tax consequences that may otherwise be avoided.

Some life insurance companies have concierge units that monitor loan status at the point of lapse or surrender, and you would be well-advised to select an insurance company with this capacity.  To be effective regarding the tax bomb, such carriers need to be proactive in their client relationships, not merely reactive to client inquiries.  I hope that ultimately the policyholder service division of all life insurance companies will bring this potential liability to the attention of those surrendering or lapsing policies, particularly those policies with 50% or more of the gross cash value subject to outstanding loans.