DECIDING HOW MUCH PREMIUM TO PAY
INTO YOUR VARIABLE UNIVERSAL LIFE
INSURANCE POLICY.
Now that you and your licensed financial professional have
determined the appropriate type and amount of life insurance,
you’re ready to take the next step: determining the amount
of premiums to pay. One of the most attractive features of
a variable life insurance policy is that it does not have set
premiums. With the flexibility to determine your own
premiums comes the responsibility to make sure you pay
enough so that your policy can survive market volatility and
charges that will increase as you get older. How much of a
death benefit your policy will pay to your loved ones, and
even whether it will pay one at all, depends in large part on
how well you fund it.
This presentation can help you understand the factors that
influence a variable life insurance policy’s performance and
the impact of different premium levels on the death benefit
and cash value. The factors include:
Amount and timing of premium payments
Time
Asset Allocation
Cost of insurance and other charges
Historical experience of returns on net premium payments
Using these factors along with a probability model, we
can infer an appropriate funding level and its likelihood of
sustaining a variable universal life insurance policy for your
lifetime. (We call this the “Confidence Factor”.) Please note
that this number is not a prediction; rather, it is a possibility
based on historical experience as displayed by the probability
modeling tool. It presents a range of probabilities that various
investment outcomes might occur. You should not infer that
a particular investment outcome will, in fact, occur.
The following models give a sampling of the results for a
generic variable universal life policy. The information these
models provide can ultimately give you a starting point as you
work with your licensed financial professional to estimate a
funding level appropriate for your situation and objectives.
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*Historic long-term compound rates
HOW CAN I BEST FUND MY POLICY? of return for 5 model portfolios. The
model in yellow is closest to your
self-assessment of risk tolerance
and desire for reward.
45 year old male seeking $1,000,000
lifetime insurance protection
Step 1: Solve for the premium with the constant average
long-term rate of return typically associated with your
self-assessed asset allocation.
Based on your self-assessed Asset Allocation, which Conservative* 7.5%
most closely resembles the very aggressive model
shown to the right, you could fund a variable life policy
with as little as $5,800 (based on current industry factors)
on the expectation of earning at least the historic 13.6%
annually compounded rate of return associated with
such an allocation. A graphic representation of expected
outcome might look something like this:
Moderately Conservative* 9.2%
Static View
Illustrated Rate of Return for your declared allocation
30%
20%
10%
0%
–10% Moderate* 10.9%
–20%
–30%
45 51 57 63 69 75 81 87 93 99
Attained Age
(000s)
1,600
1,400
1,200
1,000
Aggressive* 12.5%
800
600
400
200
0
45 51 57 63 69 75 81 87 93 99
Attained Age
Very Aggressive* 13.6%
3
HOW CAN I BEST FUND MY POLICY? *Historic long-term compound rates
of return for 5 model portfolios. The
model in yellow is closest to your
self-assessment of risk tolerance
and desire for reward.
45 year old male seeking $1,000,000
lifetime insurance protection
Step 2: View the impact on the same hypothetical
policy using the premium from Step 1 with the specific
historical, yearly rates of return that actually occurred
using your self-assessed Asset Allocation as if you had
Conservative* 7.5%
bought such a policy in 1947 and paid $5,800 per year
in premiums.
When we apply historic, month-to-month rates of return
to your chosen allocation, the combination of low
premium + market volatility could produce the following
unintended result. In fact, there may be less than a 35%
chance that the policy can sustain to age 100 or that an
unpredictable and volatile future equity market will Moderately Conservative* 9.2%
produce the results you would have expected on the
first graph.
Dynamic View
Historic Annual Rates of Return 1/1/1948 – 12/31/2002
(A calculation alternative to the illustrated rate)
30%
20%
10%
0%
–10% Moderate* 10.9%
–20%
–30%
45 51 57 63 69 75 81 87 93 99
Attained Age
(000s)
1,600
1,400
1,200
1,000
Aggressive* 12.5%
800
600
400
200
0
45 51 57 63 69 75 81 87 93 99
Attained Age
Very Aggressive* 13.6%
4
HOW CAN I BEST FUND MY POLICY? *Historic long-term compound rates
of return for 5 model portfolios. The
model in yellow is closest to your
self-assessment of risk tolerance
and desire for reward.
45 year old male seeking $1,000,000
lifetime insurance protection
Step 3: Re-solve for the premium that allows the
illustration to succeed with the specific historical, yearly
rates of return that actually occurred with a generic
version of your selfassessed asset allocation.
Conservative* 7.5%
If we re-solve for a funding level of this generic policy
illustration based on your asset allocation and historic
month-to-month returns, we find the premium that would
have maintained the policy — had the generic and
hypothetical policy been purchased and managed as
portrayed — is $7,000.
Moderately Conservative* 9.2%
Dynamic View
Historic Annual Rates of Return 1/1/1948 – 12/31/2002
(A calculation alternative to the illustrated rate)
30%
20%
10%
0%
–10% Moderate* 10.9%
–20%
–30%
45 51 57 63 69 75 81 87 93 99
Attained Age
(000s)
1,600
1,400
1,200
1,000
Aggressive* 12.5%
800
600
400
200
0
45 51 57 63 69 75 81 87 93 99
Attained Age
Very Aggressive* 13.6%
5
HOW CAN I BEST FUND MY POLICY? *Typical required Confidence Factors
for 5 model portfolios. The model in
yellow reflects OUR guess of your
required Confidence Factor.
45 year old male seeking $1,000,000
lifetime insurance protection
Step 4: Confirm an acceptable Confidence Factor and
appropriate premium funding to initiate your policy.
We employ a process of randomizing historic returns in
turn recommend a premium level that will have an Conservative* 7.5%
acceptable Confidence Factor for you.
We’ve run 1,000 separate illustrations with the $7,000
premium—each with a random pattern of returns—and
found that 70% of the resulting illustration calculations
successfully sustained to age 100, while 30% did not
succeed.
Is 70% an acceptable Confidence Factor for you? Here Moderately Conservative* 9.2%
are some additional considerations, along with possible
premium funding levels.
$7,000 $7,000
70% 30%
$9,500 $9,500 Moderate* 10.9%
80% 20%
$12,000 $12,000
90% 10%
$12,750 Guaranteed
100% Lifetime Premium
Aggressive* 12.5%
It isn’t about the amount of the premium — it’s about
producing a comfortable result. The more money you
put into the policy, the better it can withstand downward
volatility. The less money you put into the policy, the
more you’re counting on favorable market conditions —
which may or may not happen — to support your long-
term objectives.
Very Aggressive* 13.6%
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THINGS TO REMEMBER:
The illustrations and graphs used in this report Even a policy that is “on the curve” in later life
are based on industry data that has in turn can quickly lapse for lack of sufficient cash
been used to create a generic variable universal value if there’s a significant drop in those
life policy illustration from which we can then values due to investment losses.
make our statistical calculations.
This is because variable universal life contracts
Because both sub-account returns and cost of provide that the net amount at risk will
insurance charges in the future will inevitably automatically increase if cash value decline in
be different from those on which we have order to provide the death benefit stipulated on
based the analysis, you should avail yourself of the specifications page of the policy. When this
periodic policy reviews to make sure you are occurs at older ages — especially beyond age
meeting your objectives. 70 — the ever-escalating monthly cost of
insurance charges that are assessed against the
All calculations have been made with the
total amount at risk creates significant charges
assumption that underlying sub-accounts in
against the policy. And as those charges are
the hypothetical illustration most closely “map”
paid from the cash value itself, the net amount
to your self-assessed asset allocation. We
at risk is forced even higher.
derive our five model portfolios from those
provided by Ibbotson and Associates, a third The resulting downturn can be especially harsh
party provider of technical and statistical on the economics of a policy in the later years
economic data. of an insured’s life. To maintain a policy with a
reasonable certainty that it will be in force no
The purpose of an illustration is to explain how
matter what the date of death, the policy
a policy works, not to predict a non-guaranteed
should be funded with more than is strictly
outcome. While we attempt to bring a statistical
necessary. In this instance, “necessary” is
credibility to our process, we are still making
defined from the standpoint of a sales
assumptions about the future and then basing
illustration (or “in-force” illustration) oriented to
certain conclusions on those assumptions.
calculating the least you could pay for a policy.
Once again, it is important that you periodically
The “reward” of over-funding is the greater
update your information and make any funding
chance the policy will sustain to age 100 and
adjustments that may be suggested by the
the potential for substantially higher policy
update.
values in the later years.
This report is completely independent of
Prudential Financial’s policy illustration system.
Ultimately, your policy will succeed or fail as a
result of the balance between the premiums
you pay into the policy — and the investment
returns thereon — and the charges the
insurance company assesses based on its
experience over the next 55 years of the
potential time span of your policy. As long as
the cash value remains above $0, your policy
will be in force.
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INVESTMENT ANALYSIS TOOLS—THINGS YOU SHOULD KNOW:
The Confidence Factor tool used in this Historic rates of return are lowest for the
report generates random results; each time Conservative Asset Allocation and highest
an individual “illustration” is run, a different for the Very Aggressive Asset Allocation, with
result is likely. This is why we calculate as risk ranging from “low” for the Conservative
many as 1000 illustrations — to smooth out Asset Allocation and “significant” for the Very
the variations in random results. Aggressive Asset Allocation. Policy cash values
for Conservative sub-accounts will generally
Historic returns in your self-selected Asset
not “perform” as well as those for more
Allocation are the “universe” of rate-of-return
aggressive sub-accounts, but the conservative
data assumed in this report. For our first
policy owner will be taking less risk.
calculation of historic value, we go back in time
as many years as 100 minus your current age. All things being equal, the more conservative
(If you’re 43 now, we go back 57 years). When the sub-account selections, the more premium
we randomize historic returns to determine a it will take to produce a given cash value at
Confidence Factor, we use 480 months of some future time.
historic data, from January 1963 through
IMPORTANT: the projections or other
December 2002.
information generated by this report and its
Historic return data is supplied by Ibbotson analysis tool regarding the probabilities that
& Associates, Chicago, IL. We will match your various investment outcomes might occur are
self-assessed suitability and Asset Allocation hypothetical in nature, do not reflect actual
to one of five Ibbotson & Associates model investment results and are not guarantees of
portfolios — ranging from Conservative to future results. The report and its analysis tool
Very Aggressive. only presents a range of possible outcomes.
Asset Allocations include representative
investments typically made by investors
who are 1) Conservative, 2) Moderately
Conservative, 3) Moderate, 4) Aggressive,
or 5) Very Aggressive.
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