Updated: Dec 9, 2019
Think about it - one policy that provides liquidity upon your death, liquidity to supplement retirement, and liquidity in case of a long-term care event.
As a leader in the life insurance industry and through our membership in M Financial, we have had the privilege of sharing with our carrier partners what clients need and turning those needs into products priced and built for the affluent. A common frustration for any successful individual is having to acquire a variety of insurance products to protect against different risks. We understand that frustration and have worked to design and deliver a single life insurance policy to help protect against three risks during three critical life stages. The importance of each of the 3 life stages depends on your financial profile. However, a critical feature of any financial plan is one that delivers good economics while providing flexibility as needs change throughout the years.
Life Stage 1 (Age 50 to 65)
You should start to think about transitioning some or all of your life insurance death benefit protection from term life insurance to permanent life insurance. The death benefit is the critical liquidity you are counting on to pay a tax-free lump sum to your heirs in the event of an early death.
Life Stage 2 (Age 65 to 80)
You are evaluating your liquid net worth to determine if you have sufficient assets to fund your retirement income needs. The underlying cash value in your permanent life insurance policy can be a critical asset to use if you need additional retirement income. You have the following options with your life insurance policy’s underlying cash value or potentially the death benefit:
Take tax-free policy withdrawals up to total premiums paid
Take tax-free policy loans without triggering tax on policy gains
Execute a tax-free 1035 exchange to a guaranteed or variable annuity to create consistent retirement income
Sell the policy to the secondary market for cash which is referred to as a life settlement
Life Stage 3 (Age 80+)
A long-term care medical event starts to become statistically meaningful. The reality of your individual circumstance is the probability is either 0% (you will never experience it) or 100% (you will have a long-term care medical event). We can structure the life insurance death benefit to provide substantial benefits in the event of a long-term care need. When available, our preference is to have an indemnity-based long-term care benefit. Unlike reimbursement definitions, you do not need to submit bills, receipts or any other type of monthly paperwork. You simply receive a check each month.
Client Profile: Male or Female Age 50+ with a Net Worth of $2M+
Risk Profile: You can fund premiums based on guarantees, fixed interest rates or variable investment options (i.e. allocate among available funds)
Male age 50 purchases a $1,000,000 death benefit and wanted to pay for the policy with a single premium.
He decided to fund the policy with guarantees as he was already taking financial risks in his business and was also heavily weighted to equities within his investment accounts.
He was most concerned about additional liquidity if he died before age 80 and then wanted to protect his liquid net worth if he had a long-term care financial need in the future.
A life insurance policy focused on delivering a death benefit and long-term care benefits if needed - it was funded based on guaranteed pricing:
Death Benefit = $1,000,000
Single Premium = $274,798
What are the economics if I die?
The internal rate of return (IRR) is 14% to 5% if you die before age 80 and stays above 2% on a guaranteed basis if you live to be age 100. IRR at life expectancy (Age 85) is 3.76% and 5.37% on a pre-tax equivalent basis assuming a 30% blended tax rate.
What are the economics if I need long-term care benefits?
Assuming you need long-term care at age 80 and remain on claim for 5 years, the internal rate of return (IRR) is 5.86%. This pays you $1,200,000 in total long-term care benefits ($240,000 per year for 5 years).
The Economics – Is life insurance a good or bad investment?
When structured properly, life insurance will deliver good investment results under four liquidity options: when it pays in a death benefit, when it provides supplemental retirement income, when it delivers long-term care benefits or when it provides a lump sum cash payment upon sale of a life insurance policy.
We completed an analysis, using hypothetical ages and assumptions, to illustrate the economics of using life insurance to provide benefits for each of your life stages with one policy.
To start, we worked with clients to get answers to the following questions:
How much death benefit is needed?
How do you want to pay premiums? Single payment, over 10 years or over your lifetime?
What underlying investment structure do you want for the policy? Guarantees, fixed interest rates or investment flexibility to allocate among various accounts – equities, fixed income, real estate and index funds.
For the economic analysis, we have assumed the following:
$1,000,000 Death Benefit
Male Insured, Preferred Non-Smoker
Female Insured, Preferred Non-Smoker
Ages 50 & 60
Product Types: Guaranteed, Fixed Interest (at 3%) and Separate Account (variable at 7% net)
Assume policy is funded with a Single Premium
Policy Used for Death Benefit
The best way to evaluate the economics of life insurance is to measure the premiums paid since the policy was acquired against the death benefit based on various assumed death ages. This is referred to as the policy death benefit internal rate of return (IRR). The IRR in parentheses is the pre-tax equivalent assuming a 30% blended tax rate.
$1,000,000 Death Benefit
Male Age 50 (Insured)¹/ ²
Female Age 50 (Insured)¹/ ²
$1,000,000 Death Benefit
Male Age 60 (Insured)¹/ ²
Female Age 60 (Insured)¹/ ²
Policy Used to Supplement Retirement Income
There are various ways to evaluate the economics of a life insurance policy used to supplement retirement income. The value that is analyzed is the policy’s underlying cash surrender value which is available upon surrender. However, it is also available for policy withdrawals and loans or for a tax-free exchange to an annuity.
Generally, the life insurance cash value, if needed to supplement retirement income, should be accessed only after you have used qualified and non-qualified retirement accounts for retirement income.
Policy Cash Surrender Value at Age 70
Male Age 50 (Insured) - Fixed Account (3% Interest Rate)¹
Female Age 50 (Insured) - Fixed Account (3% Interest Rate)¹
Male Age 60 (Insured) - Fixed Account (3% Interest Rate)¹
Female Age 60 (Insured) - Fixed Account (3% Interest Rate)¹
Another way to access liquidity from the life insurance policy is to evaluate selling the death benefit to the secondary market. This is called a life settlement which you may have heard being advertised. The buyer will typically make a lump sum payment to the policy owner. Depending on current health and life expectancy studies, the policy can often sell for more than the policy cash surrender value.
Policy Used for Long-Term Care
One of the more recent developments with a life insurance policy is to use the death benefit to fund long-term care payments. If structured properly, this can pay up to 2% of the death benefit over a period typically for up to 5 years. With the exception of a cognitive type long-term care event (dementia or Alzheimer’s), the majority of long-term care medical needs will likely be 5 years or less.
The best way to measure the economics of a life insurance policy when used for long-term care benefits is to measure the premiums paid since the policy was acquired against the long-term care benefits paid and net death benefit remaining (if any) upon death.
Guaranteed: 10 Pay¹
The potential long-term care benefits paid below are based on purchasing a $1,000,000 guaranteed life insurance policy with provisions to pay long-term care costs for up to 5 years. We measured the IRR of the 10 premium payments against the long-term care benefits and the net death benefit remaining (if any).
Separate Account (Variable): 10 Pay (at 7% Net)¹/ ²
The potential long-term care benefits paid below are based on purchasing a $1,000,000 life insurance policy that earns 7% net with provisions to pay long-term care costs for up to 5 years. We measured the IRR of the 10 premium payments against the long-term care benefits paid and the net death benefit remaining (if any).
Principal, TRC Financial
¹ The hypothetical illustrations are based on various assumptions, such as underwriting and premium payments. Actual results will depend on formal medical underwriting an and final illustration.
² The policy values are hypothetical for illustration purposes only and may not be used to project or predict investment results. Policy values will vary based on the actual performance of sub-account investments selected, actual insurance charges over the life of the plan and the timing of premium payments.
The above is based on the economic results for several TRC Financial clients. The economics associated with each individual client are unique and impacted by the insurance product acquired, the performance of the life insurance policy, timing of premium payments, medical underwriting for the insured(s), and the actual life expectancy of the insured(s). The economic results not intended to be opinion or advice on legal, tax, accounting or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.