For an explanation, see Decision Making Under Uncertainty: A (Second) Wakeup Call for the Financial Planning Profession.

Required breakeven rate of return for buying term and converting to a cash value policy later vs. buying a cash value policy now

Actual Cases
Date prepared Company/ Product name/ Product type/ Type of term-a) Age/ Gender/ Smoking status-b) Face amount/ Premium pattern-c) Illustrated interest rate-d) Breakeven analysis
Breakeven criterion-e) Waiting period-f) Breakeven interest rate-g)
11/01 Northwestern Mutual/ Estate CompLife/ WL/ART 50/ Male/ Nonsmoker $500,000/ Pay for life 7.00% Death benefit at age 100 3 years 4.1%
12/02 Ameritas/ Low-Load VUL/ VUL/10- 57/ Female/ Nonsmoker $1 million/ Pay for life 7.00% Death benefit at age 100 3 years -1.3%
12/02 Ameritas/ Low-Load VUL/ VUL/10-year term 57/ Female/ Nonsmoker $250,000/ 6-pay 7.00% Death benefit 2 years 3.7%

Explanation:

  1. What is the name of the insurance company? What is the product name of the cash value policy? What type of cash value policy is it? Common types are participating and interest-sensitive whole life (WL), universal life (UL), and variable universal life (VUL). What type of term policy are you using for comparison? Common types are annual renewable term (ART) and level-premium term (10-year, 15-year, 20-year, 25-year, and 30-year).
  2. Male or Female; Nonsmoker or Smoker.
  3. What is the illustrated pattern of premiums; e.g., payable for life, payable for x years, single premium?
  4. If whole life, what is the dividend interest rate? If universal life, what is the credited interest rate? If variable universal life, what is the assumed gross rate of return (before M&E risk charge and fund expense)?
  5. What is the point of reference for comparing the now vs. later illustrations? Examples: Death benefit at age 100, cash value in Year 20.
  6. How long do you postpone buying the cash value policy; that is, what is the length of time from the purchase of the term policy to the conversion to a cash value policy? Example: 3 years.
  7. What is the after-tax rate of return that you would have to earn on the invested difference between the term and cash value premiums to be in the same position if you bought term and converted later instead of buying the cash value policy now?

If you have an actual case to contribute to this list, copy these questions to your e-mail program, provide the answers, and send them to gdaily@glenndaily.com

  1. When were the sales illustrations prepared? (Month/year)
  2. What is the name of the insurance company?
  3. What is the product name of the cash value policy?
  4. What type of cash value policy is it?
  5. What type of term policy did you use for comparison?
  6. What is the insured's age, gender, and smoking status?
  7. What is the face amount of the policy?
  8. What is the premium pattern?
  9. What is the illustrated interest rate?
  10. What breakeven criterion did you use?
  11. What is the waiting period to convert?
  12. What is the breakeven rate of return?