The Wealth Preservation Institute (WPI)
Learn a creative, honest and protective way to run cash-value life illustrations
By Roccy Defrancesco
As many of you know, I'm a big advocate of building wealth in a tax-favorable manner, such as inside a cash-value life policy -- my personal preference being revolutionary life (RL).
Being conservative with your cash-value life insurance policy illustrations is very important these days -- especially to avoid lawsuits. Much of the industry has gravitated toward equity indexed life insurance (EIUL), which is fine, but I do not agree with how much of the industry illustrates building cash in the policy or how tax-free loans (retirement income) are illustrated.
Problems with "typical" illustrations
1) Using default settings to set crediting rates.
The default crediting method with most companies pegs the growth to the S&P 500 Index and is typically anywhere from 9 percent to 10+ percent returns every year.
I think illustrating at 9 percent to 10 percent is not conservative with our national economy, and the world economy having its issues. I traditionally illustrate 7 percent to 7.5 percent as an annual rate of return, which I think is reasonable.
2) Using default settings when illustrating variable loan rates.
One of the powerful attributes to an EIUL policy and RL is that a client can choose to take "variable" loans from the policy.
The default settings are aggressively set to make for a best-case scenario and usually default to a 2 percent positive loan spread (which significantly increases the amount that can be borrowed from the policy). I think that only giving a client a variable loan illustration is a great way to get sued. You should be showing clients "wash" loan as well.
A new way to illustrate cash-value life insurance
I observed a different and "new tome" way to illustrate cash-value life insurance as it pertains to how much a client can borrow from the policy. The following is an outline of how I typically illustrate how much cash can be borrowed from a life insurance policy:
Why is that a problem? Because if, after the borrowing phase, the policy runs into years that deliver returns less than the illustrated rates, the client might have actually to put more premiums back into the policy to keep it from lapsing (unless the client is using a policy with a no-lapse guarantee that kicks in between the ages of 65-70 (depending on the company that would prevent it from lapsing).
A more conservative approach
The more conservative approach shows the client borrowing approximately the same amount of money from the life policy in the borrowing phase, but has approximately 20 percent of total borrowed funds as the cash surrender value at the end of the borrowing phase.
Because there is significantly more cash in the policy versus running a level income example, the client would be much more protected if, after the borrowing phase, the returns are lower than illustrated.
Here is how you would run the illustration:
Say you have a 37-year-old client funding $75,000 a year into a policy for 20 years (with a 7.5 percent crediting rate) and borrowing from the policy using "wash loans" from ages 65-84.
Illustrative software
As many of you know, I feel so strongly that many clients should use cash-value life insurance to build wealth that I created my own illustrative software system that creates a very powerful eight-page showing the client how beneficial growing wealth with a life policy can be.
The software was just tweaked to allow advisors to illustrate with level income or with a max-inflation income.
If you can't sell cash-value life insurance from the eight-page illustration the software creates, you can't sell life insurance. To see two different eight-page illustrations from the above example (which include two 3D charts), please click here.
Summary
Be conservative with your cash-value life insurance illustrations. When you use a good cash accumulating policy like revolutionary life, you do not have to be overly aggressive with your assumptions to make things look as good as mathematically possible.
I think you should consider illustrating with a max-inflation income as described above. Doing so will show your clients how to remove approximately the same amount of money in retirement while making sure there is significant cash in the policy at the end of the borrowing phase.
And if you really want to take your sales up a notch, you might consider purchasing the illustration software with the eight-page sales printout.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
Being conservative with your cash-value life insurance policy illustrations is very important these days -- especially to avoid lawsuits. Much of the industry has gravitated toward equity indexed life insurance (EIUL), which is fine, but I do not agree with how much of the industry illustrates building cash in the policy or how tax-free loans (retirement income) are illustrated.
Problems with "typical" illustrations
1) Using default settings to set crediting rates.
The default crediting method with most companies pegs the growth to the S&P 500 Index and is typically anywhere from 9 percent to 10+ percent returns every year.
I think illustrating at 9 percent to 10 percent is not conservative with our national economy, and the world economy having its issues. I traditionally illustrate 7 percent to 7.5 percent as an annual rate of return, which I think is reasonable.
2) Using default settings when illustrating variable loan rates.
One of the powerful attributes to an EIUL policy and RL is that a client can choose to take "variable" loans from the policy.
The default settings are aggressively set to make for a best-case scenario and usually default to a 2 percent positive loan spread (which significantly increases the amount that can be borrowed from the policy). I think that only giving a client a variable loan illustration is a great way to get sued. You should be showing clients "wash" loan as well.
A new way to illustrate cash-value life insurance
I observed a different and "new tome" way to illustrate cash-value life insurance as it pertains to how much a client can borrow from the policy. The following is an outline of how I typically illustrate how much cash can be borrowed from a life insurance policy:
-
1) Run the policy at the (MEC) minimum death benefit
2) Drop down the death benefit after the client is done paying premiums
3) Illustrate a level income for X amount of years in retirement (showing both wash and variable loans)
Why is that a problem? Because if, after the borrowing phase, the policy runs into years that deliver returns less than the illustrated rates, the client might have actually to put more premiums back into the policy to keep it from lapsing (unless the client is using a policy with a no-lapse guarantee that kicks in between the ages of 65-70 (depending on the company that would prevent it from lapsing).
A more conservative approach
The more conservative approach shows the client borrowing approximately the same amount of money from the life policy in the borrowing phase, but has approximately 20 percent of total borrowed funds as the cash surrender value at the end of the borrowing phase.
Because there is significantly more cash in the policy versus running a level income example, the client would be much more protected if, after the borrowing phase, the returns are lower than illustrated.
Here is how you would run the illustration:
-
1) Run it at the MEC minimum death benefit.
2) After the funding phase, reduce the amount of insurance coverage.
3) Run the income at max-inflation income with the inflation percentage at 3 percent.
4) Manually tell the software that you would like to have 20 percent of the total amount borrowed as the cash surrender value at the end of the borrowing phase.
Say you have a 37-year-old client funding $75,000 a year into a policy for 20 years (with a 7.5 percent crediting rate) and borrowing from the policy using "wash loans" from ages 65-84.
- Total income using a level income method: $13,967,240
- Cash surrender value at age 84: $393,972
- Total income using the max-inflation income: $13,889,431
- Cash surrender value at age 84: $2.79 million
Illustrative software
As many of you know, I feel so strongly that many clients should use cash-value life insurance to build wealth that I created my own illustrative software system that creates a very powerful eight-page showing the client how beneficial growing wealth with a life policy can be.
The software was just tweaked to allow advisors to illustrate with level income or with a max-inflation income.
If you can't sell cash-value life insurance from the eight-page illustration the software creates, you can't sell life insurance. To see two different eight-page illustrations from the above example (which include two 3D charts), please click here.
Summary
Be conservative with your cash-value life insurance illustrations. When you use a good cash accumulating policy like revolutionary life, you do not have to be overly aggressive with your assumptions to make things look as good as mathematically possible.
I think you should consider illustrating with a max-inflation income as described above. Doing so will show your clients how to remove approximately the same amount of money in retirement while making sure there is significant cash in the policy at the end of the borrowing phase.
And if you really want to take your sales up a notch, you might consider purchasing the illustration software with the eight-page sales printout.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
