Disclosures: The rate of return used for the Life Insurance Illustration should have a gross rate of return equal to the rate of return used in the hypothetical account in the Tax Master program. The hypothetical account does not factor investment costs, and if it did, the hypothetical account's results would be less. ANY NUMBER APPEARING IN THE ACCUMULATION CELL UNDER PERMANENT INSURANCE MUST BE DOCUMENTED IN WRITING BY THE PROGRAM USER MAKING THE PRESENTATION. A COPY OF THE INSURANCE PROPOSAL ILLUSTRATING ANY NUMBER OTHER THAN ZERO MUST ACCOMPANY THIS COMPARISON. Usage Hints: Click the descriptive label for each row to include the value in the account comparison. Click the "Difference" row to quickly display all the information. Enter the cash value of the insurance in the top right box that appears when you click the Account 2's Accumulation ($0). Press tab or enter after you enter the cash value. Click CV to change the display to surrender value. Click SV to toggle the display to death benefit. Click DB to toggle back to cash value. (Each value must be entered individually from a valid policy illustration.) Toggle between paying expenses from lifestyle or from the investment account by clicking the summary heading (Lifestyle/Investment Account Summary.) |
Sample Default Inputs: Initial Balance: $0 Annual Contributions: $10,000 at beginning of each year Contribution Years: 30 Accumulation Years: 30 Rate of Return: 10% % Treated as Ordinary Taxable: 100% % Treated as Capital Gain: 0% Ordinary Tax Bracket: 40% Capital Gain Tax Bracket: 20% All Term Premiums are set to zero Compound Interest Vs Permanent Insurance taking the expenses from the Investment Account. Accumulation: When you click on the first line (Accumulation) you will notice the amount of $1,809,434 (assuming sample default values listed above) on the left hand side of the page with a zero on the right under permanent insurance. Our viewer is assuming that he will have the $1,809,434 in his account at the end of the 30-year period in this example. You can show the cash value illustrated in your company product in this field but we suggest that you postpone doing so until you have walked your client through the entire presentation. Otherwise, they will not have all the information necessary to understand what these two numbers really mean. Less Contribution: In our default example each is saving $10,000 in after tax dollars and putting it into the respective accounts. You will notice that each put away the exact same amount over the period. Less Ordinary Tax: Remember that in this comparison any and all expenses must be taken from the investment account. The interest is compounding in the account on the left, which creates a tax due each year. Over the period our person on the left must reach into the investment account and remove $358,678 in order to pay the taxes due. The $358,678 assumes you have entered zero term insurance values or are not considering term and the other default values listed above. The person on the right with the permanent insurance has no additional taxes to pay so nothing must be subtracted from their account. Currently the federal government allows the cash value of life insurance to accumulate tax deferred. Less Opportunity Cost of Ordinary Taxes: The opportunity cost on the taxes paid can amount to a great deal of money. When you click the purple center label for Opportunity Cost of Ordinary Tax, notice that the dollar value representing the opportunity cost is displayed in the left column. Since our person on the left paid a tax, which could have been avoided, they not only lost the tax dollar, but what that dollar could have earned for them had they not given it away. The person on the right with the permanent insurance paid no additional taxes so the opportunity cost on zero is zero. Opportunity cost is an idea regarding a potential lost opportunity and not an actual deduction to an account. Less Term Insurance Premiums: The dollars spent for term life insurance must be subtracted from the investment account to cover the risk in the event the person on the left die before they have time to accumulate the dollars required in their investment account. The person on the right did not have to purchase any additional term insurance because the $10,000 they put in the permanent insurance contract gave them the same amount of life coverage the person buying term and investing the difference was carrying. Less Opportunity Cost of Term: Had our person on the left not purchased any coverage at all, they could have invested the dollars spent on premiums in their investment account and they would have those dollars plus the interest they would have earned over time. In order to understand the true cost we must factor in what the term premiums could have earned had they been invested. Our person on the right paid zero in term premiums, thus the opportunity cost is also zero. Opportunity cost is an idea regarding a potential lost opportunity and not an actual deduction to an account. Less Capital Gain Tax: Finally, any capital gains tax is subtracted. Investment Account Summary: At this point we still have one more input to make. The permanent insurance policy does in fact have some cash value to be accounted for. At this point you should type in the value illustrated in your proposal system on the product you wish to illustrate. When you enter an input you will see the disclaimer stating that you must be able to document any number in this field other than zero. Once you have made your point with the guaranteed* value you will want to show the result if the company pays you what they are illustrating currently. While the policy does have many additional benefits to discuss helping a client to see the cost of each alternative is a good place to begin. *Guarantees are based on the claims paying ability of the issuing insurance company. Compound Interest Vs Permanent Insurance - expenses taken from Lifestyle. Accumulation: Put your mouse pointer on the phrase of Accumulation and click to view the end of the period value calculated from the initial assumptions. A default example of $10,000 invested at 10% for 30 years at a 40% tax bracket will show the figure $1,809,434 on the accumulation line on the left hand side of the screen and zero on the right. The $1,809,434 is the amount the investor is counting on having in their account. At this point we are going to leave the accumulation on the Permanent Insurance side at zero and come back to it at the end of the discussion. When you click on the line items in the middle of the screen; you will not only see the individual values to the left and the right but also at the bottom of the page you will see the difference in the two accounts. The difference arrow will point to the side with the greatest value. As you go through the line items, you will see the net accumulation and the difference change in proportion to each calculation. Using the default assumptions, you will notice at this point that the difference is in favor of the Buy Term & Invest The Difference side by $1,809,434. Less Contributions: The next line item to review is the amount that each contributed to receive the accumulation value shown. You will notice that it is the same on both sides of the ledger and is a negative amount shown in red. Plus Taxes Avoided: The next line illustrates the amount of taxes which must be paid in addition to the regular annual after tax contributions. You will see that the compound interest strategy required $603,774 in taxes on the interest earned. There is a zero in the left-hand column because this person had to pay $603,774 in taxes and at the end of the 30-year period has no claim to any of the dollars sent to the government. The person on the right however had no taxes to pay but still had to reach into their lifestyle and subtract $603,774. The permanent insurance required no additional taxes (under current tax law) so the taxes that were avoided by using permanent insurance could now be invested in a side fund. Let's assume that every time our person on the left wrote a check to the government for taxes due on the interest earned the person on the right put that same amount under their mattress. At the end of the period, our person on the right would have the same dollar amount in cash that the person on the left paid to the government. In order to get the true picture the same out of pocket cost must be accounted for on both sides of the ledger. Plus Opportunity Earnings of Taxes: When clicked, the opportunity cost of the taxes are displayed in the right column. Compound interest created the taxes, which must be paid. Taxes paid cannot then be invested, they are gone and gone forever. The opportunity cost becomes real when those dollars can be redirected and the taxes, which would have been necessary, are avoided. This is a major benefit currently of permanent insurance, the growth inside the policy compounds without being taxed annually. Since the person on the right did not have to pay the taxes they could have not only saved them, but could have invested them. If the person on the right had invested the taxes saved and earned 10%, the default sample investment/opportunity cost rate of return, they would have an additional $832,178. Plus Fund Term Premiums Avoided: Now we have to factor in another item which affects the bottom line. The term insurance cost that you entered on the assumptions screen will show up when you click the button. Since our investor on the left wanted to make sure the family had something in case of their premature death they purchased some term insurance. The actual cost of the premiums is shown on this line. The person who purchased the permanent insurance on the other hand had the same amount of death benefit, which was included in the contract along with their annual $10,000 after tax premium, and it’s cost has been factored into the cash value available. In other words, they purchased a policy for the same amount of death benefit as the person on the left for the same dollar amount of premium as the person on the left was investing. ($10,000 a year) In some cases the amount the person on the left is investing will not be enough for the person on the right to purchase a permanent product replacing all the term insurance the person on the left owns. There may also be situations where the annual amount being invested will be more than enough to purchase a permanent policy and you can load the contract with additional cash thus increasing the cash value at the end of the period making the net accumulation even larger. The zero cash value was designed to allow you to use any product you choose so that you can build the permanent life contract to meet the wants and desires of the client. When you factor in these dollars our buy term and invest the difference person on the left had to pay, the picture gets even clearer. Our person on the left paid all those premiums and has zero to show for it today. Yes they had the coverage but they have to cash from this transaction. If they are still alive at the end of the period they may be forced to drop the coverage because now it is getting cost prohibitive or can continue to pay the increasing premiums. Either way the cost is getting greater and greater the longer they live. Plus Opportunity Earnings of Term: Just like the tax paid had an opportunity cost, so does the term premiums. When you click on Opportunity cost on Term you see what the actual premiums would have earned had you invested them at the investment rate of return entered on the assumptions screen. The person on the right was able to recoup the cost of the term premiums so they could also have invested them. Had they done so they would have the opportunity cost in addition to the premiums saved. Plus Capital Gain Tax Avoided: Finally we must factor in any capital gain tax. Total: Now we know that the policy we have been putting this $10,000 a year in has some cash values because there are some illustrated cash values* in the contract. Pull out a ledger from your carrier and circle the illustrated cash value* at the end of the period and type that number in the cell on the top right side of the ledger by accumulation under Permanent Insurance. The net accumulation will now increase on the right by the illustrated* cash value and the difference between the two accounts will also recalculate. *Illustrated cash values are based on the claims paying ability of the issuing insurance company. You may wish to illustrate the results not factoring in the opportunity cost. Simply hit the reset button and go through the calculations again without clicking on the opportunity cost. Simply do not click on that particular line item and its cost will not appear. |
If expenses are being paid from the investment account, the Summary will show adjustments to the Ideal Investment being subtracted from the investment account on the left. If expenses are being paid from lifestyle, the summary will show adjustments to the Cash or Surrender Value being added to the insurance product on the right. These factors come from the side funds for taxes saved by PLI and term premiums saved by PLI. A year-by-year illustration of the values used to generate this summary is displayed in worksheet form by clicking the Documentation button. |