This calculator provides an easy-to-understand (and generate), same-cash-flow, long-term accumulation comparison between a cash value permanent life insurance policy and a taxable investment account. A properly constructed PLI policy will typically outperform a savings-class taxable investment - all the while providing more benefits and protection. It is both expected and mandatory that PLI capitalization, loan and balance information be taken directly from a valid policy illustration. A best practice suggestion is to have several example policy illustrations available so that you can choose an example that best reflects the characteristics of the person you are speaking with. The ideal solution would be to build and use an illustration specific to the client, but that may not be practical or necessary to convey the concepts outlined by this calculator. Remember to consider that PLI is a conservative, safety-based accumulation vehicle. It is typically most appropriate to compare it with similarly classed investment vehicles such as CD and Money Market accounts. (However, depending on the characteristics of the PLI product illustrated, it may be more appropriate to compare to more aggressive investment types.) Notes regarding multiple "purchase cycles" option: Clicking the < > buttons surrounding the purchase cycle count will allow you to repeat the purchase cycle cash flows as many times as will fit within the illustration timeline. The general case assumption is made that policy loans that are fully repaid with interest will not affect cash value accumulation or death benefit results. If this is not the case for your product, do not use this feature. The long-term effect of multiple purchase cycles will vary depending on the "pay cash" strategy account rate of return and the loan repayment rate of return. If the cash account ror is low and the loan payback ror is high, you should expect the long-term cash account value to increase because of the higher funding (repayment) rate. The reality is that most people do not "pay themselves back" like this. They will just pay back the principal amount (if any at all). Notes regarding the "Reality" checkbox option: Clicking this checkbox modifies the refill payment amount on the "pay cash" side to repay principal only. This strategy better reflects reality for people who "pay themselves back". HOWEVER, please be aware that when you activate this feature, the cash flow requirements of the two strategies are no longer equal, so you no longer have an identical cash flow comparison. |
[Script written using default example values] Let's run the numbers and see if a collateralization strategy, using PLI as your private reserve, really does outperform a pay cash strategy. The first thing we need to do is generate a proposal that illustrates how a permanent life insurance policy may perform for someone like you. [Proposal/Illustration generated from your insurance company proposal system.] We'll illustrate a period where we collateralize the policy, make and payback a single loan, and then we'll examine the long-term results. Using our policy illustration, let's enter the relevant numbers into the collateralization strategy side of the calculator.We collateralized the policy by putting away $30,000 for 5 years. In year 6 we're going to make a major capital purchase of $50,000. We'll fund that major purchase by taking a loan against the insurance policy and repay the loan over four years. For this policy, the annual loan repayment would be $13,577.77 over that 4 year period. Finally, let's enter what the policy looks like in year 25. According to the illustration, the death benefit would be 804,677 and the cash value would be $396,648. Now let's take a look at the person that's paying cash. [Click on Pay Cash heading to show the column.] To make an apples-to-apples comparison, we're going to assume the exact same cash flow transactions happen for the person that is paying cash. They two are going to fund their investment at $30,000 dollars for 5 years - just like the policy. Let's assume they can get an average long-term rate of return of 5%. Let's also assume they are in a 30% average marginal tax bracket during the illustration period. Finally, let's assume they don't spend any money on protection so they can get the best possible growth on their contributions. The "pay cash" person makes the same capital purchase in year 6 by withdrawing $50,000 and decides to pay back their account at interest - which is unlikely - but it keeps the cash flows the same and gives them the best possible outcome in our comparison. So they make the same $13,577.77 contributions to their cash account for the same four years. What does their account balance look like in year 25? They have a cash account value of $331,055. Ok, Mr. Client, which of these two would you rather have? Your PLI Private Reserve with $396,848 of cash value AND an additional $407,829 of net death benefit - or - a cash account with a $331,055 balance? Yes, I would choose the private reserve strategy too. [clicking documentation: How did we calculate the pay cash account balance? Let me click the documentation button and show you.] [clicking graph: Let's visualize these long-term results side-by-side. On the left you have the private reserve balances in year 25. The pay cash balance is on the right. As you can see, the policy cash value exceeds the cash account balance by $65,793 (displayed when you hover your mouse over that area of the bar chart) and when you consider the value of the additional death benefit, the private reserve is over twice as big.] [clicking PLI IRR: Although permanent life insurance is not an investment per se, sticking with our apples-to-apples comparison objectives, we can calculate the Internal Rate of Return required for the capitalization cash flows to generate the illustrated cash value and net death benefit balances. In this example, the annualized returns were 4.34% and 4.47% respectively. Those would be the equivalent of 6.2% and 6.38% from a taxable account (in the same average tax bracket used by the pay cash scenario.) [clicking Benefits: Here is a summary of the benefits of the Permanent Life Insurance contract compared to a Cash position.] |
The math for the pay cash strategy comparison is very straightforward and in fact, the documentation worksheet "self documents" the calculation in the column headers. Column 1: Year (self explanatory). Column 2: BOY Account Balance, the cash account balance at beginning of year. Column 3: BOY Contributions, cash inflows timed at the beginning of the year. Column 4: BOY Withdrawals, cash outflows (the purchases) timed at the beginning of the year. Column 5: BOY Term Cost, cash outflows for term premiums timed at the beginning of the year. Column 6: Annual Growth, (Col2 + Col3 - Col4 - Col5) * Cash Account Rate of Return. Column 7: Tax on Growth, Col6 * Cash Account Tax Rate. Column 8: EOY Refill Payment, cash inflow (loan repayment) timed at the end of the year. Column 9: EOY Account Balance, Col2 + Col3 - Col4 - Col5 + Col6 - Col7 + Col8
The PLI collateralization strategy account figures are entirely determined by the carrier illustration software. The pay cash strategy calculation simply mirrors the timing and cash flows pulled from the policy illustration. |