James M. Russo, CSA, Senior Partner, Medicus Fiscalis, LLC

We are currently living through a storm of diminished economic returns, as the unrelenting downward pull on stocks has left Wall Street—and with it, all investors—exposed and scurrying for cover. What were once robust, healthy portfolios have been pounded into cadaveric shadows.

You, as a medical professional, understand better than anyone the value of a periodic physical. A comprehensive examination plays a vital part in ensuring sound health care. In my non-medical estimation, moreover, the power of these periodic checkups can be more beneficial to your patient than even the inspection itself. Not only does it provide patients with a sense of security and satisfaction in knowing that you are looking after them, it also gives them the opportunity to hear the unvarnished truth about their health and what they can do to improve it.

Sounds great, right? But do you really subscribe to this idea? Do you truly want to hear the unvarnished truth, particularly when, in the realm of finance—as we know all too well of late—truth sometimes can be hard to hear?

In my 20 years of experience in financial services, it has become apparent that personal and financial health, and not necessarily in that order, are the two most important issues that weigh heavily on people’s minds. In your day-to-day medical practice, the time, effort and energy you devote to your patients may minimize or completely eradicate the time, effort and energy you devote to your own personal affairs.

With that in mind, the purpose of this article is to illustrate how you can immediately save both time and money by reconsidering the most basic financial tool in every fiscally successful person’s portfolio—life insurance.

This basic financial tool is also the foundation upon which all financially successful businesses, estates and individuals rely and build. It is neither exotic nor exciting and often even boring, but it should never be overlooked. When it is—and it often is—the results can be devastating.

So let’s begin, but remember that limited space prevents me from covering every possible situation, advantage, disadvantage and use of the products covered.

Term Life Insurance
The purpose of term life insurance is to provide maximum coverage for a speci-fied period for the lowest annual outlay possible. Term life insurance is obtained for two primary reasons: 1) to get the most coverage for the lowest annual cost available; and 2) to purchase insurance for a specific number of years to cover the cost of, for example, child rearing, a loan or other obligation, a short-term business arrangement, etc.

Another factor is convertibility, the contractual right granted to the insured (or owner of the contract, if different from the insured) by the insurance company to convert the temporary protection of term life to permanent protec-tion. Thus, when evaluating term life, you must take into consideration the costs of the permanent product to which you may convert. You should purchase as much term life insurance as possible for as little as possible. However, it is not uncommon for the insurance company with the lowest-priced term life policy to have one of the highest-priced permanent life insurance policies. Consider also that the difference in cost among the top five or six term policies is generally just 1% to 3% of the annual outlay. However, the difference in cost among the convertible permanent life insurance policies can be 10% to 20% of the annual premium. If you are considering exercising your right to convert, remember that paying 3% more of a lower premium for term insurance today is much better than paying 10% to 20% more of a higher permanent life insurance premium tomorrow. A look at the chart below illustrates this.

Whole Life
The oldest and probably most familiar life insurance product is whole life insurance. Its original premise was that it would provide protection for the insured’s whole life until death occurred, up to age 100. The whole life policy was designed to endow (ie, the cash value of the policy equaled the death benefit) at age 100, at which time the policy would cease and pay out the cash value in lieu of the death benefit. Today this may seem peculiar, but when whole life insurance was created, life expectancy was about 65.

Whole life insurance used to be the only product available to cover the entire life of the insured. In addition to the guarantees provided by whole life insurance, the savings component was extremely valuable. It not only forced the insured to save money for the future while providing the protection he or she needed, but it did so on a tax-favored basis and, in many cases, at a higher rate of return than one could earn on one’s own. At one point, no better product was available. But, as with anything else, times, opinions and econom-ics change, thereby causing products to change, adapt or die.

Universal Life
Universal life insurance was originally designed to combine the low cost of term insurance with the cash value component of whole life insurance. Universal life insurance became very popular in the late 1980s to early 1990s and has become the cornerstone of many life insurance portfolios. For this discussion, we are going to bypass the original cash value design and cover the more popular, newly designed, lifetime-guaranteed, non–cash value product. This product made its debut a decade or so ago, and its many variations have fueled its popularity, helping it become the product of choice for most permanent life insurance needs. In fact, one can view the lifetime-guaranteed, universal life insurance policy as a lifetime level-term policy. It is also a commoditized product similar to its sister, term life insurance, but with one major benefit: premiums can never be increased, provided you pay your agreed-upon premiums on or before each premium due date to cover the death benefit for the benefit period you purchased. In addition to the guarantees provided by this product, there is a level of flexibility offered by no other product. You can design this product to cover you for virtually any time period, from 10 years to the remainder of your entire life, regardless of when death occurs, even out to age 120.

Another advantage offered by lifetime-guaranteed universal life insurance is that convertibility and future insurability factors have been removed from your future decision-making process, unless you decide to increase your coverage. If your life insurance requirements exceed 20 years, lifetime-guaranteed universal life may be the most economical product for you.

This product has surpassed the older, more expensive and, in my opinion, outdated whole life product. I say this because most individuals, businesses and estates are not interested in developing high cash values within their life insurance portfolio. I believe life insurance should be purchased for life insurance, and based on human life value, income replacement, and asset and wealth preservation, not as a savings or investment program to accumulate wealth. (Exceptions exist, however.)

Variable Universal Life
Variable universal life became the product of choice during the high-flying stock market years of the 1990s. Although this product promised no guarantees, it offered virtually unlimited returns that rivaled those of the stock market, potential high future income, favorable tax treatment and life insurance protection. This product’s advantages caused people to disregard the fact that there were no guarantees, and in time this proved dangerous.

During the 1990s, many illustrations projected annual rates of return of 12% to 18%, and for a while actual returns achieved or exceeded these projections. However, this has not been the case in recent years. During the years of high returns, the insured opted to reduce their premium outlay. During the lower-yield and subsequent negative-return years, the death benefit offered by the product was jeopardized. Many insureds were either forced to ante up additional premium dollars, reduce the death benefit or both, which strained their cash flow and life insurance portfolio.

Now that you have a better understanding of how the products work, you should be able to save yourself some time in evaluating the best product for your needs. The tables demonstrate how converting from one form of insurance to another may save a substantial amount of money. These are real-world examples.

Premium Period Carrier “A” Annual/Total Cost Carrier “B” Annual/Total Cost Annual/Total Cost Difference
Term: 20 Years $3,000 / $60,000 $3,150 / $63,000 $150 / $3,000
Permanent: 20 Years’ coverage $18,000 × 20 = $360,000 $15,000 × 20 = $300,000 $3,000 / $60,000
NOTE: All charts are examples for illustrative purposes only. Your actual results may vary.

Policy Type Current Death Benefit Current Cash Value Current Outlay Future Annual Outlay
Example 1 – Male – Age 36
Whole Life $126,693 $67,3501 $1,648 $1,648
Lifetime Guaranteed UL $287,699 $56,764 $67,3502 $03
Example 2 – Male – Age 39
Variable Life $2,000,000 $55,0381 $10,000 $10,000
Lifetime Guaranteed UL $2,000,000 $41,929 $67,6624 $7,503 3
Example 3 – Male – Age 40
5-Year Term Life $10,000,000 $0 $4,850 $4,8505
Lifetime Guaranteed UL $10,000,000 $0 $3,050 $3,0506
Example 4 – Male – Age 40
Whole Life $15,000,000 $585,9687 $169,704 $169,704
Lifetime Guaranteed UL $30,000,000 $0 $169,704 $169,7043
Example 5 – Male – Age 50
Variable Life $671,717 $37,6111 $12,240 $12,240
Lifetime Guaranteed UL $1,7000,000 $15,268 $50,0008 $12,0003
Example 6 – Female – Age 51
Variable Life $100,000 $21,8001 $1,320 $1,320
Lifetime Guaranteed UL $323,000 $14,762 $23,1209 $1,3203
Example 7 – Female – Age 59
Universal Life $2,000,000 $250,0001 $20,000 $20,000
Lifetime Guaranteed UL $2,000,000 $178,526 $250,0002 $03
1 transferred to new policy; 2 trans-ferred from current policy; 3 guaranteed; 4 transferred from current policy plus additional first-year outlay of $12,624; 5 premium and protection guaranteed for 5 years, premium increases in the 6th year to $66,450; 6 premium and protection guaranteed for 10 years, premium increases in the 11th year to $69,150; 7 cash value withdrawn and returned to insured/owner for personal use; 8 transferred from current policy plus additional first-year outlay of $12,389; 9 transferred from current policy plus additional first-year outlay of $1,320. UL, universal life
NOTE: Rows in red represent existing position, while rows in green represent new position.

Conclusion
Life insurance combinations are virtually unlimited, and all insurance port-folios should compare the cost-to-benefit ratios of the new, innovative products with those of your existing portfolio. Other factors, such as carrier ratings, tax ramifications, ownership interests, beneficiary designations, business needs, future cash flow and future net worth, will likely need to be considered.

Above all, the most important aspect of your life insurance program is to make sure you cover your obligations today in the event that death occurred yester-day. All other features and benefits should be secondary to the amount of insurance required.


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The information and opinions contained in this article are those of the author. McMahon Publishing does not endorse any of the claims, either explicit or implicit, contained herein.