YRT solutions – Can they compete in the current world?
Your client has a holding company with significant investments. You want to show your client how life insurance can be used to increase the size of their estate using the Corporate Estate Bond financial planning concept. The insurance product you will use is Manulife UL and you structure the solution using the Level COI for 10 years cost of insurance type.
Full CDA credit (ACB = $0) in year 38.
Pre-tax yield required to match the NEV of the life insurance solution at life expectancy = 8.58%.
An alternative insurance solution to consider:
In looking at the Level COI solution, you wonder if there is an alternative solution that may provide more value without adding significant risk to the client. You look at several alternatives and determine that a Manulife UL YRT Gold Investment Account solution may be a solution the client should consider. You solve for the level minimum premium required for 10 years using a policy interest rate assumption of 2.50%. This is lower than the net rate of return this account is earning.
Summary of values
Full CDA credit (ACB = $0) in year 27.
Pre-tax yield required to match the NEV of the life insurance solution at life expectancy = 9.96%.
The YRT solution provides a lower ACB for this case. In part this is due to the lower premium associated with this solution. However, the primary reason for this lower ACB is because YRT solutions carry higher NCPI deductions under current tax legislation. Under this YRT solution the ACB falls to $0 eleven years earlier than the under the 10 year COI solution. Of these 11 years, 9 are due to the YRT COI structure and 2 are due to the lower premium.
In comparing these two solutions it is important to note that the Level COI solution is guaranteed while the YRT Gold Investment Account solution is not. The current yield on the Gold Investment Account is 4.21%, therefore a level of conservatism has been assumed in creating this YRT solution. The Manulife UL Gold Investment Account policy guarantees that the credited rate on this account will be no less than 1% below the current smoothed yield of the actual fund (i.e. no less than 3.21%). The current credited rate on this account is 3.71%.
One of the concerns in dealing with YRT cost structures is “What if the investment earns a lower return than illustrated”? Showing a conservative return (relative to what could realistically be earned) reduces this risk. Another fundamental benefit with Manulife UL is that the Gold Fund investment is based on the smoothed return of the Performax Gold whole life investment fund. The smoothed return eliminates substantial year to year variations.
Smoothing out these “shocks” provides meaningful value and stability to every solution. With the YRT solution CDA credits are also higher in each year to life expectancy. Given the substantially lower deposits (nearly 10%) and higher net estate values it is a solution worth considering. YRT solutions may not apply to all insurance planning situations but in our current world more consideration should be given to these alternative solutions.
Date: April 2017