(At the end of my last entry I said I was going to discuss some more medical conditions and how they affect life insurance premiums. I’m setting that topic back since I have had several inquiries about my last blog that need to be addressed.)
In my last entry I showed how a couple, husband age 65 and wife 63, could purchase a $2,000,000 second-to-die life insurance policy with an annual premium of $21,815. That may not seem too astonishing, but the premium and death benefit were both guaranteed for 58 years—putting the wife at age 121. When I ran the Internal Rate of Return (IRR) on the death benefit, it was a respectable 3.69% if the second of them died in 40 years. That puts them at age 105/103 respectively. Of course, if the second of them dies earlier, the IRR is much better, 38.86% for example in 10 years. And, remember this is an after-tax rate of return since the death benefits from life insurance proceeds are not subject to income tax. The couple would have had to invest the $21,815 earning the after-tax IRR each year to produce the equivalent of the policies guaranteed death benefit.
When I show these numbers to people they say, that’s too good to be true! How is it possible for any financial institution to absolutely guarantee such a great IRR for such a long period of time with today’s low interest rate environment? If 100% of the people who buy these great lifetime premium guarantees keep their policies until the death benefit is paid, the insurance companies would have a tough time meeting this obligation. But, the fact of the matter is that many, many people will discontinue paying their premiums and the policies will lapse long before the claim is paid.
What this says to the consumer is only purchase permanent life insurance if you will be able and willing to continue premium payments long into the future. When you do, you will get a policy that is true…it just doesn’t seem so and those who drop their policies will help make it possible for you. Guaranteed premium life insurance, owned by an Irrevocable Life Insurance Trust to keep the proceeds out of the estate, is truly the best way to provide for estate tax liquidity. It isn’t too good to be true.
As promised, next I’ll be visiting some more medical conditions and how they affect life insurance costs and availability.