We have yet to meet a high income or high net worth who does not have some form of life insurance. Years ago, clients purchased traditional whole life policies that were very secure but had very poor returns. More recently, clients have become enamored with variable life insurance because the policies buy term insurance (which is inexpensive at a younger age) and invest the balance of the premium payment in the stock market via mutual funds. Clients seem to like the action in the market whenever they can get it and, therefore, having a life insurance policy that can roll with the market is very appealing.
As many of the readers with variable life policies have found out, cash values in a variable policy not only go up with the market but they fall (very hard the last two years) with the market as well. This section of the material was created to inform clients of a “new” EILIP in the marketplace that has an annual minimum return guarantee every year but still allows the cash value in the policy to grow at a between 12-17% rate every year if the stock market performs well. (High-end cap rates vary with different companies).
An example is the best way to illustrate how switching to the “new” EILIP can save you significant money.
Doctor Smith in January of 1999 had a variable life insurance policy with a $2,000,000 death benefit and a cash value of $250,000. Because Dr. Smith had his cash value invested in an XYZ aggressive growth fund (which we will assume averaged negative eighteen percent (–18%) over the last two years), today Dr. Smith’s cash value in his variable life policy is $168,100. Needless to say, Dr. Smith is not happy.
If Dr. Smith had the “new” EILIP, he today would have had plus 2% credited towards growth in his policy; and, therefore, his cash value would be approximately $260,100.
For those clients using a traditional whole life policy, an example works as well to illustrate how much money could be lost by not using the “new” indexed life insurance policy.
If Dr. Smith bought a whole life policy today, typically the investment return inside the whole life policy will be less than 5% a year. If Dr. Smith has $250,000 in cash value inside a whole life policy today making 5% in growth every year, Dr. Smith will have $319,070 in five years. If Dr. Smith used the “new” indexed life insurance policy and the S&P 500 Index had returns of 8%, Dr. Smith would have $367,332 or about $48,262 more in cash value just over that five-year period by using the “new” EILIP.
Pros and Cons of the “new” EILIP:
Cons – 1) If the market averages over 17% for the time you have your life insurance policy, you would be better off in a variable policy (not very likely).
2) If the market averages less than 5% over the time you have your life insurance policy, you would be better off in a conservative whole life policy (not very likely)
Pros – 3) There is a minimum guaranteed return every year (1-3% for the Universal Life Policy)
4) The policy does let the owner partake in the upswings in the market up to 17%.
5) Mortality costs (costs of insurance) are much lower in the later years than a variable life insurance policy.
6) Flexibility, unlike typical whole life policies, the “new” EILIP is very flexible with its premium so the owner can choose when and how much premium is to be paid each year.
Newest Product on the market (Revolutionary Life)
Recently a new EIUL policy has come on the market which is “revolutionary.” The product has a crediting method where the insurance company will credit 140% of what the S&P 500 returns on an annual basis. For example, if the S&P 500 returns 5%, the policy will credit its growth at 7%. If you look into buying an EIUL policy, we strongly recommend you look at this product.
If you would like the possibility of getting upwards of 12-17% return on the cash value in your life insurance policy every year and would like to avoid the stock market’s negative years with a 1-3% minimum guarantee, then you should look into the “new” EILIP. Also, if you are nearing the age of 50 and have a variable life insurance policy, you should seriously consider changing to the “new” indexed life insurance product to protect the principal cash value in your policy and to lower the costs of insurance inside the product.
For help reviewing your current life insurance policy or to discuss the purchase of a new policy, please contact an APS “Rated” Advisor.