Creative divorce planning using return of premium term life insurance
By Roccy Defrancesco
The Wealth Preservation Institute
You know the statistic: More than 50 percent of all marriages end in divorce. In 2009 alone, there were over 80,000 divorces. But how many divorced couples have children who are minors? I think it's safe to say that the answer is in the thousands.
Divorce issues with minor children
When a couple who has minor children gets divorced, it is nearly universal that in the settlement, one of the parents will carry life insurance to take care of the children in the event of the early death of the higher income producing parent. The death benefit (DB) would pay for clothes, food, housing and so on while the children are under the age of 18; and many times, the DB will also be allocated to pay for college expenses should the parent die before the last child reaches 23-24 years old.
In general, divorces are very expensive. The income-producing spouse usually gets stuck with child support and, potentially, spousal support. Therefore, when it comes to life insurance in the settlement, most of the time term life is used to minimize costs. Even though term is cheap, the parent paying the bill really doesn't like paying the bill because he/she is dictated to by the court or is forced to agree to it in a settlement.
Return of premium term
I personally do not like term life. I would much rather discuss with the parent the value of cash-value life insurance as a unique tax-favorable/wealth-building tool.
Because term life is used the vast majority of the time in divorce settlements, (in order to avoid the parent thinking that the premium paid was a waste of money) you might consider recommending ROP term life. Many will very much like the idea of getting the premium they were forced to pay back at the end of the term.
Example: Say you have a 29-year-old couple with two minor children between the ages of two and three. The husband is the bread winner and in the divorce settlement he agrees to carry $1.5 million in 20-year level term life coverage. The annual cost of regular term for a preferred male 29 years old is $863 (x 20 = $17,260).
The cost for 20-year level ROP term is $2,635 (x 20 = $52,700).
The difference in premium per year is $1,772.
At the end of 20 years with the ROP product, the client will have a tax free amount of $52,700 coming back to him. At the end of 20 years with regular term, the parent gets back zero.
The question then is whether this is financially viable.
If you took the difference in premium and invested it in mutual funds, you would have to earn a guaranteed rate of return of 3.64 percent net every year or approximately 6 percent gross (using a 20 percent blended capital gains/dividend tax on the growth, a 1.2 percent mutual fund expense, and no money management fee) to accumulate $52,700.
Do you know any 6 percent, 20-year guaranteed investments for 29-year-old clients? I don't know of any. Therefore, not only is buying ROP mentally viable, it is also financially viable.
This is a very simple concept and one you can use with clients you know, but it can also be used to help you market to divorce attorneys and CPAs who also do divorce work.
Older couples without children
There are thousands of divorces involving couples who have been married for 15+ years where, upon divorce, the non-income earning spouse needs to be taken care of financially for a number of years. This is typically done through spousal support. However, to insure that the spouse is taken care of in the event the income-producing spouse dies, life insurance is typically used.
Let's look at an example of 30-year ROP term for a 40 year old who agreed to buy 30-year level term life with a $1.5 million dollar death benefit to protect the divorced spouse.
Term life premium = $2,135
ROP = $4,225
Total premium paid over 30 years is $64,050 for traditional term and $127,650 for ROP. At the end of 30 years, the ROP will return $127,650, and the traditional term returns zero.
If the client invested the difference in premium ($2,120) each year for 30 years, the investment account would have to net 4.18 percent or gross 6.7 percent each year, guaranteed for 30 years. Again, I don't know any such investment out there offering this today, which means that using ROP term is financially viable.
The idea of using return of premium term life as a tool to help clients going through a divorce is not brain surgery. You won't get rich selling this concept. However, you can use it as a nice marketing tool to get to know attorneys and CPAs, and the bottom line is that it will make a lot of sense both financially and mentally for the clients to whom you introduce it.
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