Keeping Client Life Insurance Policies on Track

By Hickman, Robert T. | The CPA Journal, June 1996 | Go to article overview

Keeping Client Life Insurance Policies on Track


Hickman, Robert T., The CPA Journal


From cost accounting, I learned that a CPA can enlighten a client with a concept called "budget variance analysis" (BVA). BVA is the comparison of previously forecast numbers with actual achieved results. Studying the difference between budget and actual has always been an extremely valuable exercise. Applying the concept to life insurance policies can be revealing and instructive in keeping those policies on track to achieve stated objectives.

BVA is a timely determinant of whether variances are good or bad, and, what immediate steps to take in order to maneuver a financial plan of specific numbers back-on-track before a problem arises.

Life insurance policies are purchased on the initial premise of a budget projection that can typically range over 20 to 50 years. This initial budget is properly displayed through at least two life insurance illustrations which attempt to represent a realistic range of future outcomes. After a life insurance policy is acquired, it is necessary to do BVA studies typically once every three-to-five years. These analyses provide intermittent information so that timely action can be taken in ways which serve to hold life insurance policies (and plans) on their intended courses. Policies can be timely controlled by premium payment adjustments, use of policy-equity values, and adjustments to death benefit size. When an investigation and corrections aren't made, there is the risk unrecognized bad variances may accumulate, which could one day devastate a financial plan. A small, but valuable case study, demonstrates the benefits of BVA. BVA Case Study When the large office supply chain-stores began to spring up, my 49-year-old client, Mr. X, was fortunate enough to sell his stationery store business, and "get-out-withhis-shirt." After doing so, Mr. X obtained employment at a larger office supply business in a managerial capacity. Because of this dramatic change-of-life, Mr. X engaged my services to prepare a personal financial restructuring plan in order to set a realistic course for his new and changed lifestyle One of Mr. X's specific objectives was to front-load $15,300 into a whole life insurance policy. The budget purpose of this design was to put into force a growing death benefit policy that possessed the leastvariable policy composition characteristics (whole life), and, to lower the budgeted illustration's annual required premium of $3,745 per year down to a net annual payment amount of $1,700 per year. The $2,045 reduction in annual premium was the direct benefit of the $15,300 front-loaded amount, which represented the maxim mum front-loaded amount that could be paid before encountering a modified endowment contract-policy status. Seventeen hundred dollars per year was the maximum tolerable premium payment amount that Mr. X could afford in light of the new financial lifestyle that had been forced upon this once-prosperous stationery store owner. This $15,300 was taken from a very old life insurance policy which Mr. X did not want to keep for various financially justifiable reasons. All of these factors were assembled and constructed into a tailor-fitted policy for Mr. X through a solvent, reputable life insurance company.

Prior to policy acquisition, we prepared two illustrations that would project a range of possible outcome over future years until Mr. X's death. Mr. X's average mortality was for 40 more years, but we generated illustrations through to age 99 in order to have mortality+ values too. By preparing two illustrations that depicted a range of possible outcomes, we created a number of points for future comparison using BVA concepts. The first illustration assumed a constant eight percent dividend scale (eight percent representing the upper end of the range). This illustration set a projected budget of annual premium payment amounts according to the following plan:

Age 59, Year 1 $15,300

Ages 50-64, Years 2-16 1,700

Ages 65-99, Years 17-51 1,500 Note that in this design, all dividends are reinvested and the policy's equity was being used to pay for $2,045 of the total annual premium cost amount of $3,745 in order to keep Mr. …

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