Comparing Leveraged Life Insurance Illustrations
“And now you know the rest of the story…”
The Insured Retirement Program (IRP) is an insurance concept designed to meet a client’s need for life insurance protection and cash flow during retirement. While most Canadian insurers offer their own version of the Insured Retirement Program, in all situations the concept shows how the client can gain access to the cash value of their life insurance policy through a bank loan, structured as a line of credit.
The benefit of the concept is that the borrowed funds are received tax-free and the outstanding loan is not required to be repaid until the life insured dies. When the life insured dies, the insurance proceeds repay the loan with any remaining balance paid tax-free to the named beneficiary.
When comparing IRP illustrations from different insurance carriers, it is important to understand that not all illustrations are created equal. There are differences that can make it difficult to determine which carrier’s IRP provides the highest level of benefit for the client. Without understanding the differences, the client may not be able to make an informed purchase decision.
Here are some of the different assumptions you should be aware of:
Timing of the loans
Manulife’s IRP illustration assumes bank loans are beginning of year loans, while a number of other carriers assume end of year loans. This is apparent because in year one, the beginning of year loan and end of year loan balance are the same amount.
For a beginning of year loan, the loan balance at the end of the year will include the interest accrued during the year. As a result, an end of year loan assumption has a positive impact on the loan benefits showing. An end of year loan illustration may show a higher level of loan benefit because the cost of borrowing (interest expense) is growing at a slower rate over the life of the illustration.
Using Manulife’s IRP concept, Manulife Bank will not restrict the investments allowed under the program. With most other carriers’ IRP concept, the lender will restrict investments as the loan margin grows. To secure a 90% loan margin, other lenders may require funds in the policy be invested in more conservative, fixed interest type of investments which offer a potentially lower rate of return compared to other investment options.
What happens if the loan margin exceeds the loan margin limit? The CSV percentage outside of the loan margin limit provides the client and Manulife Bank with time and flexibility to work together to get the loan margin back on side, using the excess CSV as a “buffer”.
Diamondview IRP illustration software can illustrate alternative loan margin benefits for comparison. This is available by selecting the “Loan Margin Sensitivity Analysis” page in the optional reports section of the software. This page will show alternative loan amounts at 90% margin if the IRP has been illustrated at 75%.
Life expectancy assumptions
Life expectancy assumptions are built into all carriers’ product and concept illustrations. In most cases the outstanding loan balance will hit margin (75% or 90%) at life expectancy. Differences in carriers’ assumptions for life expectancy will impact the benefits illustrated. Typically, lower life expectancies will show higher loans when compared to higher life expectancies. It is important to use consistent life expectancies when comparing benefits.
Policy cash values
Despite the potential for differences in assumptions the most important factor to consider is the insurance policy linked to the concept illustration, as it is the policy values that ultimately drive the benefits available under the concept.
When comparing benefits, if the Manulife insurance policy has the highest level of cash value and death benefit but is showing the lowest level of IRP benefit, it is important to understand why it is showing a lower level of benefit. The differences we have pointed out may be the reason for this. By sharing this information with your client, you allow them to choose the concept that best fits their level of risk tolerance and make an informed product purchase decision.
And now you know the rest of the story.
Reviewed: May 2018