Demonstrating the UL tax advantage
back to index
This is not too hard. Like many demonstrations, it involves comparing two scenarios. In this case, comparing buying UL vs not buying UL. (see graph below)
It requires you to set up a UL scenario appropriate to the individual's situation.
Remember, you are obliged to enter all the client's financial data.... loans, salary, capital... (this is the point of the exercize, unlike a simple UL illustrator, RRIFmetic shows how the UL interacts with all the client's financial undertakings... tax included)
What we are going to do is compare two investment estate planning strategies, investing inside a UL policy vs investing outside.
Once the data (Capital, loans, UL parameters....) has been entered, smooth at a level which doesn't run the capital out. Let's say if you amortize, and the ATI comes in at at $34,567, then pick $34000 as the smoothing level we will compare with.
Now... and this is important, SAVE the current configuration once you are satisfied that the data is representative of the UL scenario we are demonstrating.
Now remember... you are never going to 'save' again. We are going to be running various smoothings but we always want the original UL data scenario to be saved, since it is fiddly to have to re-enter the UL scenario's data each time.
We are going to be running the program multiple times, but we want to be able bring up the 'UL scenario' data version each time.
The process we will use is the 'Two Case Smoothing' study. Here is how it works.
First 'Get' the individual. This will have all his data including the UL data in place.
Next, Compute|Special|Two Case Smoothing study and we will get a window displaying (at the bottom) two legend titles and a graph title.
These are arbitrary, but the suggested entries are "UL", "No UL" and "Universal Life comparison"
Once these three have been entered, 'OK' out of the window and....
1. First, smooth at the above level we determined (in this case $34K).
2. Next we remove the UL parameters, taking out the 'ul benefit' and 'annual insurance cost' or, if we used an outside UL quote, temporarily zero out the 'death benefit' column. Remember, DO NOT 'SAVE' so that the original UL quote is still in the saved file.
Once the UL is removed, you have one more step...
3. Finally... smooth again.
This is the second scenario.
Now it is time to display (graphically) the results of this demonstration, click on the '2 study result' button at the bottom of the screen. Here is the result...
Universal Life Comparison
You can see that the estate benefits much more from the UL scenario. In fact, initially the net to estate advantage is $300K and at age 95 (should the client reach that age) his estate will still net $100K over the no UL scenario. Contrast this with term insurance, where the graphs cross over at a certain point.
Why??? When you examine the numbers it is plain to see that the 'culprit' is income tax.
back to index