PLI Alternative

Permanent Insurance may be a good place to put the difference between the two mortgage options, especially when you factor in the tax-favored treatment and the possibility of substituting PLI premiums (that help build cash value) for term premiums.  In this tool, the amount saved in taxes and premiums compound at the assumed hypothetical interest rate.

This screen compares the total cost, including opportunity costs (future values), of two alternatives for mortgaging a house:

Alternative One: Buying a house with a short (perhaps 15 years) mortgage and optionally insuring the mortgage payments with mortgage or term insurance.

Alternative Two: Buying a house with a long (perhaps 30 years) mortgage and insuring the mortgage payments with permanent life insurance.

Regulatory Disclosure Reminder: Please remember the primary reason to purchase a life insurance policy is to protect one's beneficiaries through the death benefit.  However, permanent life insurance can also serve as an accumulation tool that has some very unique benefits. To qualify for life insurance, one must take a health examination to determine insurability.  Not everyone is insurable. Life insurance products contain fees, such as distribution fees and mortality and expense charges. The main way that a permanent life insurance policy is positioned to be tax advantaged is though policy loans.  Policy loans may reduce the cash value and death benefit of a policy, and if they are not repaid, a loan could cause a policy to lapse. If a policy is over funded and becomes a MEC contract, the contract's earnings will be taxed as ordinary income at withdrawal, and may be subject to a 10% penalty if withdrawn before age 59 1/2. This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. All hypothetical presentations must be based off of policy illustrations, and the illustration must be presented to the client.

The program automatically calculates the monthly difference between the two mortgage alternatives.  If we deposit this monthly difference in permanent life insurance (PLI), the Hypothetical Cash Value would be {enter the Cash Value in top right cell}.  Here is the company ledger that documents the Hypothetical Cash Value.The next row shows the tax savings available over the 15-year period.  You can spend or invest those tax savings. This tool assumes that you place the tax savings in a vehicle that grows at the hypothetical assumed interest rate over the 15-year period.  This additional interest is shown in the "Opportunity Cost on Taxes" row. If you have term insurance or mortgage insurance, purchasing permanent life insurance may reduce or eliminate the need for term or mortgage insurance.  Thus, you can save the premiums on term or mortgage insurance.  The saved premiums are shown in the row "Term or Mortgage Insurance Cost".  This tool assumes that you place the savings in a vehicle that grows at the hypothetical assumed interest rate. The interest earned on the term or mortgage insurance savings is shown in the row "Opportunity Cost of Insurance".

The row Summary Total is the maximum available to you.  It is the sum of the top five rows.  We subtract the remaining balance on your 30-year note from the Summary Total.  A positive difference shows the hypothetical outcome of the PLI alternative.

Remember there is more to consider than just the monetary benefits.  Liquidity, use, and control of your money over the 15-years are tremendous benefits to consider.  Since we do not know what is ahead economically, the control of your money offers you more options and choices in the future.  

Let me make one more point.  How fast does your car go? Do you drive it that fast? Probably not. We have just shown you the difference between "park" and  "full throttle" so to speak.  How fast you drive is up to you.  However, it is important that we give you all the information about this and other issues, so that you can make your own decisions.  If what you know to be true about mortgages turned out to be false, when would you want to know?

A spreadsheet for the side fund which includes the tax advantage and the term/mortgage insurance costs

Documentation calculations are performed in a series of worksheets defined as follows:

The first worksheet is simply the amortization schedule for the longer mortgage.  The longer mortgage is the mortgage with the longer term, typically this will be 30 years but it may be any reasonable number.

The second worksheet is simply the amortization schedule for the shorter/higher monthly payment mortgage.  The shorter mortgage will typically be 15 years but it may be any reasonable number.

The third worksheet calculates and summarizes the tax and insurance cost savings between the two positions.

Tax and Insurance Savings Worksheet

Column 1: Monthly tax savings of Mortgage One (from Mortgage One amortization worksheet).

Column 2: Cumulative tax savings: (Summation of Column 1 to date).

Column 3: Opportunity cost (value) of tax savings (Column 1 * (1 + Investment ROR / 12)^(remaining months - 1) - Column 1).

Column 4: Cumulative opportunity cost (value) of tax savings (Summation of Column 3 to date).

Column 5: Monthly insurance premium (annual insurance premium entered on screen / 12).

Column 6: Cumulative insurance premiums (Summation of Column 5 to date).

Column 7: Opportunity cost (value) of premiums (Column 6 * (1 + Investment ROR / 12)^(remaining months - 1) - Column 6).

Column 8: Cumulative opportunity cost (value) of insurance premiums (Summation of Column 7 to date).