BUYING GUARANTEED INSURANCE THAT FITS MANY CIRCUMSTANCES- PERSONAL OR BUSINESS
Errold F. Moody Jr.
January 2003
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The first issue is what is insurance supposed to do? It's supposed to take care of a real or perceived risk in the future. It is NOT supposed to provide all sorts of cash alternatives- though that is what has been added over the past 40 years. That said, the savings element is viable for those people who wouldn't save a dime anyway. Better that a whole or universal policy forced them into putting something away for a rainy day well into the future. The unfortunate part of that argument is that the argument is inherently flawed due to human nature. Once people who have limited assets review the policy later in time and see the cash value (or the much higher costs of insurance versus term rates), they simply terminate the policy (25% of purchasers relinquish their cash value policies in the first two or three years. 50% terminate in the first 10 years) and take the cash (which is income taxable beyond the premiums paid). There are, obviously, those other purchasers who become aware that they shouldn't have bought a cash value policy in any case- savings or otherwise- and they simply opt out once the realization hits. So the major winners are the agents/advisors who make the commissions/fees.
That said, what can you do? Well, if you are younger, on a limited budget, don't have much in assets, etc., buying term provides a lot more coverage for the buck than anything else. If you died in the interim, the policy face value will not (probably) create an estate tax issue due to an estate that is under the set limits. The problem with term, however, is that it will expire in (normally) a maximum of 30 years (some may last longer but may not be guaranteed for the set period of time. Even some of the 10, 15 and 20 year policies may actually guaranteed for only a shorter period of time (do some homework) so it cannot be used as a permanent substitute for long term coverage or for estate planning. Additionally, most of the level term policies will cover only till age 80 simply because of the additional risk of dying after that. So if you did purchase a policy at age 60 with a 20 year level term, you need to recognize that the only "benefit" from the policy was to die within that time frame and that there would be NO coverage beyond that. So one needs to ask, why was the policy purchased in the first place? Why was only a 20 year span considered? If that fits the need, so be it. But using term for long periods means that you can try to extend the term insurance by reentering at the higher rate (due to your older age) But the cost may be prohibitive in the later years of life, if not impossible. For example, the level term policies may let you convert to a permanent policy without evidence of insurability but not past age 70/75- and it will cost a lot more than opting for a permanent policy earlier (assuming one purchased the right type of policy to begin with.) If you are simply trying to extend a level term policy, evidence of insurability is undoubtedly required. If you have become "sick" in the interim, the rates would probably be so high you probably would not be able to afford them.
In essence, you need to review for what purpose and for how long you need/want insurance. If you need/want a policy that extends to age 95 or 100, trying to invent some "scheme" with a term policy doesn't make it. Converting to a permanent policy later on may be prohibitively expensive and, in any case, the policies are NOT GUARANTEED. You have just put the risk back into insurance.
However, let us consider a life insurance strategy for those above 45 and where permanent insurance is either mandatory or probable. And why do I say probable? Because of the estate tax considerations. If I use an example of a $1,000,000 policy, there is literally an ipso facto issue of a large estate at least at a later point in life- in other words far beyond the lifetime exemption. Basically, if you are buying a large policy, the assumption is that you have some decent amount of assets or income to insure for. Let's say that you are 50 years of age and have a $1,000,000 estate now (house, 401(k), fishing gear); then at a 7% after tax rate, it would be valued at age 80 at $7,600,000. Add in another $1,000,000 for the life insurance policy and you have a whale of a lot of estate tax. But the point to this limited commentary is that the life policy is INCLUDED in the estate and would be taxed at over 50%. That's ludicrous. Can you get rid of that policy during life once you reach the higher asset limits? Yes, but you need to use up some of your lifetime gifting exemption to gift it over to a Irrevocable Life Insurance Trust. The value for gift purposes is essentially the cash value- though to be more specific, the interpolated terminal reserve. For example, if you had a $1,000,000 standard whole, universal or variable policy and $400,000 cash buildup, then your lifetime exemption would effectively drop from $1,000,000 by $400,000 (the interpolated value) to $600,000 (depending on which year the gift took place). You just shot yourself in the foot since, when you die later on, the excess estate is taxed at higher estate tax rates. That therefore means that the use of a standard cash value policy violates most common (and financial) sense. Better read that last statement again. I just said that the sale of standard large cash value policies to those people who already have significant assets- or those that are projected to have large amounts of value during the later years of life- is almost like throwing money away.
2001 commentary- the above is valid IF you should die prior to 2010 since Bush has extended the estate deduction to high limits up to that time and a full deduction at 2010 of any amount. It also might apply to assets after 2010 since the current law indicates that in 2011, everything then reverts back to the old laws. But as far as I am concerned, not a chance. After 2010, laws will be enacted that allow the full deduction as under 2010 since a reversion back to a law effectively 10 years old just wouldn't make any economic or political sense (though I am not saying the law made sense initially.) It is my position that any taxes that are needed then will come through added social security taxation for wealthy retirees or the fact that the wealthy will not get any social security at all. But they will not revert the estate tax back to a prior decade. Just in case, the above commentary addresses the problem of a large estate with insurance included.
(2003 comment- with the Republicans firmly entrenched, the full exemption from estate taxes should be confirmed in full.)
In such regard, this article no longer really addresses that the insurance will be included in an estate from 2010 onward. It will merely reflect the use of the standard cash value policy and whether it produces the results that one should anticipate from a policy through the cash value buildup of whole life, universal or variable. It is true that the cash value buildup is available for "tax free" loans later in life. But, it costs a lot of extra money to be able to get that cash buildup. One can argue that the idea of a standard whole or universal life policy is actually to gain internal wealth that can be utilized later on. Perhaps for a limited few, but I submit that insurance is what I indicated on the front page-
Insurance, properly utilized, is nothing more than a pool of money to reimburse those that have a misfortune befall them. The others simply get the emotional protection for a loss that never occurs. In essence, therefore, you hope to never use it.
It is a contract that provides assistance in case of the (early) demise of another. But the extra cash value buildup is a throwback to earlier years where the marketing of the insurance companies and agents indicated that the cash value was a definite "need". I submit otherwise. I want insurance to be insurance- effectively nothing more.
So what are the alternatives? As stated, buying term insurance. Cheap, just insurance and a low/negligible interpolated reserve. But they don't last till age 100- some you can't get after age 55 anyway so they are effectively not viable unless you are "guaranteed" to die within the allotted time. There are those "planners/agents" who would say you could just re-enter the policy at the expiration since they are guaranteed renewable. True, but to reiterate, the problem is if your health has declined later in life (most assuredly), then the insurance company simply ratchets up the cost to reflect the closer time of dying. So they become prohibitively expensive. O.K. so now what? After a lot of phone calls to all types of companies, I have concluded that a type of policy could/will solve many problems of the cost of insurance was well as the lack of guarantee till age 100 .For example, you CAN buy a universal life policy will guarantee a policy up to age 100+. The key to that last sentence is GUARANTEE. It's called no lapse insurance- as long as you pay the premiums, it doesn't lapse. It's not designed for cash value (though there is internal growth- you just don't pay any attention to it unless you wanted to terminate the policy early by taking all the money out (though other alternatives would be available as in "regular policies (extended term, etc.)) It's just insurance, period. That's what insurance is all about folks- guaranteed death benefit to a certain age. You can have every other agent now tell you how you can get a universal or variable policy at a "net" lower cost (but that "universally" means that neither you nor the agent know how to invest)- but only based on perceived projections into the future. I have used NO projections- interest rates, mortality, company expenses- just insurance.
Lastly, regardless of what type of insurance you have, let's say you have reached age 70 and do NOT have any estate problems due to other planning opportunities that have been utilized or the need for the policy no longer exists. As with all types of insurance, you can simply surrender the policy for the cash value or utilize one of the surrender options- paid up insurance, reduced term and a few others. But what is perhaps far more viable - particularly with business insurance where key man or partnership insurance is not longer needed- is simply to SELL the policy outright. That's right- sell your policy to someone else who is willing to continue the payments and get the face value at your death. (The insurability interest exists at the time of sale of the initial policy- it does not have to exist later on.) So, let's assume you have made payments on the $1,000,000 policy from age 50 to 70 at $12,100 per year. That amounts to $242,000 total costs. Surrendering the policy- and assuming no cash value- and you get effectively nothing. But let's say your actuarial lifetime as determined by a physician is another 10 years. Maybe an investor would pay your $250,000 for the rights to your policy. Why would anyone do that? Because even if they did pay the $12,100 for the next 10 years when you did die, they would end up with a net return over 11%. Of course, no one can know what the policy would be worth many years hence, but assuming you did nothing more than getting your money back for the premiums paid, what is wrong with that?
SUMMARY: These policies can be used in most situations calling for the use of permanent insurance but where the cash value is not required or needed. In other words, the purchaser simply wants what insurance is designed to do- provide a GUARANTEED amount upon a certain occurrence. There is no need to try to analyze a policy illustration to (supposedly) determine what the policy will earn internally since the cash availability is incidental to the use of the policy to begin with. If there is cash value, it will impact the gifting elements of a policy, but it almost assuredly would be less than almost all other standard polices sold for the cash buildup.
To all of you consumers or advisors, this article and the use of insurance follows my basic premise of investing. Keep products separate, simple and cheap. Since I am not licensed outside California and don't know any of a reader's needs anyway, I do not suggest people buy a specific company policy. But the policy(ies) do exist, do what I have indicated and are available nationally. You are NOT going to find this policy directly on the internet. You probably won't find it with 99 44/100% of the agents. So you are going to have to hire someone who knows what they are doing in the insurance arena. Or don't hire anyone that's any good and simply pay a lot more money for insurance that have NO guarantees. It's your money.
Addendum: In January 2003, I was requested to find a "good" rate for a $7,000,000 policy on a healthy 63 year old woman. I contacted a major brokerage firm and got a quote for $205,300.
But here is my point about having a license and getting insight to companies and agencies all over the country. I was able to find another quote of $96,740 GUARANTEED till age 120.
Addendum: In February 2003, I was requested to find a $1,000,000 policy on a 75 year old healthy man. It was $35,150 payable to age 100 but guaranteed to age 120.
Match that up against any other permanent insurance. No load insurance- that generally offered by fee only planners- is far more expensive with no guarantees.
Universal policies designed for life are about 40% to 60% less than whole life. (2003) However, the cash value is not guaranteed. It's just insurance all the way to age 120.
Male, Best Class, $500,000
| Age | Whole Life | Universal life with No Lapse Guarantee | UL cost as a % of Whole Life |
| 20 | $3,445 | $1,248 | 36.2% |
| 30 | 4,400 | 1,845 | 41.9 |
| 40 | 6,930 | 3,063 | 44.2 |
| 50 | 10,885 | 5,132 | 47.1 |
| 60 | 18,080 | 8,690 | 48.1 |
| 70 | 30,920 | 16,109 | 52.1 |
| 80 | 60,200 | 33,013 | 54.8 |
If you want insurance for your life, this is what you look for. It's a commissionable product. It beats low load, non commissionable products by a mile- assuming you want insurance. Notice that there is no reference to cash value or loans. That's because the cash value is irrelevant. The only time you take money out is if you wanted to terminate the policy. Simple and cheap.
Load versus no load insurance. (2004) Almost all no load mutual funds will have lower expenses than a loaded fund and, all other things being equal, outproduce a loaded fund.
But what about insurance? The initial position taking by consumers is that a no load or load load policy will outproduce a commissionable product. That's certainly what the illegal and incompetent fee only planners would have you believe. Invariably they point to Ameritas as the premier no load policy that consumers should buy since there are no commissions. On its face, it seems logical. But insurance policies are not transparent. You can compare Ameritas to other loaded commissionable products and they will beat most of them. The problem is that you are not buying a guaranteed policy. They sell the standard universal life policy that may rise in value depending on interest rates. But other costs may rise as well- mortality, expenses and so forth.
My point is, if you want insurance, buy insurance. Period. Just buy a no lapse policy. As long as you pay the premiums, you have your insurance.
Here is the difference:
Ameritas: 60 year old, preferred male, $500,000- $12,480 annually for life. Not guaranteed
Same but guaranteed for life 21,261
No Lapse company 1 7,062
2 8,140
3 7,908
There you have it. Yet another reason why the fee only planners do such a disservice to the public. Guaranteed commissionable insurance is $4,000 to $5,000 annually less than the most marketed no load. Do the math.
Guaranteed Insurance, * Based on $1,000,000 death benefit guaranteed to age 100, * Male preferred best rate class (2004)
Age 30 Age 40 Age 50 Age 60 Age 70
No Lapse $3517 $5603 $8446 $13698 $23711
Company A $4740 $7140 $9880 $15450 $26970
Company B $4200 $6840 $10100 $15820 $26280
Company C $4488 $6796 $9920 $15689 $26562
Company D $4305 $6439 $9489 $15190 $25441
Company E $3848 $6058 $9294 $15094 $27009
Check those rates against any no load non guaranteed products offered by unlicensed "fee only" only planners. Such as Ameritas for example- which would tend to be several thousand dollars more annually.