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Why Your Family Cannot Afford for You to…

“Buy Term Insurance and Invest the Difference”

This past year, Edward, 78, responded to one of our marketing programs. He asked our agency to complete a Life Insurance Audit on a 10 Year Level Term Life Insurance policy he purchased on his life at the age of 76. Upon his death, his wife Barbara would need extra income to pay some modest debts and supplement her annual income needs. He wanted her to have an income tax free lump sum provided by the life insurance.  If she predeceases him, he wanted his youngest daughter to receive the proceeds to help restore any income she may lose in the caring for them in the final years. The agent correctly told him that this was the best rate for which Ed could qualify. They did not offer any other products to him at the time, and his premium was $225 monthly for $100,000.  Barbara after reading one of our articles became concerned, about the skyrocketing costs at the end of the 10 year level period. The premium would increase every year beginning at the age of 86 and by age 88 his premiums would be well over $1,000 a month.  Ed & Barbara wanted to know if they were spending these monthly premiums wisely on this policy, and if there was any other life insurance alternatives at his age. As mentioned, none were offered or even made available and they assumed at his age of 76 this was the only product available.

After completing a 10 minute life insurance analysis, we compared the premium and determined it was in order with other A+ rated, companies, except for one thing. There were other types of life insurance that were more cost effective than the one sold to him. We offered him a permanent lifetime policy with level premiums and the same rating class. This policy is cash accumulating pays at his death an increasing benefit of the total cash value in addition to, the original death benefit of $100,000.

In ten years with the other agent’s “Best Plan Available”  Ed would have a policy that has annually increasing premiums jumping from $225 monthly to $650 monthly in year 11 to more than $1,000  monthly premium in the 13^th year of the policy, and thereafter completely unaffordable. Most people in a similar situation like Ed & Barbara would eventually just decide to quit paying these increasing premiums and lapse the policy with no return of any premium or death benefits ever paid to anyone in his family.

This is what the insurance companies that offer these plans to seniors are depending on. This is one of the reasons these products are so popular.  Another is that they typically pay the agent 100% - 120% commission. Ed & Barbara would have nothing to show for these very high average premiums that are within normal limits for many companies for his age.  One of our agencies’ companies not only offered Ed & Barbara insurance coverage that never ended, but in 10 years his policy will have a walk away tax-free cash value of more than $32,000.

Let us now examine how to use our alternative “Wealth Maximization Strategy” using a specific type of permanent protection available to Ed’s current age of 78.  We will illustrate how our strategy combining his life premiums with his current monthly savings can provide the absolute best overall ROR (Rate of Return) for Barbara and their children.

Asset & Wealth Maximization Strategies utilizing life insurance must be closely compared to traditional investing methods such as Mutual Funds, Stocks and other Equities Securities.  As you know nothing in this arena is ever guaranteed, without substantial risks to the investor. See our corresponding article “How Parents can Become their Children’s Safest Retirement Accounts”, for a more detailed summary. We understand most people do not like paying for life insurance but sometimes it is absolutely the best guaranteed investment strategy. Ed & Barbara are currently saving several hundred dollars monthly using traditional forms of investments.  We suggested they divert $215 of that savings into premiums on a new permanent policy for Ed. The policy’s monthly premium is $440 with a starting death benefit of $100,000. He will also cancel his current 10 Year Term plan for $225 a month previously outlined above.

Let’s look at what current financial compass heading Ed & Barbara are on with their current investment savings and term life premiums.  Their term plan for the next 8 years has a premium of $225 monthly, coupled with $215 of their investment savings.  Thereafter let’s assume they quit paying on the policy and divert their premium into their investment savings, totaling now $440 monthly until Ed passes.  Have you ever heard the phrase by some financial personalities on television “buy term and invest the difference”? This theory never applies to people who need life insurance in their retirement years for either Wealth Maximization Strategies or Estate Tax Planning needs.  The fact is by using the diversity of specific life insurance products they unmatched when creating a legacy of tax free wealth. We will assume for the next 8 years, Ed’s age of 78–86, ir an ROR is at a level 12% compounded annually, and tax deferred for their monthly $215 savings.

For our comparison we will assume for the next 8 years, Ed’s age of 78–86, a ROR at a level 12%. This investment will also be compounded annually, and tax deferred for their monthly $215 savings.

We all know, unless you were investing with "Bernie Madoff’” this 12% ROR is not only improbable return rate for this amount of money, but probably impossible.  But let’s just see how this comparison turns out using the figure of 12%. The total at the end of the 8 year period when Ed is 86 after taxes at a 30%  tax rate, would be $29,700.00, again based on a at a 12% ROR.  If Ed passed away during the first 8 year period,  his family would have a net amount increasing annually by $3,500 added to his $100,000 of Term death benefit: Year #1 ($103,000), Year #2 ($106,500), Year #3 ($110,000) and so on through year 8.

In 8 years the term insurance for $225 monthly ends due to excessively high increasing premiums.  But they continue to save the total monthly amount of $440 which is the same amount of the proposed policy.  If you adding that to their 8 year after tax investment account, it totals $29,700. Total death benefits now drop to the account value increasing only through his additional annual savings. But in 8 more years at Ed’s age of 94, his total investment savings have grown to $143,000 based on a level 12% compounded annually that we are using for this illustration. We also have not accounted for any annual management expenses or broker fees. Now, $70,700 of this 8 year tax deferred accumulation is now taxable at an estimated 30% rate leaving his family a net amount of $121,500. (See article “Tortoise & Hare of Investing” and how fees actually affect investments)

The alternative strategy using the Permanent Life Insurance policy with a level monthly premium of $440 monthly, projected only at the current policy rate of 5%, has grown to a tax free death benefit for Ed’s family of $135,200. If inflation increases along with taxes, and interest rates go up to slow the shrinkage of the US Dollar the overall ROR and cash accumulations in the permanent policy will also increase higher than the figure shown above.

Just shifting a small amount of assets, or savings, can create a far higher overall Rate of Return than is usually achievable through any traditional investments. There is nothing we know of that is legal without risk, lottery, or luck, that can parallel or match this Wealth & Asset Maximization Strategy. For more information, or to get a free no obligation Life Insurance Audit, contact our agency, by filling out the information below. Wouldn’t you want to know if the current life insurance policy you owned was the best plan available, for your family?

Brian D. McGann, CEO

MedicareSaver Solutions, LLC

Certified Special Care Planner

Office Phone 321-939-0999