Originally Posted by Newby
You won't know until you die.
If you live a long, long time the best payment period would have been to single pay or the shortest payment period.
If you die soon after buying the policy, the lifetime payment option would have been best because you would have the least amount paid in.
Most people BELIEVE they will live a long time so I always recommend as short of payment period as they can afford.
I think this is an over simplication of the concept of paid-up insurance. I think it could be argued that:
"If you KNEW you were going to live only a year, then the best policy would be the cheapest term policy available and you should never have purchased whole life."
But that's incorrect thinking because
ALL LIFE INSURANCE IS TERM insurance. Every type of life insurance policy you buy is really a term policy because the protection element of the product is term insurance and there is always (ALWAYS!) an annual cost within the contract for that insurance - whether you bought ART or a single premium whole life.
Basically, when you buy a single premium whole life, you are funding the policy with a lump sum of capital, and it is the investment return on that lump sum which pays the annual premium for the protection element (the term aspect of the policy).
Let me make this easy to understand for the person trying to decide between a lifetime premium and single premium no lapse UL product.
In this example I ran a Compulife comparison for a 50 year old male, preferred plus non-smoker. The cheapest $1,000,000 no lapse UL policy, to age 121, for an annual pay product is Aviva Life at $7,316.00 per year.
By contrast, running a single premium for the same case, Aviva's is cheapest at $125,579.00
The problem is that if you die the day after you pay the $125,579 premium, your estate gets $1,000,000 total, the $125,579 is part of the death benefit.
In effect you are getting back your $125,000 plus $875,000 of insurance. So to compare this properly to the life pay option, we need to increase the amount of insurance by 1000/875 which is 1,149,425. Now that's not quite right, because the more insurance you buy the cheaper it gets. But it got me close to the right face amount.
After playing around for a few seconds, I round that if I increased the face amount to $1,144,000, the single premium is $143,662. So now if our client buys that policy, it is directly comparable to the annual premium deal because if your client puts up the capital, $143,662, and dies a day later, his estate will get $1,000,000 (the same as the annual premiums deal) and ALSO gets back the original $144,000 in capital.
So now the question is, "Which is better, pay $7,316 per year, or let $143,662 capital pay that for you?"
As it turns out, $7,316 is a 5.09% return on your clients investment capital, and that return is GUARANTEED FOR LIFE.
Now there are two things about that to consider:
First, the $7,316 is payable on the first day, but your investment doesn't actually pay that amount of interest until the end of the year. For that reason the rate of return is actually a tick better than my simplified explanation giving the single premium an advantage. You can compensate for this by reducing the face amount of the policy to $1,137,000, keeping in mind that if you pay the $7,316 and die a week later, that part of the $144,000 would have been gone.
Second, the 5.09% is a TAX FREE return on the money. There is no tax payable (EVER) on the interest being earned within the policy, the same interest paying the annual premiums which otherwise would have bo be funded with after tax dollars. When you die, the entire $1,144,000 dollars is payable to your estate TAX FREE (under current tax laws).
You have to be careful NOT to remove the single premium before you die. If you did that, the money would be taxable because the company/government would compute some of the lump sum as original capital, and some as untaxed interest.
If you went with a 10 pay, you can basically build up the lump sum over a 10 year period, and your original deposits (premiums) are considered part of the tax base cost of the policy - an advantage over single premium if you cash out. But if your client has the investment capital, the single premium may be VERY, VERY attractive.
My guess is that a lot of people, in higher tax brackets, who also need insurance to fund their estate problems, will find the 5.09% after tax, fully guaranteed for life, to be a DARN good return on their money. Others, worried about inflation or super high interest rates, may be spooked. But you need to remind them that no lapse UL still earns current market rates, and so if interest rates go high, the policy could outperform its guarantees.
And providing you can explain it as I have done here, that the money is NOT GONE if you die, the investment is merely PARKED UNTIL YOU DIE, you will find it a much easier sale.
I have more I can tell you, if you have any questions.
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