Optimization = Diversification

Objective: primary focus is to maximize the return on this investment. Life insurance is a way to provide cash for one’s estate. The more, the better. Date of death is unknown.

Decision criteria: Life product comparison based on return on investment.

Methodology: Internal Rate of Return (IRR) to life expectancy +/- 10 years

Why don’t others do it this way? Why do I promote such a different approach to the product selection process?

Because it’s about money. And money is math!

When it comes to investing, people may have trouble distinguishing fact from opinion, and cause from correlation. A life insurance policy contract is a different and relatively complex financial instrument as evidenced by a 50 page policy contract and a 30+ year timeframe to completion.

Here is my summary of the top layer of the permanent life insurance product selection process. It’s ok to disagree. I ask anyone providing product advice to put their alternative perspective in writing and tell me why and what they disagree with.?

?#1 Convertible Term (Grade B)

(keep your powder dry)

TOP LAYER: Our industry’s #1 logical fallacy is that term is a waste of money. It clearly is not.

Critical consideration: Option to get life insurance now, change to permanent later.

#2 Term to 100 - T100 (Grade B+)

(old time music)

TOP LAYER: Convenience, not performance

Critical consideration: Leveling mortality costs on a guaranteed basis locks in today’s fixed investment returns for the long term. Today’s fixed investment returns are relatively low.

#3 NON participating Whole Life (Grade A) (no regret term)

TOP LAYER: Guaranteed level cost non increasing death benefit (same cost as T100) with one notable exception: Increasing cash value

Critical consideration: Eventually cash value = death benefit at age 100

?#4 Par Whole Life with PUAs (Grade A)

(some classics never change)

TOP LAYER: Optimistic projections of future increases

Critical considerations: Double the cost of NON Par initially. Non disclosure of assumptions means the purchaser has to trust the projections. OSFI and the CIA have more guidance on non-guaranteed products now. Par helps the company optimize its capital requirements since risk is transferred and the capital requirements can be reduced.

#5 Yearly Renewable Term (Grade A+) (planner’s choice)

TOP LAYER: Guarantees the cost of the life insurance at the lowest possible cost.

Critical considerations: ?Policyowner never overpays. Nice.?But cost of insurance goes up. Prepayment considerations to be discussed. Choosing how to manage the investment. Inside or outside the life insurance policy contract. This is the future of the life insurance product.

Recommendation: A Diversified Portfolio

I can think of no better tool than quantitative thinking to process the information that we have access to. Especially important in a sales environment where the sellers are not rewarded for sharing how the math works. Or for optimizing the long term expected financial results.

Death Benefit is the foundation (every optimal financial result has a death benefit paid). The higher this amount, the better the financial result for the purchaser. Money in, money out. The calculation of the return on investment is simple.

Cash Value is a consideration for those who see opportunities to benefit from having "collateral inside the policy” so you don't have to use other assets as collateral if you want to borrow money. But cash value inside the policy tends to reduce the return on the death benefit. And it may not be as efficient as creating and using other assets outside the life insurance policy contract.

Today we know that?portfolio allocation accounts for 90%+ of the success of a portfolio. In the case of life insurance, product diversification is sacrosanct.