Life Insurance Q&A - w/ FAQ Section

[Jonathan M]

Agree with everything you have said to the tee, except this. In this case, that’s a 4% net, essentially guaranteed return. Nobody is getting that as a guarantee these days. But I also agree the liquidity plays an important role in this particular case and it’s kind of a border line decision on what makes the most sense. That said, in many other cases (as the ROP % return varies quite widely) it isn’t as cut and dry in the sense that “ROP riders don’t really impress much when it comes down to the math” and I would argue that in most cases it makes complete sense given the after tax guaranteed returns of ROP relative to what can be found “risk free” in the market from a purely dollar for dollar net return.

I've run the calculation for ROP vs. investing the difference tax free, hundreds of times (literally) and probably 75% of the time it makes incredible sense to pay the ROP premium. I show my clients this data without issue and let them make the decision.

Hi Wes....I tend to agree with you...but more in regards to the ROP on CI (it's much richer than DI). With CI coverage I am more in favor with the ROP because it provides 100% of the premium back. But in the case of DI, only 50% of the total premium is coming back at the end of each 7 year interval, so the opportunity cost is a little higher than that of the ROP for CI.

Don't nit pick on the 4% If we were in 2006 right now, you would all say that I was being Uber conservative. Over 7 years with minimal risk in a TFSA account 4% is very attainable...yes, given our current economic environment there are challenges and I even hesitated to sow 4% ...

Heck I could buy bank stock and get a 4% dividend these days....If the share price never dropped or gained a dime in 7 years, I'd be all set (if I reinvested the dividend)....but as you say it wouldn't be guaranteed. Alas, we long for the good o'l days to return again .

Thanks for the feed back Wes.

CHeers

[Jonathan M]

Wait a minute...how are you getting a 4% return from that?

I just did the calculation and it’s actually an 8% net annual return to match the ROP feature.

As the OP stated, the insurance cost is $744 and the ROP feature is $428 for the total annual premium of $1172. Over 7 years the total premiums paid are $8,204. 50% of that is $4,102. Investing the ROP premium ($428 annually) in a TFSA for 7 years would need an 8% annual compound rate of return to match what the ROP returns given the money is invested at the begining of the year.

I'll have to look more into this tomorrow...

One thing that may differentiate our numbers is that I was using the numbers from the most recent post ($700 + $400). Also, I started with a PV of $400 (and then used an "end of year" FV calculation at 4%/year)....It's possible I made a mistake. I'll have fun figuring this one out tomorrow.

[Jonathan M]

I'll have to look more into this tomorrow...

One thing that may differentiate our numbers is that I was using the numbers from the most recent post ($700 + $400). Also, I started with a PV of $400 (and then used an "end of year" FV calculation at 4%/year)....It's possible I made a mistake. I'll have fun figuring this one out tomorrow.

Just looked at it again. at 4% saving the $400 at the beginning of every year for 7 years the value would be $3285 at the END of the 7th year. I had added one extra payment by mistake. So I had $3685 initially.

Oh well. $3285 is still a nice little liquidity fund...although not a much as the ROP...which is what I stated earlier for this case....SO the ROP isn't BLOWING it away.

I even worked it out the long way..just to make sure

400 X 1.04 = End of year 1 value
+ 400 X1.04 = End of year 2 Value
....etc. until the end of year 7.

Good catch though Wes. Appreciate how technical this thread is, Shows the caliber of advisors on here.

Jonathan

[pbxphone]

Thanks Guys. Interesting to note how one would normally think about insurance premiums just as an expense, if unused....and here we are analyzing how we can maximise the returns on an additional premium as an investment.

Its attractive for people who have lots of extra cash. A great way to invest without incurring any capital gains..I guess !

[AristoFinancial]

Thanks Jonathan and Wesobag for greatly analyzing the ROP.

[wesboag]

Thanks Guys. Interesting to note how one would normally think about insurance premiums just as an expense, if unused....and here we are analyzing how we can maximise the returns on an additional premium as an investment.

Its attractive for people who have lots of extra cash. A great way to invest without incurring any capital gains..I guess !

If it wasn't completely against compliance or I wasn't in the industry I'd be all over offering to pay peoples ROP's for the return or a high premium, lol.

I don't necessarily think of it as an investment but rather a hedge or an ability to decrease the actual dollar for dollar cost over a period of time.

[wesboag]

Just looked at it again. at 4% saving the $400 at the beginning of every year for 7 years the value would be $3285 at the END of the 7th year. I had added one extra payment by mistake. So I had $3685 initially.

Oh well. $3285 is still a nice little liquidity fund...although not a much as the ROP...which is what I stated earlier for this case....SO the ROP is BLOWING it away.

I even worked it out the long way..just to make sure

400 X 1.04 = End of year 1 value
+ 400 X1.04 = End of year 2 Value
....etc. until the end of year 7.

Good catch though Wes. Appreciate how technical this thread is, Shows the caliber of advisors on here.

Jonathan

I know you know your stuff Jonathan...trust me, i've made far worse mind blip calculations before.