A client asked me to review their Equity Indexed Universal Life insurance policy that they had and wanted to know if they should continue paying the policy premiums or if there was something better that they should be doing with their money.

Great question! I thought it would make for an even better blog post for retirement plan smackdown, so let’s run the numbers on if they should keep the policy or not.

 What value are you getting from your equity indexed universal life policy?

The client is a healthy 56 year old male, and purchased an Equity Indexed Universal Life insurance policy back in 2008 at age 49. The stated monthly premium is $300/month, but the client has only been paying the minimum monthly premium of $264/month. The policy provides for the following benefits:

• $200,000 tax-free Death benefit
• Terminal Illness, Chronic Care rider
  • If the doctor says that you have under 24 months to live, or need help with 2/6 Aid for Daily Living (ADL) activities, then you can access the $200,000 death benefit before you die.
• Qualifying Event rider
  • If you have a heart attack, stroke, diagnosis of cancer, or end stage renal failure you can access the death benefit before you die
• Unemployment Rider
  • Pays your policy premium for 90 days after you’ve been unemployed for 90 days
• Long Term Care Rider
  • If you can’t perform 2/6 Aid for Daily living activities, then you can access up to 2% of the death benefit ($4,000) each month until the benefit goes to zero.
• Extension of Benefits rider for long term care
  • If you spend your entire $200,000 death benefit on long term care at $4,000/month (50 months) then you can get another $200,000 of long term care coverage that will pay out at 1% of the original death benefit, or $2,000/month for another 100 months.

Is this a good deal or not? Well, let’s look at the costs. From their statement, we can derive the following monthly costs associated with their policy:

• Expense Charges:  $124
• Rider Costs:           $55
• Insurance Cost:      $27

Total Costs:           $206

• Net Amount:         $58

Out of the $264/month check that he’s been paying for the past 8 years, 78% of it has been eaten up by insurance costs, fees and expenses. The client has paid a total of $26,112 into the policy but it only has a cash value of $8,589, and a surrender value of $7,954. This is the amount of money that the client could walk away with if they wanted to do something else.

Also, the client has only been making the minimum premium payments to keep the policy in force, the policy was designed to work on a $300/month payment plan, the fact that the client has only been paying $264/month means that the policy is at a huge risk of becoming underfunded and eventually lapsing. If the client wants to keep the policy, they should planning on paying at least $300/month from here on out.

Should you cancel your equity indexed universal life insurance policy or not?

Before you do anything, you should see if you can get equivalent life and long term care coverage for the same $300/month cost.

First off, I used www.sidebysidequotes.com to search for all of the insurance options for a healthy 56 year old male, and here are the following results for a $200,000 death benefit.

I also used www.sidebysidequotes.com to search for all available long term care plans and searched for a plan that would provide for $4,000/month of long term care coverage for the longest period possible, which is for five years.

Genworth Privileged Choice Flex 3 Enhanced Long Term Care Policy: $103/month

Depending on how long the client wants guaranteed life insurance coverage for would dictate how much they’ll end up spending for their plan. After completing a complete financial review with the client, we found out that wanted the life insurance to pay off the house in the event of death so that his spouse wouldn’t be in a financial bind. Since 2008 they’ve paid down the mortgage to where they only owe $100,000, so client client decided to go for a 20 year Term Plus Insurance plan from Ohio National for $100,000. This plan has a unique conversion feature, whereby if the client were to be diagnosed with a terminal illness, they could automatically convert their policy over to a whole life plan with a $100,000 death benefit with no additional medical underwriting. This give the client the protection that they need, and a conversion clause just in case.

Here’s what his new payment will look like:

• 20 year $100,000 Term Insurance plan: $38.41
• LTC 5 year plan for $240,000:               $103.00

Total LTC and Life insurance cost:     $141.00

Money left over:                                $159.00/month or $1,908/year

 What to do with your monthly savings by cancelling your equity indexed universal life policy

This is where the real savings and value come into play. The $159/month savings is $1,908/year. The client was already maxing out their IRA account at work, so we advised them to switch their PPO plan at work to a Health Savings Account. This will allow them to put the $1,908/year, tax-free, into a Health Savings Investment Account. The final numbers on this are phenomenal:

• Client plans to work for 10 more years and retire at age 66
• Invest his HSA contributions into and investment account that can be set up with www.HSAbank.com
• $1,908/year for 10 years at 8% = $31,759
  • At age 66, keep investing the HSA account tax-free, and the future values could be:

 Total Amount spent on insurance premiums for the next 30 years:

• Long Term Care: $103/month x 360 months = $37,080
• Life insurance: $38.41/month X 240 months = $9,218
• Health Saving account: $159 x 120 months =    $19,080

           Total Spent on new plan:                              $65,378

 Compare this to how much you would have spent with the old plan:

$300/month x 30 years = $108,000

 Do whatever you can to get a Health Savings Account—it is better than Thanksgiving dinner

Alternatively, the client could add more to his 401(k) plan at work, or look at doing a ROTH IRA, but the Health Savings Account is a superior option because there were already paying the $300/month that was earmarked for life and long term care costs anyways, so by investing into the Health Savings Account, they’re able to have more access, control, and tax benefits versus the old EIUL policy.

Granted, you can’t take take “participating policy loans” out of a Health Savings account, but the client wasn’t putting enough money into their EIUL policy to benefit from any of these features. The HSA account gives them a tax deduction on their contributions, tax-free growth, and tax-free withdrawals when used for medical costs like long term care, Medicare Part B premiums, heart attack, etc.

A modest 10% growth rate of return is not out of the question, and having another $554,000 of liquid monies available to pay for things versus an empty life insurance policy that very well could implode in the future sounds like a good way to go.

The Key to everything is getting a comprehensive Retirement Income Plan to see what your options are.

At Anthony Capital, we offer a 2nd opinion service that does exactly that, it takes a 30,000 foot overview of your current retirement plan and gives you recommendations on the things that you can do to improve. By looking at more than just your investments, we can come with initiative and personalized solutions that can help you save money on unnecessary fees, expenses, taxes, and penalties and help you reach your retirement income goals.

If you’d like to request the 2nd Opinion service for your retirement account, then CLICK on the link to schedule a time to get on my calendar! It could be worth tens of thousands of dollars!

Dave Anthony, CFP®, RMA®