A young engineer client, age 33, and his wife, age 31, found out they were expecting for the first time, with twins on the way. In reviewing his current life insurance coverage, he discovered that his dad and mom had used the maximum annual gift tax exemption for a number of years to purchase two Variable Universal Life policies on him when he was 15, thinking his son would be covered for life, as the illustrations showed.
But due to business conditions, his dad couldn’t contribute any more premium gift payments into the policies after a few years. Two major bear market declines over the last decade, plus their son’s increasing annual mortality costs, had caused these market-based insurance polices to lose significant cash value over the years.
In a free policy review, we determined that the policies’ reduced cash values were projected to only support life insurance coverage until his age 52, rather than age 100, as originally projected. To extend the same coverage past age 52 and back to age 100 would now require unaffordable annual premium payments– with no guarantees of death benefits or cash values, and no protection from additional future bear market declines.
Furthermore, the young couple had no funds set aside to cover the potential costs of a chronic illness or debilitating accident during his lifetime, which these older-designed policies would not cover.
Extension of Coverage Term
We used the $89,272 of remaining cash values within the two variable universal life policies to purchase a new limited pay custom whole life policy from New York Life, with a Chronic Care rider, layered with a New York Life Guaranteed Universal Life policy that would only cost him $1700 in premium payments per year. After the transaction, the client walked away with $1 million in permanent life insurance coverage that would last to age 121 based on New York Life’s current dividend scale. That was a good thing in retrospect, now that his young family has grown to 4 dependents!
Increasing Death Benefit
The client’s two new policies are expected to have a combined $3.2 million in insurance coverage by his age 121, for a total lifetime premium outlay of only $211,672. That’s 15.4 times more than the total premiums going into the policies during his lifetime. This new policy is not subject to any market-based risk. (The purchasing power of that death benefit will likely be less in the future than today–but the cash value sitting inside his VUL policies were being eaten away each year by increasing mortality costs, and those policies would have only provided coverage for his spouse and children for less than half the time of the new Custom Whole Life and Guaranteed Universal Life policies from New York Life.)
Easy Access to Cash Value
Plus, during his lifetime, he can borrow from his Custom Whole Life policy for short-term needs, like home improvements, a new car, or educational expenses. Instead of paying loan interest to a third party lender and putting up his home for collateral, he can simply take immediate loans whenever he wants with a simple phone request to New York Life, using his policy as collateral.
An Asset That Continues to Grow Every Year
In the meantime, based on New York Life’s unbroken history of dividend payments to policyholders over the last 134 years in a row, his policy is expected to continue to build cash value through annual, tax-sheltered dividends, even while there are outstanding loans.
From day one, the policy’s death benefit, chronic care pool, and cash surrender values are protected from creditors and claimants, reserved exclusively for the use and financial protection of his dependents. If he were to pass away earlier than life expectancy, his heirs would receive $1,010,000 in insurance proceeds tax free, (less the amount of any unpaid loans and interest).
Lifetime Chronic Care Expense Benefits and Guaranteed Death Benefit
By the time our client reaches age 83, with no further payment of any premiums, the cash value inside the custom whole life policy is expected to total over $487,000, and he will have the ability to use up to $440,000 at anytime during his life for a chronic illness or dementia care. With over $1M in death benefit protection from the two policies, continually increasing cash values, and chronic care coverage during his life, this client is much better off than when we first met, when he was expected to lose all his insurance coverage by his age 52.
Guaranteed Insurability and Increasing Net Worth Values
As an additional benefit, this client has the option of sheltering more savings into the custom whole life policy, without the need for any further medical examination. Most couples agree they should try and put away 10% of their net income for future needs every year. If he socked away less than 8% of his net income every year into his policy until he was age 65 and then stopped premium payments, (rather than depositing savings into a taxable savings or brokerage account), he would have over $988,000 in cash value by his normal retirement age of 67 (adding a substantial non-market correlated pool of resources in retirement to supplement his qualified retirement plan distributions and potential Social Security benefits). By his life expectancy at age 85, he would have over $2,700,000 in tax free death benefits for his wife and children.