Before the development of universal life insurance, permanent life insurance was relatively straightforward. Policies had fixed premiums, fixed death benefits, and fixed interest rates generating consistent growth of cash surrender values over time. As a result, determining the internal rate of return (IRR) on policies was relatively easy. However, as “flexible premium” universal life products were developed in the early 1980s, policyowners gained flexibility to structure premium payments differently – introducing the possibility for individuals to place greater emphasis on either the IRR of death benefits or the IRR of cash surrender values based on their goals. However, because of the complexity of universal life insurance, many policyowners (and financial advisors) still remain unaware of this ability, and how to properly utilize flexible universal life products to fully optimize either one of these objectives.
In this guest post, Rajiv Rebello of Colva Insurance Services examines various universal life insurance premium payment strategies, illustrating that in order to fully understand the dynamics influencing both death benefit and cash surrender value IRRs, it is crucial to understand exactly how the policies work, including how the insurance expenses are deducted from a universal policy in the first place. Additionally, through some sample scenarios, Rajiv examines what premium payment strategies work best for maximizing either a death benefit IRR or a cash surrender value IRR.
Ultimately, the key point is that it’s important for any advisor to understand the mechanics of how best to maximize a life insurance policy, and why the funding strategies to maximize cash value accumulation are fundamentally different than maximizing the internal rate of return on the death benefit itself. Whether it is through “maximum funding” strategies, “minimum funding” strategies, or hybrids and other variations of flexible premium payment strategies… financial advisors and their clients have many strategies available for pursuing different financial objectives. And because choosing the right strategy can have a considerable impact on a client’s wealth, it is crucially important to pair the right funding strategy with the right policy structure in order to accomplish the long-term goals of a client!
source https://www.kitces.com/blog/universal-life-insurance-funding-strategies-death-benefit-cash-surrender-value-bd-csv-irr/
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