Underwriting - SPL vs monthy pay

May 11, 2019

  1. pfg1
    Offline

    pfg1 Guru

    Posts:
    1,473
    Likes Received:
    268
    State:
    Virginia
    LOL, Bob. You are acting like nobody on here knows anything but you.

    Obviously insurance always wins if they die early. But if that client who's 60 now lives to 90 or 100, (which is quite possible these days) the ultimate net is about half of that $1million, the rest of that $1m was spent buying the insurance. If the same $14,510 was invested over that 30-40yrs... even at a conservative rate, it would crush that.

    Its not an argument, and I'm not saying insurance isn't a good thing - it is. But insurance and investments are 2 different things, and should be used accordingly and rarely directly compared....imo. They are both great for what they do, and I believe most people should have both.

    AND... everything you are saying has really nothing to do with the OP's question.
     
    pfg1, May 13, 2019
    #11
  2. Allen Trent
    Offline

    Allen Trent Guru

    Posts:
    408
    Likes Received:
    278
    Ok, now I understand that I missed 3 or 4 assumptions you made in your original statement.

    1. you assumed the person could get a guaranteed rate of return that would generate $14,510 per year from their $424,000, therefore still having the exact $424,000 in tact when they die & thus $1,424,000 like they would with the Single Pay
    2. you assumed the don't owe any income taxes on that $14,510, but if they are invested in a taxable account such as a bank CD or deferred annuity, they would have to make closer to 5% guaranteed to net the 3.5% needed to generate the $14,510 premium due (assuming 30% fed/state tax bracket)
    3. you assume the client can always pay the premium in the future even if they lost money if the $424,000 was invested more aggressively or if they entered a nursing home & had to pay the premiums in addition to paying for the nursing home, etc.

    Again, I am a big believer in both of these types of plans, I just wasn't following your math as it left out a few of those assumptions I wasn't initially tracking with. It can definitely work, especially if you used maybe a EIA or VA with a Lifetime Withdrawal benefit that is 5% or higher to assure the premiums are always

    I still tend to like the idea of paying it all up front if they can. having the cash in the policy can help minimize internal costs on the life policy in addition to having the cash in the policy without worry of the person forgetting to pay when they are 97 years old & maybe dealing with dementia, etc
     
  3. Lloyds of Lubbock
    Offline

    Lloyds of Lubbock Super Genius

    Posts:
    132
    Likes Received:
    54
    State:
    Florida
    Not every company underwrites based on net amout at risk.
    Many underwrite on full face amount because that is what will be paid out.
    So the answer is company dependent but generally no leniency.
    The UW I just spoke with says they do not underwrite NAR but full face.
     
  4. Robert Barney
    Offline

    Robert Barney Guru

    Posts:
    1,215
    Likes Received:
    116
    I like seeing no lapse UL paid up as well. But for those who sell BIG policies, and there should be lots of BIG policies being purchased, all of this stuff comes down to business decisions and you have to be able to talk at the level of the client buying this stuff. It's not emotion, it's a fact based sale.
     
    Last edited: May 13, 2019
  5. Allen Trent
    Offline

    Allen Trent Guru

    Posts:
    408
    Likes Received:
    278
    $2000-2100 per month is what a Life only SPIA would pay for a 60 year old Male. Rates are pretty low currently, so it is pretty risky to take a life only payout knowing the person could die tomorrow & lose $424,000 on that SPIA bet. Now, if it is a person who needs that income to live on & has no spouse or heirs, then maybe that is trade worth taking. Lifetime withdrawal benefit on an EIA or VA might be a better play in your example.

    About 80-85% of that monthly amount would be reported as tax free until the $424,000 is recovered. After $424,000 is recovered it is reported as 100% taxable.

    Considering it would take 17-18 years to get back the initial $424,000, it is mostly tax free because there is not much interest being credited to the calculation, mostly a mortality credit play for those that live past life expectancy. A 60 year old male has a life expectancy of about 21 years. While the exclusion ratio is a great thing in some situations, it can actually backfire tax-wise for those that live long enough. Imagine someone getting $25k per year & only being taxed on $5k per year from age 60-77. then, all the sudden you are taxed each year on $25k. this can end up being worse than paying taxes each year on a level basis throughout on other investments that might have qualified dividends, tax free municipal bond income of even taxable interest from Annuity distributions.
     

    Attached Files:

  6. Robert Barney
    Offline

    Robert Barney Guru

    Posts:
    1,215
    Likes Received:
    116
    Yes, but if they used the $2,100 per month $25,200 to buy life insurance, and then died a year later, the $424,000 would be gone, but with the $25,200 income, could afford $1.75 million of no lapse UL leaving them ahead.

    There would be less if the told payout shrank because of tax. It looks like it's a close flip.
     
  7. Allen Trent
    Offline

    Allen Trent Guru

    Posts:
    408
    Likes Received:
    278
    It does work perfectly on paper for sure. I guess I am gun shy a bit after meeting a widow whose husband did a life only SPIA to buy a no lapse UL. After paying the life premium for 2 years, he started having dementia issues & got irate about having to pay a stupid life insurance premium. He died in the 4th year of the SPIA. It was a perfect plan, no fault of the agent. But the longer this type of plan goes on, the higher the probability of some human error & mistakes can happen & unravel the entire plan.
     
  8. Robert Barney
    Offline

    Robert Barney Guru

    Posts:
    1,215
    Likes Received:
    116
    And that story, combined with the fact that the GUL and SPIA didn't make a big difference in the example above, make buying a single premium whole life more sensible. But I think if you explain the lump sum capital as on deposit, paying the premiums, and that you need to increase the insurance to receive back the capital, you will find you sell more coverage and your client (especially a sophisticated client) will find it easier to understand the benefit.
     
Loading...