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Three Ways to Pay for Life Insurance - With and Without Equity
Sunday, 24 November 2013 12:57

There are many ways to pay for Life Insurance, here are three more alternatives: One without and two with cash values.

Let's examine another hypothetical example on a male, age 35, that doesn't use any form of tobacco, and has average health, normal weight for their height. Face amount of the life insurance policy is $1,000,000.

Strategy: Own Policy After 30 Annual Premiums   No Equity With Equity, Same Premium  With Equity, Maximum Premium
Inital Premium (monthly)  $783 $783 $2,410
Total Premiums, Age 65 $281,880 $281,880 $867,736
Total Cash Value, Age 65 $0 $688,142 $2,821,429
Annual Tax-Free Income, Age 65 to Age 100 $0 $95,431 $376,413
Total Tax-Free Income, Age 100 $0 $3,340,085 $13,174,455
Total Tax-Free Income, Less Premiums Paid, Age 100 - PROFIT $0 $3,058,205 $12,892,575

What are the life insurance policies used for these three "strategies?"

No Equity:  This is a Universal Life policy, with a No Lapse Guarantee Rider, with guaranteed level premiums for 30 years, and coverage guaranteed to age 121. No premiums are required after 30 years, much like a 30 year traditional mortgage. As long as the premiums are paid on time, the policy stays inforce to age 121, and no more premiums after age 65. Essentially, this is Lifetime Level Term with Guaranteed Limited Payments. Once the 30 years of premiums are paid, the policy owner will own this policy outright, just like one owns a home after the mortgage is paid up. This policy has negligible cash values for the first few decades, and no cash values in later years. It is not an investment or savings program. As we noted in the previous article, this policy has a lower lifetime cost than any other kind of term life insurance.

With Equity, Same Premium:  This an Index Universal Life policy, with the same premium schedule as the Universal Life policy described in the previous paragraph. Instead of a guaranteed premium and guaranteed death benefit, this policy has a guaranteed interest rate on cash values of 3%, with excess interest credits that are linked to the positive changes in a market index. Excess interest has a cap and a floor. The cap can change up and down, depending on prevailing interest rates. The floor is always zero. Even when the market index is negative, the cash value of this policy is protected from losses. As you can see, the premiums during the first 30 years are the same as the Universal Life policy, but the Index Universal Life policy has substantial cash values at age 65. If the policy owner wants to they can use this cash value to supplement their retirement to the tune of $95,431 per year, via policy loans. As long as the policy stays inforce until the insured dies, those loans are tax-free.

With Equity, Maximum Premium:  This is the exact same policy as described in the second paragraph, but with one difference: The premium schedule is the maximum allowed under IRS Section 7702. By paying the maximum premium, the costs of the insurance are minimized over time. This produces a higher death benefit and a much higher tax-free income to supplement the policy owner's retirement. At little over three times the monthly premium produces almost four times as much tax-free income from age 65 to age 100.

Who Should Buy Permanent Life Insurance?

Anyone that has a permanent need for death benefits. 

This includes everyone that has saved for retirement using an IRA, or employer sponsored retirement plan like a 401(k), 403(b), or 457 plan, AND they desire to pass on their savings to the next generation, may find that they still need death benefits from Life Insurance. Why? Because all those dollars in an IRA or tax-deferred retirement plan are taxable upon death. While there are options to spread those taxes out over a few years, the one thing we know for certain about taxes is they are very likely going to go up in the future because our government is spending more than it brings in. It is impossible to predict what future rates will be with any certainty, and there is no guarantee that the existing options to spread out those taxes on retirement plans will exist after the next election.

Also, if you are eligible for a pension, and you're married, then you may also want to keep some Life Insurance coverage after retirement. Why? Because when a married person pulls the trigger on their pension, they have a tough decision to make. They can accept the maximum monthly pension amount, disinherting their spouse (this usually requires the spouse's signature), or they can accept a much lower monthly pension with a survivor benefit for their spouse. Any election that provides a survivor benefit for a spouse is like buying life insurance at retirement age, which it is much more expensive than it was when one was younger and working.

Finally, a lot of people over the age of 65 still carry a mortgage balance, or have other debts, like car loans, credit cards, and even student loans. Life Insurance may still be necessary.

If the death benefits of Life Insurance are still needed after age 65, or for more than 20 to 30 years, then Term Life Insurance may cost a lot more than permanent Life Insurance alternatives. That leaves us with one final question:

Who Should Buy Cash Value Life Insurance?

Anyone that has a need for permanent death benefits, AND/OR who needs an additional place to save and supplement their retirement income on a tax-advantaged basis. This is where a professional life insurance agent can help you make the best decision for your situation using the financial planning process.

If you want to work with a professional life insurance agent, then I would like to apply for the job. Call me today at (800) 680-5596 and leave me a message, or send me an email by clicking  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .


 

NOTE: These illustrated numbers on this page are hypothetical and do not represent any specific policy or company. Values are based on current market conditions at the time of publication, and are subject to change. Policy values will vary based on gender, age, nicotine usage, and other health factors. For a custom proposal for your situation, please call (800) 680-5596.

 

Brent D. Gardner, CLU, ChFC