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Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us. Liquidity Life Insurance "This report demonstrates that there aren't right and wrong ways in buying life insurance. Each option has potential advantages and disadvantages. Some clients have a significant preference for one approach and would make their entire purchase in that manner. Others have split preferences and would mix the purchase among them." Although the estate tax (as of January) is in hibernation for the year, it will awaken in 2011. Large estates with difficult to market assets face a potential estate tax liquidity problem. Life insurance is ideal for this situation. There are two excellent liquidity life insurance options. Each has different potential advantages and disadvantages. These differences are not benign. They are potentially huge and depend on future events. Helping clients and advisors understand the differences is important so an informed choice can be made. In my experience most insurance agents only recommend the no-lapse universal life (with lifetime guarantee) choice. This is a mistake. The following case study explains the two options and the differences. The client, 57 and single, has a $15,000,000 estate represented by a fractional interest in real estate. Although the estate tax is in flux it is believed that a credit equivalent of $3,500,000 and 45% tax rate will emerge. Based on this, her estate tax is $5,000,000. This is the life insurance amount covered in this case study. The client is in excellent health and I assumed she can qualify for preferred underwriting. Of many options two are the most reasonable to consider. One of them I refer to as static-priced universal life (UL), and the other market-priced UL. A few years ago many life insurance companies developed and began selling universal life (UL) policies with no lapse secondary guarantees based on paying specified premiums. I refer to these no lapse policies as static-priced. The premiums and death benefits are guaranteed - what-you-buy-is-what-you-get. We can think of this as term-insurance-for-life. Static-pricing is in stark contrast to market-pricing. A market-priced policy's performance (and premiums) will depend on future fixed-income yields and mortality experience. Static-priced policies have low to no cash values whereas market-priced policies have robust cash values. Static-Priced UL - Acme Life My review of static-priced policies indicates that Acme Life has good pricing relative to financial strength. A $5,000,000 policy has guaranteed annual premiums of $52,827 paid every year. Like term insurance this is a simple deal - pay the $52,827 and $5,000,000 death benefits are guaranteed lifetime. As noted below the cash values are low to zero compared with the market-priced alternative. Table 1 shows Acme Life's financial strength ratings.
Market-Priced UL - Premier Life I believe the best option for market-priced UL is a low-expense Premier Life policy. The target premium for $5,000,000 coverage from Premier Life will change as the crediting rate changes. Based on the current 5.6% rate the target premiums are $65,359. I have estimated the target premiums based on various average crediting rates, shown in Table 2.
You will note that if Premier Life's crediting rate averages less than about 7.1% the target premium will exceed the Acme Life's static-priced guaranteed premium of $52,827. Table 3 shows Premier Life's financial strength ratings.
Cash Value Difference Static-priced policies have little to zero cash values. In contrast market-priced policies have robust cash values. There is a tremendous liquidity difference between the Acme Life static-priced and Premier Life market-priced options. Table 4 shows the cash value difference. The premiums for Acme Life are $52,827 and $65,359 for Premier Life.
Conclusion This report demonstrates that there aren't right and wrong ways in buying life insurance. Each option has potential advantages and disadvantages. Some clients have a significant preference for one approach and would make their entire purchase in that manner. Others have split preferences and would mix the purchase among them. If you believe that fixed income yields will remain low for an extended period of time and cash value liquidity isn't important, Acme Life is the better choice. If you believe that fixed income yields will go up on a sustained basis and / or cash value liquidity is important Premier Life is the better choice. I believe that maximum cash value liquidity is a very important characteristic of life insurance. I am very comfortable that this client and her advisors know the important differences between static- and market-priced UL. I am also satisfied regardless of the decision that is made for the purchase of this liquidity life insurance.
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