Over the last 10 years of my career, I’ve been pegged as a PAR guy. As a result, most would assume that PAR would be my go-to solution for all insurance problems, right? Well, that’s not the case.
I get the following question a lot from advisors and their clients, what’s better, PAR or UL? My quick answer to that is “the one you have when you die!” I know that doesn’t answer the question, but it truly depends on the objective, the structure and the situation you are trying to solve for.
We were helping an advisor a few weeks back with an intergenerational case. His client is a healthy 68FNS, she had been widowed 2 years ago and finally found some balance in her life after losing her husband of 45 yrs. Insurance proceeds had been paid out, capital assets and RRSP/RRIF had been transferred (spousal rollover) and she continues to receive income from her deceased husbands company pension under a survivor benefit.
1 year ago, she gifted her 2 adult children $250,000 each ($500,000 total) and was now making plans to earmark $1,000,000 for her family upon her death. $250,000 is to be left to each of her 2 adult children and $100,000 to each of her 5 grandchildren.
Outside of her husband’s company pension income, she too had her own company pension income. This combined sustainable income along with income from government programs and other assets was more than she could ever possibly spend. She was considering allocating most of her deceased husband’s after-tax monthly pension income to an insurance program to create the $1,000,000 gift! As beneficiary of her husband’s insurance policies, she realized life insurance was probably be the best vehicle to do so.
The advisor initially approached me looking for a PAR solution. I asked why PAR and he said, “that’s what you do, isn’t it?” After all, he wanted to compare it as an asset class to a GIC alternative. I suggested that an asset class conversation may not be necessary as it usually compares Cash Surrender Values (balance sheet values) first and then Death Benefit (estate benefits) second. In this case, the situation was really about the creation of $1,000,000 with a fixed monthly dollar amount, so UL really needs to be considered as a solution. I knew right away that based on her age of 68 it would probably take over 20 years before a PAR policy could catch up to a minimum funded UL from a net to estate perspective.
Before we dive into comparing PAR and UL for this advisor, look back to the communication I wrote in July titled “It Just Makes Cents”. In this scenario we have monthly income to work with and not annual payments. As a result, additional costs will apply for paying PAR premiums monthly. Not a deal breaker, but something you need to be mindful of.
The advisor specifically asked to see numbers from Canada Life, so our BD team simplified things and ran a minimum funded UL policy for $1,000,000 which generated a monthly premium of $2,901.36. They then ran two PAR scenarios (Current DSIR-1), one solving for the same premium with Maximum ADO and the other, all base premium. They then imported all this into a Life Design Analysis (LDA) report. I pulled what I believe is the tell all slide, Insurance Benefit Overlay.
This provides an easy to read bar chart showing the crossover point of 22 years (age 90) for when a PAR policy (DSIR Current -1) “could” outpace the minimum funded UL. This was all the client needed to see for her to decide what solution best fit her objectives. She decided on the minimum funded UL solution because it created an instant $1,000,000 guaranteed and could be funded from a portion of sustainable pension income that was not required by her. She felt comfort in knowing that $1,000,000 would be created instantly…even if she lived past 90!
Now the advisor just needs to get the application in before October 13 before UL rates increase again!
For more information on finding ways to maximize value for your clients, please reach out to a QFS Business Development team member or email email@example.com to start a conversation.
Scott A. Morrow, CEA, CLU
Vice President, Business Development
Qualified Financial Services
This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.