by geode_lover » Mon Sep 20, 2010 11:36 pm
Please tell me if you think this is a good investment. I am considering purchasing a policy through Northwestern Mutual as a retirement supplement for me (if I need it) and for retirement for my 19 year old son. My son will be the insured, I will own the policy and be beneficiary. I will insure my son for 1.5 million and pay a total of $286,570 over the course of 20 years. The 20 year cash value will be $532,976 and if all goes well I won't need any of it. When my son is 69 the cash value will be $3,150,254, life insurance will be $5,314,080 and the premium outlay will have been $387,303. Please tell me if you think this would be a sound investment for my son's future.
Also, will this increase the value of my estate if I die and am still the policy owner? I plan on transferring it to him in around the 20 year mark. Thanks for your help. It looks like it could be a great thing to do for my son but I'm on the fence. Any advice is appreciated.
Also, will this increase the value of my estate if I die and am still the policy owner? I plan on transferring it to him in around the 20 year mark. Thanks for your help. It looks like it could be a great thing to do for my son but I'm on the fence. Any advice is appreciated.
Posted: Tue Sep 21, 2010 12:33 am Post Subject:
Sounds like you've been presented with an illustration for a UNIVERSAL LIFE (or a VARIABLE UNIVERSAL LIFE) policy. And while anything that's illustrated hypothetically as you have in your hand can happen, most modern universal life policies have not performed as robustly as agents have illustrated them -- many have fallen far short. It looks like you've been illustrated about a 5% rate of return, which at least is conservative.
I'm curious, however, to find out, if the premium outlay in the first 20 years is $286,570, how the next 30 years of premium only come to $90,733. Something does not seem to add up correctly.
The inherent hazard of Universal Life, especially when a death benefit is as large as $5.3 million, is that at later ages, the premium necessary to support the cost of insurance is very large. Only the increasing cash value can overcome the difference if insufficient premiums are being paid. Your son's policy will go to age 121, and although premium payments are not required in UL, failure to pay premiums (or sufficient premiums) will most likely put the policy on track to lapse, or at least erode the massive cash value you've been illustrated.
As long as you and your son can learn to read and understand the annual policy statement you will receive, and fund the policy properly over time, it has the potential to do what you've been illustrated. But those numbers are in the "NON-GUARANTEED" columns of the illustration and the annual statements. Be sure you also understand what the "GUARANTEED" columns are showing to you, too.
There are also so-called secondary guarantees that can avoid that as long as 100% of the "scheduled" (or "planned") premiums are paid on time and without fail. There is an additional fee for that benefit, but I'm not sure it would promise $5.3 million at age 121 in the absence of proper premiums or cash value interest crediting. NWM probably has them available.
Perhaps someone more familiar with Northwestern Mutual's UL policies can shed some light.
As for the question of your estate and life insurance, if you are the owner of a policy on someone else, the cash value of the policy will be includable in your estate for estate tax purposes if you die before your son (which is the way life is supposed to work) since you had "access" to it up to the moment of your death.
You could use a life insurance trust as the owner of the policy to avoid the estate tax issue, but in turn would probably be prevented from tapping the cash value for your own needs and still be able to demonstrate that you had no beneficial interest in the policy. An estate planning attorney would be the proper person from whom to get your answers.
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