Indexed Universal Life vs. Pretend For: Robert McNamara Presented By: [Licensed user's name appears here]
Indexed Universal Life vs. Pretend Preface A decision to acquire additional life insurance can represent one of several significant phases in your overall financial planning. An important part of this decision involves the comparison of the life insurance policy to alternative investment possibilities. To help you make an informed decision about acquiring the policy, the accompanying presentation shows financial data regarding life insurance compared to a Pretend. The study offers information from which you and your advisers can draw informed conclusions about the suitability of either plan. Following are major features of the life insurance policy for you to consider as part of your overall assessment: 1. Accumulating cash values; 2. Income tax deferred growth of cash values; 3. Competitive current interest rate; 4. Tax free access to cash values via policy loans; 5. Income tax free death benefits; 6. Probate free death benefits; 7. Privacy of all transactions. Favorable income tax consequences combine with significant policy values and benefits to produce a life insurance solution that has a considerable amount of financial leverage. Cumulative Payments Cumulative Flow $1.M Cumulative Payments $1.M Indexed UL 7.5M 5.M 2.5M 7.5M 5.M 2.5M $7,465,158 $3,271,346 $75, Yrs 1 2 3 4 5 Yrs 1 2 3 4 5 Indexed UL $1.M Values $1.M Value Death Benefit 7.5M 7.5M 5.M 5.M 2.5M $ Yrs 1 2 3 4 5 2.5M $1,369,249 $1,199,41 Yrs 1 2 3 4 5 This graphic assumes the non-guaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. Page 1 of 7
Indexed Universal Life vs. Pretend Taxation of Flow With tax deductible retirement plans, withdrawals (partial surrenders) are taxable. Due to this, cash flow illustrated from the tax deductible retirement plan in this presentation is the after tax result of withdrawals of a higher amount. With cash value life insurance policies, withdrawals (also known as partial surrenders) are income-tax free up to cost basis and taxable thereafter. Policy loans are income-tax free so long as the policy stays in force until death. The source of the cash flow from the life insurance policy in this presentation is policy loans. Note: Policy loans reduce policy cash values and death benefits, and the lapse of a loaned policy could result in severe tax ramifications to the policy owner. Be sure to consult a professional tax adviser if you have any questions about this issue. Flow Analysis In Year 21 Below is an analysis of tax calculations on cash flow in the first year that cash flow from the Pretend and Indexed Universal Life is illustrated. Pretend 255, total withdrawal @ 4.% tax which nets 153, Indexed Universal Life There are no tax calculations required for the life insurance policy since policy loans are not taxable On the life insurance policy, withdrawals up to cost basis (not in violation of IRC Section 772) are income tax free. Page 2 of 7
Indexed Universal Life vs. Pretend Comparison Yield 7.5% Income Tax Rate 4.% Indexed UL Interest Rate 7.5% Initial Payment 15, Initial Death Benefit 3,5, Pretend Indexed Universal Life Yr Male Age (1) Tax Deductible Deposits to the (2) Equivalent of Deposit* (3) Withdrawal from the ** (4) Value of (5) Value of if Distributed (6) Death Benefit of (7) Policy Premium (8) Policy Loan Proceeds (9) Value*** Increase (1) Value*** (11) Death Benefit 1 45 25, 15, 264,719 132,36 158,831 15, 31,565 31,565 3,5, 2 46 25, 15, 545,23 272,512 327,14 15, 153,134 184,699 3,5, 3 47 25, 15, 841,83 42,915 55,98 15, 163,733 348,432 3,5, 4 48 25, 15, 1,156,111 578,56 693,667 15, 175,248 523,68 3,5, 5 49 25, 15, 1,488,895 744,448 893,337 15, 187,65 711,285 3,5, 6 5 1,576,554 788,277 945,932 47,91 759,186 3,5, 7 51 1,669,374 834,687 1,1,624 5,831 81,17 3,5, 8 52 1,767,658 883,829 1,6,595 54,64 864,81 3,5, 9 53 1,871,729 935,865 1,123,37 57,6 921,681 3,5, 1 54 1,981,927 99,964 1,189,156 61,489 983,17 3,5, 11 55 2,98,613 1,49,37 1,259,168 78,241 1,61,411 3,5, 12 56 2,222,169 1,111,85 1,333,31 72,668 1,134,79 3,5, 13 57 2,353, 1,176,5 1,411,8 77,525 1,211,64 3,5, 14 58 2,491,533 1,245,767 1,494,92 82,641 1,294,245 3,5, 15 59 2,638,222 1,319,111 1,582,933 88,133 1,382,378 3,5, 16 6 2,793,548 1,676,129 1,676,129 94,13 1,476,58 3,5, 17 61 2,958,18 1,774,811 1,774,811 1,66 1,577,168 3,5, 18 62 3,132,171 1,879,33 1,879,33 17,733 1,684,91 3,5, 19 63 3,316,578 1,989,947 1,989,947 115,42 1,8,33 3,5, 2 64 3,511,841 2,17,15 2,17,15 123,749 1,924,52 3,5, 21 65 153, 3,448,587 2,69,152 2,69,152 153, -58,341 1,865,711 3,339,268 22 66 158,85 3,371,286 2,22,772 2,22,772 158,85-59,169 1,86,542 3,164,439 23 67 164,795 3,278,942 1,967,365 1,967,365 164,795-59,558 1,746,984 2,974,626 24 68 17,919 3,17,354 1,92,212 1,92,212 17,919-59,45 1,687,579 2,768,892 25 69 177,227 3,44,24 1,826,544 1,826,544 177,227-58,525 1,629,54 2,546,248 26 7 183,723 2,899,237 1,739,542 1,739,542 183,723-56,768 1,572,286 2,35,651 27 71 19,415 2,733,887 1,64,332 1,64,332 19,415-54,69 1,518,217 2,45,999 28 72 197,37 2,546,639 1,527,983 1,527,983 197,37-49,921 1,468,296 1,82,535 29 73 24,46 2,335,838 1,41,53 1,41,53 24,46-43,921 1,424,375 1,735,736 3 74 211,718 2,99,723 1,259,834 1,259,834 211,718-39,61 1,385,314 1,647,434 1,25, 75, 1,812,36 75, 1,812,36 *Equal to Column (7) ** withdrawal has been grossed up to account for the income tax required to produce the after tax number shown in Column (3). ***This illustration assumes the nonguaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. This illustration is not valid unless accompanied by a basic illustration from the issuing life insurance company. Note: Pretend values do not reflect market rate adjustments, if any. Pretend is assessed: Tax on withdrawals. Entries in Column (3) are after tax. 3 Year Summary Indexed UL Payments 75, 75, Flow 1,812,36 1,812,36 Living Values 1,259,834 1,385,314 Death Benefit 1,259,834 1,647,434 Page 3 of 7
Indexed Universal Life vs. Pretend Comparison Yield 7.5% Income Tax Rate 4.% Indexed UL Interest Rate 7.5% Initial Payment 15, Initial Death Benefit 3,5, Pretend Indexed Universal Life Yr Male Age (1) Tax Deductible Deposits to the (2) Equivalent of Deposit* (3) Withdrawal from the ** (4) Value of (5) Value of if Distributed (6) Death Benefit of (7) Policy Premium (8) Policy Loan Proceeds (9) Value*** Increase (1) Value*** (11) Death Benefit 31 75 219,249 1,836,415 1,11,849 1,11,849 219,249-33,429 1,351,885 1,554,851 32 76 227,7 1,543,914 926,348 926,348 227,7-28,257 1,323,628 1,543,867 33 77 234,997 1,22,91 732,55 732,55 234,997-22,265 1,31,363 1,54,53 34 78 243,226 862,681 517,69 517,69 243,226-15,397 1,285,966 1,545,837 35 79 251,73 469,268 281,561 281,561 251,73-7,65 1,278,361 1,56,844 36 8 26,434 37,284 22,37 22,37 26,434 1,155 1,279,516 1,586,658 37 81 22,37 269,427 11,65 1,29,581 1,624,58 38 82 278,689 22,84 1,312,665 1,675,872 39 83 288,23 34,243 1,346,98 1,741,838 4 84 298,56 47,537 1,394,445 1,823,78 41 85 38,178-67,854 1,326,591 1,786,693 42 86 38,178-62,77 1,264,514 1,757,38 43 87 38,178-56,382 1,28,132 1,735,84 44 88 38,178-5,979 1,157,153 1,721,857 45 89 38,178-46,134 1,111,19 1,714,938 46 9 38,178-42,267 1,68,752 1,714,155 47 91 38,178-2,991 1,47,761 1,599,866 48 92 38,178 7,694 1,55,455 1,498,65 49 93 38,178 46,232 1,11,687 1,418,232 5 94 38,178 97,714 1,199,41 1,369,249 1,25, 75, 3,271,346 75, 7,465,158 *Equal to Column (7) ** withdrawal has been grossed up to account for the income tax required to produce the after tax number shown in Column (3). ***This illustration assumes the nonguaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. This illustration is not valid unless accompanied by a basic illustration from the issuing life insurance company. Note: Pretend values do not reflect market rate adjustments, if any. Pretend is assessed: Tax on withdrawals. Entries in Column (3) are after tax. 5 Year Summary Indexed UL Payments 75, 75, Flow 3,271,346 7,465,158 Living Values 1,199,41 Death Benefit 1,369,249 Page 4 of 7
Indexed Universal Life vs. Pretend A Look at Year 5 Pretend Indexed Universal Life 3,271,346 Cumulative 75, Payments 75, 7,465,158 Cumulative Flow 1,199,41 Value Value 1,369,249 Death Benefit Page 5 of 7
Indexed Universal Life vs. Pretend Flow Comparison $7,6, $7,465,158 $5,7, $3,8, $3,271,346 $1,9, $ 21 25 3 35 4 45 5 Years (21-5) At Year 5 Cumulative Flow - Pretend $3,271,346 Cumulative Policy Flow - Indexed UL $7,465,158 Page 6 of 7
Indexed Universal Life vs. Pretend 5 Year Analysis $3,6, $2,7, $1,8, $1,369,249 $1,199,41 $9, $75, $ $ 1 2 3 4 5 Years At Year 5 Cumulative Payments $75, Pretend Values $ Value of Indexed UL $1,199,41 Death Benefit of Indexed UL $1,369,249 Page 7 of 7