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This Blog is my third response to the February 5, 2019, issue of The Wall Street Journal (WSJ) in which a flawed and misleading article appeared in the Journal Report section entitled The Case Against Permanent Life Insurance. The analysis was words only – no math – and concluded that term and invest the difference is a preferred alternative over cash value life insurance. |
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Two earlier Blogs (#187 and #188) deal with the “perm vs. term” argument by making a direct comparison of Indexed Universal Life (IUL) vs. term and an equity side fund in #187 and Whole Life vs. term and a taxable bond fund in #188. The comparison is significantly in favor of the permanent policies in each Blog.
This time I want to present the comparison in the context of an overall retirement plan using our Wealthy and Wise® System. The results are even more dramatic.
Case Study
Tom and Jodie Robinson, both age 35, are CPAs employed by the same large accounting firm. They have a good start toward their retirement with $100,000 each in their 401(k)s. They both plan to contribute the maximum amount of $19,000 this year, and their employer matches 20%. I assumed a 6.90% yield on these values. They want to take inflation into account when calculating future contributions limits. Click here for comments on the impact of inflation on retirement planning.
Click here for comments on Yield, Sequence of Returns, and Monte Carlo Simulations.
Their goal is to provide $250,000 of after-tax cash flow at retirement plus a 3.00% inflation adjustment while also maintaining a reasonable level of net worth.
As a supplement to their retirement planning, Tom and Jodie are considering a $625,000 IUL policy on Tom illustrated at 6.90%. The policy is max-funded with a $20,000 annual premium paid to age 65 with annual, participating policy loans of $195,000 a year thereafter.
Click here to review that illustration.
They have requested an alternative analysis of the following combination costing the same $20,000 annually to age 65:
- $625,000 of 30-year level term insurance (annual premium: $525)
- An equity account funded with $19,475 using a growth assumption of 6.90% plus a 2.00% dividend.
As voiced by so many people their age, Tom and Jodie have no expectancy of ever collecting retirement benefits from Social Security, so I excluded entries for that category. (The option to include Social Security benefits is available in the System.)
Below is a graphical comparison of the Robinsons’ overall net worth and spendable, retirement cash flow:
| Image 1 |
| Net Worth and Retirement Cash Flow |
| Strategy 1: Term Insurance and an Equity Account |
| vs. |
| Strategy 2: Indexed Universal Life |
Both Strategies produce the same desired spendable cash flow, but buying the term package turns out to be an $8.85 million, long-range mistake. And note that their net worth in Strategy 1, the term/equity combination, is in a death spiral.
When you develop a significant increase in net worth, a typical comment from a client is, “How about more cash flow?” There is an easy way in Wealthy and Wise to illustrate additional cash flow. For example, if Tom and Jodie are willing to reduce their long-range, illustrated net worth to the level of Strategy 1, you can illustrate additional cash flow of $97,435 a year for thirty years (age 65 to 95).
Below is the revised graphic for the adjusted net worth and the corresponding increase in cash flow, the latter being solely attributable to the IUL.
| Image 2 |
| Net Worth and Retirement Cash Flow |
| Strategy 1: Term Insurance and an Equity Account |
| vs. |
| Strategy 2: Indexed Universal Life |
| vs. |
| Strategy 3: More Cash Flow with Reduced Net Worth |
Strategy 3 net worth is also in a death spiral. Let’s be a little more conservative and reduce the additional, annual cash flow from $97,435 to $60,955 while increasing long-range, illustrated net worth to $8,080,274.
| Image 3 |
| Net Worth and Retirement Cash Flow |
| Strategy 1: Term Insurance and an Equity Account |
| vs. |
| Strategy 2: Indexed Universal Life |
| vs. |
| Strategy 4: More Cash Flow with Increased Net Worth |
Wealthy and Wise can easily calculate these changes. Click here to learn how.
Click here to review a selection of reports from this Wealthy and Wise® evaluation. There are 4 Comparison reports, 14 reports involving the term and an equity account, and another 14 dealing with the winning IUL solution. With any Wealthy and Wise presentation, I recommend that you have all the reports for a given analysis with you when you are visiting with a client or client’s attorney or CPA. The system backs up every number shown, and you never know which report you’ll need to have handy to answer the inevitable question, “Where did this number come from?” That’s why I provided all of them to you in this Blog.
Most Wealthy and Wise users select a few critical illustrations for the main report and put the balance in supplemental sections or an Appendix. More elaborate report organization can be accomplished (Table of Contents and Section pages) through use of the following prompt -- which I used for this Blog -- located on the bottom right of the Main Workbook Window:
Conclusion – The Key is in the Math
Listening to commentators like Dave Ramsey and Suze Orman (and now the Wall Street Journal) provides misleading, life insurance advice consisting of words only – no math. It can be disheartening, particularly for your prospects and clients. (I just read a words-only, term vs. perm Blog from MassMutual, a company that should be on top of integrating the math.)
I’m a little suspicious that maybe those in favor of permanent coverage are secretly so concerned that a mathematical comparison might turn out in favor of “buy term and invest the difference” that they don’t want to risk doing the math.
Buy term and invest the difference? Phooey! Given the “perm vs. term” mathematical evaluations in Blog #187, Blog #188, and this Blog, you should be well-armed to eliminate the “buy term and invest the difference” argument whenever it surfaces.
“I can only wonder if another asset with the same qualities [as cash value life insurance] would be implemented more frequently if it wasn’t called life insurance.”1
| 1 | From an article by Bill Boersma in the December 2014 issue of Trusts & Estates entitled “Life Insurance as an Asset Class”. |
Final Thought #1
I know that many of my readers are comfortable presenting the retirement cash flow features of cash value life insurance using a stand-alone illustration not integrated with a client’s other assets. Clients typically consider the premiums for these plans to be an expense. Changing to a Wealthy and Wise analysis creates a new learning curve because your presentation changes to an allocation of assets. Believe this: the wealthier a client, the easier it is to convince him or her of the power of integrating life insurance into their wealth planning with this type of analysis. With allocations from current assets as the source of premiums as shown in this Blog, it becomes a case of “comparing assets and cash flow if you do it -- with what happens when you don’t”. That is an entirely different presentation, and it can have compelling results for you.
The payoff? You will develop much higher average compensation per case and a client locked into your planning expertise, not just as an IUL policyholder. Tended carefully, you will likely have this client for life.
If you are new to Wealthy and Wise, I suggest using our Referral Resource (see below) to help you with your first few cases. Their help can be invaluable, and a commission split is not required.
Final Thought #2
As their income increases, Tom and Jodie will likely want to increase their saving toward retirement and its effect on retirement cash flow. They will need you to bring their plan up-to-date every year, and this means you not only have opportunities for additional planning strategies, you also have the justification for charging an annual monitoring fee for each review. Such fees are easier to negotiate if you charge a fee for the initial study. Look what you have accomplished for the Robinsons. Isn’t this worth a good-sized initial fee?
Blog #97 is an excellent resource if you are contemplating charging monitoring fees. Blog #98 includes a monitoring fee analysis in a Wealthy and Wise study which involves a premium financing case, but the logic fits any planning case.
Note: Before charging fees of any type, be sure to check your compliance rules and regulations.
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.
Files For This Blog
New Zip File Downloaders
Watch the video.
Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.
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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 #189, Click here for a guide to its content.
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
“Wealthy and Wise allows us to reflect practically ANY planning scenario we have encountered with clients. The ability to flow data easily into the program (without being so granular as to be unwieldy) is, in my opinion, one of the core strengths of Wealthy and Wise. Modeling alternate planning scenarios and being able to present the results in both graphical and numerical formats is certainly welcome, and I can’t imagine doing cash flow and estate growth projections without Wealthy and Wise.”
Mark A. Trewitt, CLU, ChFC, CAP, CFP, AEP, InsMark Platinum Power Producer®, Plano, TX
“Major cases we are developing have all moved along successfully because of the sublime simplicity and communication capability of Wealthy and Wise. I guarantee that the proper use of this tool will dramatically raise the professional and personal self-image of any associate who dares to take the time to understand it . . .”
Simon Singer, CFP®, CAP®, RFC®, Past President International Forum, InsMark Platinum Power Producer®, Encino, CA
“If you don’t get the client to distinguish cash flow from net worth, you won’t make the case sale.” In my experience, Wealthy and Wise is the only system that recognizes this important estate planning component.”
Stephen Rothschild, CLU, ChFC, CRC, RFC, International Forum Member, Saint Louis, MO
“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
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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.