How to model whole life or universal life insurance?

I have a Universal Life Insurance policy. I think this may have been called whole life in the past. Basically my payment provides for a fixed amount life insurance policy while the remainder becomes a savings account with a stated minimal interest rate.

I can can in the policy at any time and obtain the savings account portion.

How do I model this in ESPlanner?

Comments

Hi, You simply compare the annual term insurance amounts and annual saving amounts in your actual policy (your agent can tell you these amounts) with the annual regular saving and term holdings ESPlanner recommends. ESPlanner doesn't care precisely what you are now saving and how much you are now planning to insure in the future. It's going to tell you what to do independent of your current plans and your current policy embeds your current plans wrt saving and insurance. best, Larry

dan royer's picture

Whole life is not easily modeled in ESPlanner.

The following has been suggested in the past by others:

You should be able to treat it like a reserve fund. Otherwise, you're basically going to have to go with special receipts and expenditures and carry the "value" of the life insurance off the books. Contingent planning should allow you the flexibility of getting the life insurance pay out into the economy of the survivors if you're doing estate planning as well.

In response to Kotlikoff's dismissal of whole life, Larry Greenwald wrote the following:

I couldn't disagree more about term vs. permanent life insurance. We could debate the topic forever but most people make it much more confusing than it should be. First, term insurance pays out less than 97% of the time, meaning from an economic point of view it's close to worthless unless of course you die. Secondly, very few people invest the difference at all, let alone do it in a conservative way so that they have enough money to cover needs at the appropriate time. Do I need to say anymore about what has happened in the markets over the last 18+ months to prove that just when you need it most it may not be there. Permanent (i.e. whole life) is not for everyone, and term does have a place. However, let's understand that from carriers that pay dividends (mutual insurance companies), the cash on cash rate of return after the initial few years, when expenses are highest, have proven to rival the yields on muni bonds and if you don't need the death benefit any longer, you can borrow against the cash value on a tax deferred basis for things such as supplemental retirement income.

Let's not be to quick to make the blanket statement the permanent insurance is a waste. A better understanding will undoubtedly yield a more balance view.

I wholeheartedly agree, Larry. A skilled insurance producer can structure a permanent life contract to maximize the death benefit or the accumulation of cash within the contract, while minimizing the long-term expense.

Frankly, I'm a little disappointed that ESPlanner doesn't do a better job of illustrating and accounting for the "living benefits" of using permanent life insurance for such things as college planning or supplemental retirement funding. As just one example, life insurance can be structured to deliver a tax-free stream of income the entire way to age 120 that won't count as provisional income in the calculation of Social Security and Medicare taxation. This strategy alone opens the planning option of a less aggressive annual drawdown from qualified accounts, which will almost certainly lessen the family's tax bite.

I believe in the strategy so much that at age 60, I obtained my producer's license so that I could share the concepts with friends and family. Bottom line, with so many families facing the prospect of an impoverished retirement by following the "conventional", I'm of the opinion that's it's time to weigh all options. I'm hopeful that the team at ESPlanner will consider making a great product even better by broadening its view of insurance as more than just a death benefit. Good post, Larry.

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