A Hypothetical Example
Let's say we have a 45-year old male who is going to pay annual premium of $10,000 per year to age 65. His goal is to achieve maximum ax-free distribution/loans once he retires at age 65.
The policy design and assumptions
First, we will optimize cash value from this policy by solving for the minimum non-MEC death benefit so we could minimize Cost of Insurance. This solves for $211,000 initial death benefit.
For purpose of loan duration, let's assume from age 65 till age 100.
Furthermore, let's assume only 5% growth rate for this IUL and guaranteed wash loans (zero-interest net cost loan) to age 100.
In solving for the maximum loan amount, we get annual amount $17,998.
If this insured person dies at age 82 (life expectancy), he would have gotten 17 years of tax free income - approximately $305,966. His beneficiary would get approximately $275,397 of death benefit. This is a total of more than $580,000 tax free to him and his beneficiaries.
So, how to analyze the value of this IUL policy? We will discuss in next blogpost.