In a previous article on the changes to the taxation of life insurance, we speculated on what insurers might do to their products to keep them competitive in the 2017 tax environment. And while the changes were significant, we had every confidence in the actuaries that they would develop their products to provide value to clients.
We have now had a chance to look at the new 2017 products and, after running our analysis, we can say that the results are encouraging.
Our Analysis – Universal Life Insurance
Our experts chose a 2016 level-cost, universal life insurance product as a baseline to compare other products. Universal life insurance provides the greatest return upon death for the premium paid. We compared level-cost, universal life insurance performance to other plan designs, based on premium, insurance benefit, and Capital Dividend Account (CDA) credits.
The 2017 plan designs we compared, included:
- Increasing costs for a limited-time period
- Level costs with guaranteed cash values
- Guaranteed premiums for short durations
When comparing greatest return upon death, at normal life expectancy, the 2017 plan designs all performed much like the 2016 level-cost product. Aside from the outlier products that haven’t increased their premiums (yet), these plan designs remain attractive insurance solutions for business owners.
Please know that there is still an insurer or two that has not yet increased their level-cost premiums and this creates some short-term opportunities. We have been told that premiums will be increasing soon (10% is expected).
The Disappearing Premium Gap.
Prior to the tax rule changes effective January 1, 2017, the premium gap between an insurance product that provided the greatest return upon death versus the one that had the highest cash values had traditionally been quite large. That gap has decreased with the new rules and will decrease even further.
With a closing premium gap, do you pay more per month for a policy that will have a significant cash value in 20 years or pay less per month with no cash value?
This is all part of the analysis to determine which product is the most appropriate for each person in their specific situation.
We should note that there has been some collateral damage as more than one insurer has taken universal life insurance off the product shelf completely. This isn’t necessarily good as competition is important in insurance and most industries.