What's the best use of premium dollars?

One of the larger problems facing the current Guaranteed UL market is the pricing of short pay designs.  The carriers feel these are the toughest to reserve for in the current economy, and the "discount" that was once significant versus a lifetime pay is no longer.  That whole scenario started me thinking about short pays in general, and if there is a significant advantage in front loading an insurance contract?  Is it different for a GUL versus a Current Assumption UL (CUL)?  Intuitively I think we would all say yes if asked the question based on the far smaller total outlay, but I wanted to answer it empirically.

Here's the scenario:

• Male age 60
• Preferred Nonsmoker
• $1 mil face amount
• Coverage to age 100
• GUL Single Pay = $230K
• GUL Lifetime Pay = $607K
• CUL Single Pay = $311K
• CUL Lifetime Pay = $702K

Sounds great, right?  Big Discount!  Maybe, maybe not.  We have to drill deeper and look at the Internal Rates of Return (IRR's), which take into account the time value of money.  The level pay scenarios have superior IRR's through at least year 25 (right about mortality ironically).  So even with the huge discount in total outlay, the odds are that paying the premium year in and year out is going to be a better deal. 
 

Of course, none of this takes the money you keep in your pocket into account.  Even if you stuffed the money under the mattress, the lump sum required to single pay would cover the first 15 years of premium, and if the client has the misfortune to pass away during that time, the beneficiaries would receive the death benefit plus the balance of the cash that was not used to fund the single pay death benefit.  Imagine the reverse:  paying $200K for a $1mil policy and passing the next year.  Ouch!

One last note on this:  If you read last week's Rant about "harvesting" the current $5mil lifetime exemption, this is yet another reason we would want to know how to integrate a life insurance policy into a trust owned investment portfolio.  Even if you gift a huge amount to the trust, crawling that money into the life contract is a better deal all the way around.