Comments on: Life insurance math question

By: Oreomind

Oreomind — Mon, 23 Jul 2007 00:38:09 +0000

Two things… I believe you are getting far to low ROI for an insurance product. Have you looked into Variable Universal Life? (VUL) That 5% is actually minus 3.4% inflation. I think you can do better than an effective 1.6% return. Loaning your insurance company 14K, for them to go into the market and earn 10-15% on your money and only pay you 5%

Also, why let the dividends pay the premiums, are you not reducing taxable income by paying them with earned income thereby saving yourself twice on the taxation side? (Reducing taxable income and an appreciating tax deferred asset)

By: gte601

gte601 — Sun, 22 Jul 2007 03:35:23 +0000

I pulled your data from the SDCIA Board
2001: cash value $10,600, dividend $498, premium $766
2002: cash value $11,600, dividend $451, premium $766
2003: cash value $12,281, dividend $404, premium $766
2004: cash value $13,086, dividend $420, premium $766
2005: cash value $14,092, dividend $442, premium $766
2006: cash value $15,418, dividend $468, premium $766
2007: cash value $16,247, dividend $495, premium $766

By: gte601

gte601 — Sun, 22 Jul 2007 03:25:22 +0000

You drop this investment if the returns do not meet your expectations…. Not just because the dividend covers the premium.

Based on the data you provided – running an excel IRR shows you are making about 3.8% return on your investment over 7 yrs once the dividend reinvest and premiums are accounted for.

If you don’t want to run the full IRR – think about it this way: at 5% simple interest you would have had 14205 after 7 yrs -and you kicked in 2184 in premiums on top of it.

By: knuckleheaded

knuckleheaded — Thu, 19 Jul 2007 17:46:10 +0000

Unless you got dependents, I’d rather have the money now.

By: Sam

Sam — Thu, 19 Jul 2007 16:24:12 +0000

Most level headed advisors will tell you to keep your investing and your insurance separate. Keep the policy if you need the insurance. Don’t let the investment portion of it influence that decision.

By: Kenric

Kenric — Thu, 19 Jul 2007 15:15:46 +0000

Shaun,

I think the tough thing to account for is the benefit of the policy. Do I count that in my decision. If this policy had a $50,000,000 payout, it’s a no brainer to keep it until I started losing money. If the policy is only $20,000 then I would have cashed it out a long time ago. But at $100,000 or $200,000, it becomes a harder decision.

By: Shaun

Shaun — Thu, 19 Jul 2007 15:10:56 +0000

I agree with Sam. Look at it this way, if you bought a rental property for $100K one year and got $10K in income, you would say your return for the year was 10%. Then the second year you get another $10K. You didn’t spend money to buy the house in the second year, but you wouldn’t claim your return was infinite.

I’m assuming the $500 dividend and $1000 yearly increase are constant. Don’t forget the loan will need to be paid off. At some point, your loan will be growing faster than your cash value. In 2009, your loan balance will be $1175 ($1111 + $64 in interest). From that point on, your loan balance will be greater than your cash value increase. Eventually, your interest charges will also be greater than the $500 dividend. At that point, you’ll be losing money.

By: Kenric

Kenric — Thu, 19 Jul 2007 15:03:46 +0000

Sam, I understand what you’re saying. I could cash out the $14k and stick it in a 6% CD and make $840 a year. So I think the question is, is the life insurance policy worth it combined with the decreasing return to 4%.