| A
$10,000,000 Variable Universal Life policy was purchased in 1998 by
the Trustee on the lives of a 63 year old male and his 61 year old
wife. It was anticipated – based in large part on the booming
stock market – that a 12% gross annual return was consistent
both with historic returns and the risk tolerance of the Grantor.
The anticipated funding level was $80,000 per year, which in turn
was the then maximum gift allowable with 4 Trust beneficiaries. |
The
anticipated cash value of the policy – according to
the illustration – was $262,000 at the end of the third
policy year (2002). Unfortunately, the poor market performance
against the allocated sub-accounts left the policy with only
$190,000 on the policy anniversary in 2002.
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| Based
on industry statistics, there’s better than a 50% chance that
at least one of the insured’s will still be alive at the point
where the policy would lapse. |
While
a current in-force illustration indicates that the policy
still “projects” sufficiency to age 100, a more
sophisticated recalculation of values on the basis of historic
returns suggests that the policy could lapse as early as age
89.
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| Since
history rarely repeats itself, it’s important to conduct a further
test of assumptions by adding a randomized probability analysis (sometimes
known as “Monte Carlo Simulation”). |
By randomizing historic returns for the policy’s asset
allocation, policy value calculations can be made.
When
300+ such calculations are made for statistical credibility,
it was discovered that the $10,000,000 policy had only a 10%
chance of sustaining to age 100, even though the in-force
illustration seemed to “assure” it.
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| Even
when the funding of the Trust is increased to the current $88,000
maximum for 4 Crummey beneficiaries... |
...the
policy death benefit would have to be reduced to $7,660,000
for a tolerable 70% probability of success.
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| What’s
different about this approach? While probability analysis and historic
return calculations do not provide certainty, probability analysis
is the process used by a skilled trustee for fixed income and equity
asset allocation determinations. This technology combined with the
experience of its principals, allows Insurance SolutionsTM Reports
to properly document life insurance policy selection and management
decisions. |
