Family Wealth Conference. September 27-28, 2012

Transcription

1 Family Wealth Conference September 27-28, 2012

2 Family Wealth Conference Life Insurance: One of the Most Overlooked Components in Your Portfolio Natalie Oh Taran Insurance & Advisory Services Moderated By: Renée Duba William Blair & Company The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of William Blair & Company.

3 Landscape of Life Insurance Marketplace Individual Life Insurance Growth Rates by Product Percent Change Annualized Face premiums amount Number of policies Universal Life Second Quarter % 7% 1% Year-to-date 3% 7% 3% Variable Universal Life Second Quarter % -7% -9% Year-to-date -7% -10% -9% Term Second Quarter % -1% -3% Year-to-date -1% 1% 0% Whole Life Second Quarter % 8% 3% Year-to-date 9% 8% 5% Total Second Quarter % 2% 0% Year-to-date 3% 3% 3% Source: LIMRA s U.S. Individual Life Insurance Sales Summary Report, Second Quarter TARAN INSURANCE & ADVISORY SERVICES

4 Long-Term Interest Rate Trend vs. Insurance Dividend Rates Source: Insuralytics Group, LLC. Copyright 2012 TARAN INSURANCE & ADVISORY SERVICES

5 Feeling Interest Rate Pressure; Concern for the Future Continuing low interest rate environment is a significant concern for insurers with considerable fixed- income exposure. Source: Towers Watson, Life Insurance CFO Survey #30; June 2012 TARAN INSURANCE & ADVISORY SERVICES

6 Profit Margins: Potential Changes to New and Existing Policies Source: Towers Watson, Life Insurance CFO Survey #30; June 2012 TARAN INSURANCE & ADVISORY SERVICES

7 Life Insurance as an Asset Class in the Portfolio

8 Incorporating Life Insurance as a Portfolio Investment William Blair & Company utilizes a quantitative tool known as mean-variance optimization (software model provided by Wilshire Associates) in developingasset allocation analyses. Mean-variance optimization requires three inputs, which serve as assumptions for the model. These include: Expected returns - the average or mean return estimates for each asset class; Standard deviations - the volatility (risk) of the expected returns for each; Correlations - the interaction among expected returns of various asset classes; Correlations* Cash U.S. Bonds U.S. Equities Non-U.S. Equities Emerging Mkts Cash 1.00 U.S. Bonds U.S. Equities Non-U.S. Equities Emerging Mkts Risk/Volatility Cash U.S. Bonds U.S. Equities Non-U.S. Equities Emerging Mkts Return Volatility Yield Source: Wilshire Associates

9 Creating Risk/Return Assumptions for Life Insurance Policies Calculate the Return on Investment (ROI) for each policy year. Annual premium paid compared to benefit received; Over time, the ROI will decrease as more premium is invested into a policy with a level face value. Employ statistical model to determine average life expectancy of the insured, and the variance around that average. We have a proprietary model developed by Wilshire Associates; Utilize annuity life tables with some modifications.

10 Calculating Risk/Return for a Universal Life Insurance Policy Proposed insured: 50 years of age Face amount: $1 million Annual Premium: $8,147 Average statistical life expectancy: 33 Years, plus/minus 11 Years Variance of average life expectancy Policy Insured Annual Cumulative Death Return on Invested Inflation Adjusted Inflation Adjusted Year Age Premium Premium Benefit Premiums (ROI) Death Benefit (@2%) ROI $ 8,147 $ 138,499 $ 1,000, % $ 714, % $ 8,147 $ 146,646 $ 1,000, % $ 700, % $ 8,147 $ 154,793 $ 1,000, % $ 686, % $ 8,147 $ 162,940 $ 1,000, % $ 672, % $ 8,147 $ 171,087 $ 1,000, % $ 659, % $ 8,147 $ 179,234 $ 1,000, % $ 646, % $ 8,147 $ 187,381 $ 1,000, % $ 634, % $ 8,147 $ 195,528 $ 1,000, % $ 621, % $ 8,147 $ 203,675 $ 1,000, % $ 609, % $ 8,147 $ 211,822 $ 1,000, % $ 597, % $ 8,147 $ 219,969 $ 1,000, % $ 585, % $ 8,147 $ 228,116 $ 1,000, % $ 574, % $ 8,147 $ 236,263 $ 1,000, % $ 563, % $ 8,147 $ 244,410 $ 1,000, % $ 552, % $ 8,147 $ 252,557 $ 1,000, % $ 541, % $ 8,147 $ 260,704 $ 1,000, % $ 530, % $ 8,147 $ 268,851 $ 1,000, % $ 520, % $ 8,147 $ 276,998 $ 1,000, % $ 510, % $ 8,147 $ 285,145 $ 1,000, % $ 500, % $ 8,147 $ 293,292 $ 1,000, % $ 490, % $ 8,147 $ 301,439 $ 1,000, % $ 480, % $ 8,147 $ 309,586 $ 1,000, % $ 471, % $ 8,147 $ 317,733 $ 1,000, % $ 461, % $ 8,147 $ 325,880 $ 1,000, % $ 452, % $ 8,147 $ 334,027 $ 1,000, % $ 444, % $ 8,147 $ 342,174 $ 1,000, % $ 435, % $ 8,147 $ 350,321 $ 1,000, % $ 426, % $ 8,147 $ 358,468 $ 1,000, % $ 418, % $ 8,147 $ 366,615 $ 1,000, % $ 410, % $ 8,147 $ 374,762 $ 1,000, % $ 402, % $ 8,147 $ 382,909 $ 1,000, % $ 394, % $ 8,147 $ 391,056 $ 1,000, % $ 386, % $ 8,147 $ 399,203 $ 1,000, % $ 378, % $ 8,147 $ 407,350 $ 1,000, % $ 371, % Return: 6.83% Inflation Adjusted Return: 3.61% Variance: 2.76% Inflation Adjusted Variance: 2.85%

11 Impact of Insurance Policy on Various Portfolio Risk/Return Characteristics Efficient Frontier Risk * Compound Annual Return Frontier 1 - No Insurance Frontier 2 - $1mm Insurance, Typical LE $5,000,000 Portfolio Value $1 Million Insurance Policy Assumes Insured Lives to Age 82, and has invested $268,851 in premiums.

12 Impact of Insurance Policy on Various Portfolio Risk/Return Characteristics The Effect of Longevity Efficient Frontier Risk * Compound Annual Return Frontier 1 - No Insurance Frontier 2 - $1mm Insurance, Typical LE Frontier 3 - $1mm Insurance, Longevity (age 95) $5,000,000 Portfolio Value $1 Million Insurance Policy Assumes Insured Lives to Age 95, and has invested $374,762 in premiums.

13 Calculating Risk/Return for a Universal Life Insurance Policy Proposed insured: 84 years of age Face amount: $5 million Annual Premium: $394,777 Average statistical life expectancy: 8 Years, plus/minus 5 Years Policy Insured Annual Cumulative Death Return on Invested Inflation Adjusted Inflation Adjusted Year Age Premium Premium Benefit Premiums (ROI) Death Benefit (@2%) ROI 1 84 $ 394,777 $ 394,777 $ 5,000, % $ 4,901, % 2 85 $ 394,777 $ 789,554 $ 5,000, % $ 4,805, % 3 86 $ 394,777 $ 1,184,331 $ 5,000, % $ 4,711, % 4 87 $ 394,777 $ 1,579,108 $ 5,000, % $ 4,619, % 5 88 $ 394,777 $ 1,973,885 $ 5,000, % $ 4,528, % 6 89 $ 394,777 $ 2,368,662 $ 5,000, % $ 4,439, % $ $ 2,763,439 $ 5,000, % $ 4,352, % 8 91 $ 394,777 $ 3,158,216 $ 5,000, % $ 4,267, % 9 92 $ 394,777 $ 3,552,993 $ 5,000, % $ 4,183, % $ 394,777 $ 3,947,770 $ 5,000, % $ 4,101, % $ 394,777 $ 4,342,547 $ 5,000, % $ 4,021, % $ 394,777 $ 4,737,324 $ 5,000, % $ 3,942, % $ 394,777 $ 5,132, $ 5,000, % $ 3,865, % $ 394,777 $ 5,526,878 $ 5,000, % $ 3,789, % $ 394,777 $ 5,921,655 $ 5,000, % $ 3,715, % $ 394,777 $ 6,316,432 $ 5,000, % $ 3,642, % 10.15% Inflation Adj. Avg. Return 6.66% 28.23% 27.92% Variance of average life ,777 expectancy Average Return Variance of Return Inflation Adj. Var. of Return

14 Impact of Insurance Policy on Various Portfolio Risk/Return Characteristics $25,000,000 Portfolio Value $5 Million Insurance Policy Assumes Insured Lives to Age 91, and has invested $3,158,216 in premiums.

15 Impact of Insurance Policy on Various Portfolio Risk/Return Characteristics The Effect of Longevity Efficient Frontier Risk * Compound Annual Return Frontier 1 - No Insurance Frontier 2 - $5mm Insurance, Typical LE Frontier 3 - $5mm Insurance, Longevity (age 95) $25,000,000 Portfolio Value $5 Million Insurance Policy Assumes Insured Lives to Age 95, and has invested $4,737,324 in premiums.

16 Policy Reviews TARAN INSURANCE & ADVISORY SERVICES

17 Insurance Policy Review Process Policy owner decides to take part in life policy portfolio audit. Policy owner completes Policy Review Authorization Form and in force ledgers are obtained. Detailed analysis of policy performance relative to insurance goals is performed. Portfolio is performing as or better than expected Portfolio slightly underperforming Portfolio substantially underperforming No further analysis is needed. Future periodic audits should be performed. Review historical cash value crediting rates and perform premium funding analysis to identify optimal funding structure within the currently owned policies. Policy owner and advisor work together to implement necessary changes. Alternative, replacement policies will be analyzed. Policy owner and advisor will determine which policies should be replaced, revised amounts of coverage needed and combination of policies to meet current goals. Begin informal underwriting process. TARAN INSURANCE & ADVISORY SERVICES

18 Gift and Estate Tax Exclusion Amounts and Rates Year Exclusion Amount Max/Top tax rate 2001 $675,000 55% 2002 $1 million 50% 2003 $1 million 49% 2004 $1.5 million 48% 2005 $1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $3.5 million 45% 2010 Repealed 2011 $5 million 35% 2012 $5.12 million 35% 2013* $1 million 55% * under current law TARAN INSURANCE & ADVISORY SERVICES

19 Bringing it All Together Power tool that creates tremendous wealth transfer leverage. Can significantly enhance overall portfolio volatility and returns. Insurance investments need to be managed; proper construction, pricing and performance drives value. TARAN INSURANCE & ADVISORY SERVICES

20 Conclusion TARAN INSURANCE & ADVISORY SERVICES

21 Biography Natalie Oh Taran Insurance & Advisory Services Natalie Oh is a principal with Taran Insurance & Advisory Services. As a licensed insurance broker, she provides her clients with risk-management advice on insurance and annuities in connection with income replacement, estate planning, wealth preservation, and business succession planning strategies. Ms. Oh is a member of the Chicago Estate Planning Council and serves on the boards of the Empowering Women Network, the Executives Club of Chicago, the National Association for Professional Women, and Alexian Brothers Foundation Partnership Committee. Education: B.A. in political science, University of California- Irvine; J.D., DePaul University.

22 Biography Renée Duba William Blair & Company Renée Duba joined William Blair s Investment Management department as a portfolio associate in She is also the founder and former head of Financial Planning and Advisory Services, which she developed and implemented in Renee works with wealthy individuals and families, business owners and executives, as well as institutional clients such as pensions, private/public endowments and foundations to provide financial solutions across a wide spectrum of issues. Prior to joining William Blair, she was a financial planner for IDS Financial Services (American Express Financial Advisors) and an Investment Associate for Harris Bank Glencoe. In addition to being a Certified Financial Planner and an Accredited Asset Management Specialist, Renée is also a licensed Life/Health/Variable / Contract Insurance Representative in the State of Illinois. Renée is a member in good standing of the Financial Planning Association. She serves as an Advisory Board Member for Empowering Women Network, Inc., and also is a member of the Board of Directors for the Community Renewal Society of Chicago and the Alexian Brothers Foundation Partnership Committee. Education: B.A., DePaul University.