I need to get a policy for my 86 year old mother for reasonable premium.
Total Comments: 144
Posted: Wed Jul 01, 2009 04:54 pm Post Subject:
"An 86 year old female who can get standard rates on life insurance has a life expectancy of greater than 6 years."
Actually the standard mortality for an 86 y/o using the IRS 2005 mortality table is 6.08 years. Or if you want to use the 2001 CSO table it come out to 6.16 years.
"You are not putting up a very compelling life insurance argument with your example. If she could invest her money and earn 5%, as long as she lives 8 years, her family comes out behind with the life insurance."
I dont think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
I also don't think you understand how an insurance carrier underwrites there clients. Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
Posted: Wed Jul 01, 2009 05:58 pm Post Subject:
"I think that he's being overly optimistic in his post. If the taxes are only $4,000, that puts the person in a combined federal, state, and local tax bracket of 13%. Additionally, if the death benefit is $282,000, the person is probably getting super preferred rates. Not too many 86 year olds can get this rate.
Regardless, assuming that the numbers are accurate, and I have no reason to believe that they aren't in his example, it still doesn't make much sense.
The odds favor her being able to leave more money behind by investing the money instead.
As an aside, if she is in a higher tax bracket, a single premium life insurance policy will make more sense than using an annuity to fund annual premiums."
Ok so the number i used are from the actual illustrations i ran last night. All the number i will be using are 100% accurate.
This was a real life example....although the client was actuly 89 y/o. I just changed everything to 86 because of OPs original question.
InsuranceExpert.....i did not run a detailed analysis for the sake of time but if you want to see the REAL scenario here goes:
This is a very common strategy known as annuity arbitrage where we use the different mortality calculation between SPIAs (Single Premium Immediate Annuities) and life insurance.
Client Info:
Female
86 y/o (we will assume age nearest)
Standard Non-tobacco risk
$200k in cash with a $200k basis.
Life Expectancy 6 years (see previous post) (using IRS 2005 or 2001 CSO mortality tables)
Resident state: CA
Federal Tax: 25%
State Tax: 8%
Total tax: 33%
Option 1:
Client put money into a CD paying 5% for the next 6 years.
In 6 years account value will be $268,019. heirs will receive $268,019 - (68,019 * .33) = $245,562
Option 2:
By a single premium Life policy for 200k.
This will buy her a 265k paid up policy.
Appon dealth heirs will receive $265k
Option 3:
Buy a SPIA with a life time payout option generating $28,824 a year for life with a 100% exclusion ratio. this will generate (after tax) the following income stream:
This net income will buy her a Life Pay guaranteed UL with a $320,000 Death benefit.
on death heirs receive $320,000
The SPIA is with AG and the Life Policy is with Transamerica.
This does not always work out but it often does. It also seem counter intuitive to believe that a life pay UL buys more DB then a 1 pay...but because of the way the SPIA mortality is calculated vs. life insurance makes it work.
Hope this helps clarify my previous post.
Posted: Wed Jul 01, 2009 06:30 pm Post Subject:
:P I love Marpol. :wink:
Posted: Wed Jul 01, 2009 06:34 pm Post Subject:
Thanks Gary,
This strategy work a lot better before SPIA rates dropped (about 1 month ago). Although they are inching up a bit recently.
Also if you look at the SPIA income it returns the clients principal in 7 years (normaly on a life pay it will pay back principal at life expectancy) wich validates our 6-7 year LE.
The Trans policy is also only Guaranteed to age 100. if you want to go to age 107 you would get 300k and if you want for a life guarantee you would get 291k. just depends on how much risk the client wants to take and family longevity history.....although you could always pay catch up premiums for a few years if you needed to.....now i am just rambling......sorry.
Posted: Wed Jul 01, 2009 08:39 pm Post Subject:
I like the concept. I'm a big believer in the value of permanent life insurance. It just doesn't work well with the numbers as presented. You are starting with an incorrect premise.
The life expectancy for an 86 year old female is 6 years. This includes ALL 86 year old females. 86 year olds living out their last days in a nursing home are included as is the 86 year old with cancer and the 86 year old with the bad heart as is the 86 year old with diabetes as is the 86 year old on life support, etc.
An 86 year old who can get standard insurance rates has to be in pretty good health. The life expectancy for the population of HEALTHY 86 year olds must be longer than the life expectancy of all 86 year olds.
Let's use your numbers combined with logic to understand that 6 years is not the life expectancy for a healthy 86 year old female. $28,824 will buy a death benefit of $291,000. That works out to a 15% annual return at life expectancy if life expectancy is 6 years. How can the insurance company earn 15% after all expenses? They can’t. What’s realistic when looking at the return on the death benefit at life expectancy is 5-6%. This would change life expectancy to 8 years. This is much more likely to be the life expectancy for a relatively healthy 86 year old.
Posted: Wed Jul 01, 2009 08:57 pm Post Subject:
I dont think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.
Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.
With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.
Posted: Wed Jul 01, 2009 09:01 pm Post Subject:
If we change the facts just a little bit, I would be very much in favor of the life insurance. Ex. Mrs. Smith is 86 years old and can get insurance at standard rates. She is receiving a pension and getting $29,000/year after tax. She doesn’t need the money. She can use this money to buy a life insurance policy that will pay $275,000 (or whatever figure we are using).
In this example, life insurance makes much more sense because if death occurs early, this year, for example, her beneficiaries will get $275,000 instead of $29,000. In the other examples, her beneficiaries would still have been getting $200,000.
Posted: Wed Jul 01, 2009 10:08 pm Post Subject:
Quote:
I don't think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.
THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.
Quote:
Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.
This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.
With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.
OK i still do not understand this statement at all. The numbers work for life insurance in this case.
So lets analyze again:
The mortality tables give a statistical average (actually it is much more complex then a simple average). Meaning it is the average mortality....meaning some people will live longer and some will live shorter.....this is the definition of standard risk. But I am not an acctuary or an insurance carrier so I do not know exactly what the mortality is for an 86 y/o at standard risk at Transamerica.
So instead of trying to guess an LE let figure out our break even ( or the over all benefit to here heirs each year she could die.
Lets assume 4 options:
1) She hides her 200k under he mattress and her heirs find it.
2) She invests her money in guaranteed CD at 5% compounding interest per year.
(Note on calculations: option 2 is calculated as follows: 200k * 1.05. Then we multiply that by 1.05 again and so forth each year. We then back out the taxes by subtracting the basis...200k....and multiplying by 0.67 and then adding the basis back...200k)
We can see that our break even point between option 2 and 4 is in year 13 or age 98. This will well past life expectancy for an 86 y/o.
I don't know.....maybe I am missing something but the annuity maximization strategy seems to be the best option. (not to mention that i am feeling lazy so i assumed the CD is growing tax deferred...which it does not....so the true break even is probably past year 100).
Posted: Wed Jul 01, 2009 11:23 pm Post Subject:
THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.
First of all, I have no idea where you are generating these numbers. Secondly, the rule of 72 deals with how long it takes to double a single lump sum payment and has nothing to do with annual payments. Finally, the return that one ultimately gets on a life insurance policy will be based upon actual year of death and not life expectancy.
Posted: Wed Jul 01, 2009 11:32 pm Post Subject:
This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.
You have wrong information. The majority of 86 year olds are not insurable at standard rates. The majority of 35 year olds will get better than standard.
Posted: Wed Jul 01, 2009 04:54 pm Post Subject:
"An 86 year old female who can get standard rates on life insurance has a life expectancy of greater than 6 years."
Actually the standard mortality for an 86 y/o using the IRS 2005 mortality table is 6.08 years. Or if you want to use the 2001 CSO table it come out to 6.16 years.
"You are not putting up a very compelling life insurance argument with your example. If she could invest her money and earn 5%, as long as she lives 8 years, her family comes out behind with the life insurance."
I dont think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
I also don't think you understand how an insurance carrier underwrites there clients. Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
Posted: Wed Jul 01, 2009 05:58 pm Post Subject:
"I think that he's being overly optimistic in his post. If the taxes are only $4,000, that puts the person in a combined federal, state, and local tax bracket of 13%. Additionally, if the death benefit is $282,000, the person is probably getting super preferred rates. Not too many 86 year olds can get this rate.
Regardless, assuming that the numbers are accurate, and I have no reason to believe that they aren't in his example, it still doesn't make much sense.
The odds favor her being able to leave more money behind by investing the money instead.
As an aside, if she is in a higher tax bracket, a single premium life insurance policy will make more sense than using an annuity to fund annual premiums."
Ok so the number i used are from the actual illustrations i ran last night. All the number i will be using are 100% accurate.
This was a real life example....although the client was actuly 89 y/o. I just changed everything to 86 because of OPs original question.
InsuranceExpert.....i did not run a detailed analysis for the sake of time but if you want to see the REAL scenario here goes:
This is a very common strategy known as annuity arbitrage where we use the different mortality calculation between SPIAs (Single Premium Immediate Annuities) and life insurance.
Client Info:
Female
86 y/o (we will assume age nearest)
Standard Non-tobacco risk
$200k in cash with a $200k basis.
Life Expectancy 6 years (see previous post) (using IRS 2005 or 2001 CSO mortality tables)
Resident state: CA
Federal Tax: 25%
State Tax: 8%
Total tax: 33%
Option 1:
Client put money into a CD paying 5% for the next 6 years.
In 6 years account value will be $268,019. heirs will receive $268,019 - (68,019 * .33) = $245,562
Option 2:
By a single premium Life policy for 200k.
This will buy her a 265k paid up policy.
Appon dealth heirs will receive $265k
Option 3:
Buy a SPIA with a life time payout option generating $28,824 a year for life with a 100% exclusion ratio. this will generate (after tax) the following income stream:
1-$28,824
2-$28,824
3-$28,824
4-$28,824
5-$28,824
6-$28,824
7-$28,824
8-$19,312
9-$19,312
10-$19,312
.
.
This net income will buy her a Life Pay guaranteed UL with a $320,000 Death benefit.
on death heirs receive $320,000
The SPIA is with AG and the Life Policy is with Transamerica.
This does not always work out but it often does. It also seem counter intuitive to believe that a life pay UL buys more DB then a 1 pay...but because of the way the SPIA mortality is calculated vs. life insurance makes it work.
Hope this helps clarify my previous post.
Posted: Wed Jul 01, 2009 06:30 pm Post Subject:
:P I love Marpol. :wink:
Posted: Wed Jul 01, 2009 06:34 pm Post Subject:
Thanks Gary,
This strategy work a lot better before SPIA rates dropped (about 1 month ago). Although they are inching up a bit recently.
Also if you look at the SPIA income it returns the clients principal in 7 years (normaly on a life pay it will pay back principal at life expectancy) wich validates our 6-7 year LE.
The Trans policy is also only Guaranteed to age 100. if you want to go to age 107 you would get 300k and if you want for a life guarantee you would get 291k. just depends on how much risk the client wants to take and family longevity history.....although you could always pay catch up premiums for a few years if you needed to.....now i am just rambling......sorry.
Posted: Wed Jul 01, 2009 08:39 pm Post Subject:
I like the concept. I'm a big believer in the value of permanent life insurance. It just doesn't work well with the numbers as presented. You are starting with an incorrect premise.
The life expectancy for an 86 year old female is 6 years. This includes ALL 86 year old females. 86 year olds living out their last days in a nursing home are included as is the 86 year old with cancer and the 86 year old with the bad heart as is the 86 year old with diabetes as is the 86 year old on life support, etc.
An 86 year old who can get standard insurance rates has to be in pretty good health. The life expectancy for the population of HEALTHY 86 year olds must be longer than the life expectancy of all 86 year olds.
Let's use your numbers combined with logic to understand that 6 years is not the life expectancy for a healthy 86 year old female. $28,824 will buy a death benefit of $291,000. That works out to a 15% annual return at life expectancy if life expectancy is 6 years. How can the insurance company earn 15% after all expenses? They can’t. What’s realistic when looking at the return on the death benefit at life expectancy is 5-6%. This would change life expectancy to 8 years. This is much more likely to be the life expectancy for a relatively healthy 86 year old.
Posted: Wed Jul 01, 2009 08:57 pm Post Subject:
I dont think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.
Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.
With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.
Posted: Wed Jul 01, 2009 09:01 pm Post Subject:
If we change the facts just a little bit, I would be very much in favor of the life insurance. Ex. Mrs. Smith is 86 years old and can get insurance at standard rates. She is receiving a pension and getting $29,000/year after tax. She doesn’t need the money. She can use this money to buy a life insurance policy that will pay $275,000 (or whatever figure we are using).
In this example, life insurance makes much more sense because if death occurs early, this year, for example, her beneficiaries will get $275,000 instead of $29,000. In the other examples, her beneficiaries would still have been getting $200,000.
Posted: Wed Jul 01, 2009 10:08 pm Post Subject:
Quote:
I don't think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%
What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.
THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.
Quote:
Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.
That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.
This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.
With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.
OK i still do not understand this statement at all. The numbers work for life insurance in this case.
So lets analyze again:
The mortality tables give a statistical average (actually it is much more complex then a simple average). Meaning it is the average mortality....meaning some people will live longer and some will live shorter.....this is the definition of standard risk. But I am not an acctuary or an insurance carrier so I do not know exactly what the mortality is for an 86 y/o at standard risk at Transamerica.
So instead of trying to guess an LE let figure out our break even ( or the over all benefit to here heirs each year she could die.
Lets assume 4 options:
1) She hides her 200k under he mattress and her heirs find it.
2) She invests her money in guaranteed CD at 5% compounding interest per year.
3) Purchases a paid up life insurance policy
4) Use a SPIA to fund a Life policy.
In all cases lets assume no estate taxes.
Net to heirs
Year Age Option 1 Option 2 Option 3 Option 4
1 86 $200,000 $206,700 $265,000 $320,000
2 87 $200,000 $213,735 $265,000 $320,000
3 88 $200,000 $221,122 $265,000 $320,000
4 89 $200,000 $228,878 $265,000 $320,000
5 90 $200,000 $237,022 $265,000 $320,000
6 91 $200,000 $245,573 $265,000 $320,000
7 92 $200,000 $254,551 $265,000 $320,000
8 93 $200,000 $263,979 $265,000 $320,000
9 94 $200,000 $273,878 $265,000 $320,000
10 95 $200,000 $284,272 $265,000 $320,000
11 96 $200,000 $295,185 $265,000 $320,000
12 97 $200,000 $306,645 $265,000 $320,000
13 98 $200,000 $318,677 $265,000 $320,000
14 99 $200,000 $331,311 $265,000 $320,000
15 100 $200,000 $344,576 $265,000 $320,000
(Note on calculations: option 2 is calculated as follows: 200k * 1.05. Then we multiply that by 1.05 again and so forth each year. We then back out the taxes by subtracting the basis...200k....and multiplying by 0.67 and then adding the basis back...200k)
We can see that our break even point between option 2 and 4 is in year 13 or age 98. This will well past life expectancy for an 86 y/o.
I don't know.....maybe I am missing something but the annuity maximization strategy seems to be the best option. (not to mention that i am feeling lazy so i assumed the CD is growing tax deferred...which it does not....so the true break even is probably past year 100).
Posted: Wed Jul 01, 2009 11:23 pm Post Subject:
THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.
First of all, I have no idea where you are generating these numbers. Secondly, the rule of 72 deals with how long it takes to double a single lump sum payment and has nothing to do with annual payments. Finally, the return that one ultimately gets on a life insurance policy will be based upon actual year of death and not life expectancy.
Posted: Wed Jul 01, 2009 11:32 pm Post Subject:
This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.
You have wrong information. The majority of 86 year olds are not insurable at standard rates. The majority of 35 year olds will get better than standard.
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