Permanent insurance Illustration

Permanent life insurance policies do not expire as term policies do. They are guaranteed to pay something at the death of the insured as long as the premiums are paid up. These include Term to 100, Whole Life, and Universal Life policies.

Term to 100 policies are fairly straightforward. Usually, the premium is a fixed amount payable until the insured reaches a certain age (traditionally 100, but can be a different age). No more premium payments are required after that age, but the coverage continues after that so the death benefit is guaranteed.

Whole life and Universal life are very complicated policies that consist of a life insurance component that pays a death benefit at death and adds an investment component called the Cash Surrender Value (CVS), or simply cash value, that can either increase the death benefit, pay the premium of the policy, borrowed from, or withdrawn. The main selling point of these policies is that the investment component grows tax-free (although that growth is taxable when withdrawn), and you can access some of those funds you put in at any time. Universal Life policies are more flexible than Whole-life policies in that they allow more flexible premium payments, more flexible choices of investments, and more flexible death benefits.

For the TIME MACHINE, ideally, we would want to be able to project the value of the total death benefit received by the beneficiary at the death of the insured, based on the premium paid. We would also like to model the impact of loans and withdrawals. Life insurance companies have their own specialised software that provides what they call Illustrations to do just that for the specifics of their own life insurance products. Besides the many parameters required to be input due to the many bells and whistles that are included in these flexible policies, these calculations require knowledge that is not publicly available to value the policies. It is actually impossible for me to predict how much of a premium paid is going to pay for pure life insurance, fees, taxes, and additional benefits, and how much of it is going to the investment component.

So to get around that, we ask you for the information we need from the Illustration that you can receive from your insurance advisor. This severely limits the projections of the life insurance in the TIME MACHINE, but that is not our fault. The illustrations are also complicated and it may take you some time to understand them and get the numbers out from them that we need. Your insurance advisor should be able to help with that. Given this information, we can determine the cash flow including tax implications of that illustration for your financial plan.

What do we need? For every year from today:

Yearly premiums. How much you are paying for the policy? If a personal policy, it will come out of your yearly cash flow (your Wallet). If owned by your CCPC, it will come out of the retained earnings. The Illustration may show the premium payable even if paid by the investments within the policy. Make sure to enter what you (or CCPC) actually pay out-of-pocket.

Withdrawals from the policy are allowed from the CSV, or through loans from the insurance company. For each year we need to know how much was withdrawn by either mechanism. These withdrawals can result in at least a portion being included in taxable income (as income, not capital gains or dividends). Any taxable income to the CCPC is considered passive income and, thus taxed at the higher rate.

How much was withdrawn from the CSV? This is taxable in excess of the proportion of the total CSV it covers of the ACB. It will be credited to the cash flow.
How much was borrowed from the policy using a policy loan? This is taxable in excess of the ACB for the total amount of the loan. It will be credited to cash flow. If any taxable income is added, that is recorded and can reduce taxable income when the load is repaid.
How much was paid back to the policy loan? Policy loans can be paid back anytime. This will be taken from cash flow. There may be a reduction in taxable income up to any amount that was added when the loan was taken out.
The policy loan balance. This can reduce the CSV and the death benefit.

Total Death benefit payable to the beneficiary. This should include the CSV if that is the option selected for a Universal Life policy. It should have been reduced by the policy loan balance in most cases.
The Cash Surrender Value (CSV). If the owner is a CCPC, this value is added to the Value of the CCPC and shown in the CCPC table. The CSV in your illustration will vary by any amounts taken out, any policy loans received and paid back, and the growth assumptions of the Illustration.
The Adjusted Cost Basis (ACB). This amount reflects how much of the policies' CSV is not taxable if withdrawn. For a CCPC, this also reduces the amount of the death benefit that is added to the CDA account.

The columns (loan balance, death benefit, CSV, ACB) reflect balances at the end of the year. If your policy started earlier than this year, we also need those balances for last year. That's a lot of numbers to enter in a web form. To make it easier, you can copy and paste the table provided into a spreadsheet. Then use the Illustration provided by your insurance advisor to fill in the spreadsheet. Then copy/paste your spreadsheet table into the box provided and click on the Parse button to automatically fill in the table on the web. Once the table is complete and correct, click the button to Save below the table to save it.

For Term 100 policies the table is simplified as there is no CSV and the ACB is only required for CCPC-owned policies. Make sure to zero the premium column for years in which premiums will no longer be paid.

Given this table, the TIME MACHINE will follow the orders of the illustration table exclusively. The premium payments will be made (whether you can afford them or not), no policy loans or CSV withdrawals beyond what is entered will be made, and the CSV and death benefit values will change only as outlined in the table. The only calculations left for the TIME MACHINE to do are to account for its implications for your personal taxes or corporate taxes for a CCPC-held policy. Tax events only occur when there are withdrawals/loans from the policy as outlined in the table. The death benefit paid at death of the insured is simply looked up from that table. For a personal policy, this death benefit is not taxable to the beneficiary (which could be your estate). For corporate-owned policies, the death benefit is added to retained earnings and that amount minus the ACB is added to the notional Capital Dividend Account (CDA), which allows for capital dividends to be distributed tax-free to the shareholders of the corporation.