To be certain of having life insurance when you need it, you should acquire it before you need it. So an important factor to consider involves the advantage of acquiring your policy now -- while your health may be the best it ever will be. Of even greater importance, should something unexpectedly happen to you in the short term, your family will be protected.
Here is another reason for acquiring life insurance early: Harvey Pierce, MD, is an internal medicine physician. He is age 45 and has determined that the participating policy loan features of an Indexed Universal Life (IUL) policy can provide him with a superb retirement supplement. ?The death benefit of the policy, while certainly valuable to him and his family, is not the primary reason for his interest.
His adviser is encouraging him to purchase the policy now. ?Dr. Pierce asks, “I will commit to this, but does it really make much difference if I do it now or in a couple of years?”
This question can be easily answered using the Cost of Waiting module available on the Personal Insurance tab in the InsMark Illustration System.
We’ll compare the following two alternatives:
- $500,000 increasing death benefit IUL issued at age 45 (max-funded with 20 annual premiums of $23,717 -- just short of a MEC -- with policy loans starting at age 65).
- $500,000 increasing death benefit IUL issued at age 47 (max-funded with 18 annual premiums of $25,384 -- just short of a MEC -- with policy loans starting at age 65).
Here are the results:
| Insured: Harvey Pierce, MD | |||||
|---|---|---|---|---|---|
| Current Age: 45 | |||||
| Indexed Universal Life Plan A: Buy Now |
Indexed Universal Life Plan B: Wait Two Years to Buy |
||||
| Initial Policy Death Benefit: | 521,414 | Initial Policy Death Benefit: | 522,779 | ||
| Policy Premium: | 23,717 | Policy Premium: | 25,384 | ||
| Number of Premiums to Age 100: | 20 | Number of Premiums to Age 100: | 18 | ||
| Cum. Premiums at Age 100: | 474,340 | Cum. Premiums at Age 100: | 456,912 | ||
| Cum. Loan Proceeds at Age 100: | 4,068,766 | Cum. Loan Proceeds at Age 100: | 3,425,677 | ||
| Cash Value at Age 100: | 727,776 | Cash Value at Age 100: | 608,174 | ||
| Death Benefit at Age 100: | 1,227,776 | Death Benefit at Age 100: | 1,108,174 | ||
| Cash Value Gain at Age 100 by Buying Now: $119,602 | |||||
| Cumulative Loan Proceeds Gain at Age 100 by Buying Now: $643,089 | |||||
| Death Benefit Gain at Age 100 by Buying Now: $119,602 | |||||
| Premiums Saved by Waiting Two Years to Buy: $17,428 | |||||
In this example, Dr. Pierce would have to earn a pre-tax equivalent rate of return of 15.19% year in and year out on the difference in premiums and loan proceeds to match the results of buying now.
Click here to review the full illustration.
Dr. Pierce asks, “Does it only work out this way when you run it to age 100? ?How does it look at my life expectancy -- age 85 for example?”
Here are those results:
| Insured: Harvey Pierce, MD | |||||
|---|---|---|---|---|---|
| Current Age: 45 | |||||
| Indexed Universal Life Plan A: Buy Now |
Indexed Universal Life Plan B: Wait Two Years to Buy |
||||
| Initial Policy Death Benefit: | 521,414 | Initial Policy Death Benefit: | 522,779 | ||
| Policy Premium: | 23,717 | Policy Premium: | 25,384 | ||
| Number of Premiums to Age 85: | 20 | Number of Premiums to Age 85: | 18 | ||
| Cum. Premiums at Age 85: | 474,340 | Cum. Premiums at Age 85: | 456,912 | ||
| Cum. Loan Proceeds at Age 85: | 1,948,876 | Cum. Loan Proceeds at Age 85: | 1,628,362 | ||
| Cash Value at Age 85: | 953,993 | Cash Value at Age 85: | 920,175 | ||
| Death Benefit at Age 85: | 1,453,993 | Death Benefit at Age 85: | 1,420,175 | ||
| Cash Value Gain at Age 85 by Buying Now: $33,818 | |||||
| Cumulative Loan Proceeds Gain at Age 85 by Buying Now: $320,514 | |||||
| Death Benefit Gain at Age 85 by Buying Now: $33,818 | |||||
| Premiums Saved by Waiting Two Years to Buy: $17,428 | |||||
In this example, Dr. Pierce would have to earn a pre-tax equivalent rate of return of 14.06% year in and year out on the difference in premiums and loan proceeds to match the results of buying now.
Click here to review the full illustration.
Conclusion
In Dr. Pierce’s case, the Cost of Waiting analysis shows that the attractiveness of a short-term delay in funding is more than offset by a significant increase in after tax cash flow which is his primary reason for acquiring the policy in the first place.
It makes little difference whether you are presenting a very large or very small amount of insurance -- Cost of Waiting is very useful in helping clients understand that acting now has very favorable financial consequences. It’s a point that is difficult to convey without the mathematical comparison illustrated in this Blog.
Licensing
To license the InsMark Illustration System, 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.
Case Data Files
If you are licensed -- or become licensed -- for Version 17.0 of the InsMark Illustration System and would like to review the data input for the illustrations in this Blog, please email us at bob@insmarkblog.com, and we will get the Case Data file (Workbook) right out to you. ?Be sure to ask for the Workbook associated with Blog #50 - The Cost of Waiting.
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