When you measure the cost of funding life insurance by dividing the face amount of the policy into the cumulative annual premiums, the awesome leverage of life insurance becomes readily apparent.
For example, if the annual premium for $100,000 of life insurance is $1,200, and you divide the $1,200 by $100,000, the discounted dollars calculation results in an answer of $1.2 cents for each $1.00 of death benefit in year 1
In year 2, it goes to $2.40 for each $1.00 of death benefit, but guess what? ?It never approaches $1.00 for each $1.00 of death benefit. Even if you apply a use of money factor, it typically won’t reach $1.00 per $1.00 until well past life expectancy -- and as you will see below, in some cases it never comes close to reaching $1.00.
Steve Savant and Don Prehn do a nice explanation of this concept in their video below entitled “Dollars of Benefit for Pennies of Cost”.
If you’d like more detail using both Universal Life and Indexed Universal Life, see my Blog #48: Dollars of Benefits for Pennies of Cost. ?It includes a look at the illustrations for both Universal Life and Indexed Universal Life.
Coming Attractions
Next week in Blog #73, Don and Steve will discuss how charitable giving can be impacted by the Discounted Dollars strategy.
Conclusion
The discounted dollars approach can be a very effective, yet simple, tool to feature the magic of 21st century life insurance. And it certainly warms up an interview where, without it, you and your client have to hunt for the current assumption numbers buried deep in a 20-page carrier illustration.
Important Note: ?The Indexed Universal Life illustration featured in the video and Blog #48 includes participating policy loans (cash values securing these loans continue to participate in whatever interest is credited to the policy). ?This feature can produce significantly better results than fixed loans. ?For a demonstration of this, see my Blog #52: Participating Loans vs. Fixed Loans.
Important Note: ?Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner. ?Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.
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