Discounted Dollars: In Compliance?

You've probably heard that life insurance lets you pay estate taxes with discounted dollars. Here's how it works: Your $4 million estate might suffer a 40% loss from taxes, but you can buy a life insurance policy to pay that $1.6 million tax for just ten annual $40,000 premiums. That's a 75% discount! Now let's compare the alternatives:

Use cash in the estate. That costs 100 cents on the dollar.

Sell illiquid assets at a 20% below-market price. That costs 125 cents on the dollar.

Take out a loan at 8% interest for 10 years. That costs 146 cents on the dollar.

Would you rather pay 25 cents, or as much as 146 cents?

"You'd have to be 19 years old to fall for that," a client told me after attending a top producer's seminar.

The flaw, of course, is that the comparison ignores the time value of money. The total life insurance premiums are only 25% of the face amount because the death claim isn't likely to be paid for decades. A terminally-ill applicant certainly won't get a 75% discount.

Whenever you save money toward a goal, you're paying with discounted dollars. Would you like to pay your child's college tuition at a 39% discount? Just save $1,459 a year at 6% after tax and watch it grow to $36,000 in 15 years. All financial products benefit from the time value of money, but only the life insurance industry turns it into a sales pitch.

And the pitch is everywhere. See it in Donald Cady's popular Field Guide, published by the National Underwriter Company. Hear it at conferences sponsored by the American Society of CLU & ChFC. Print it out with estate planning software approved for use by insurers' home offices. Thrill to this new variation in a CLU-authored article in the August 1995 issue of Life Insurance Selling:

Pay cash 196%
Liquidate assets 245%
Borrow 143%
Buy life insurance 31%

What do intelligent people in the industry think about discounted dollars when asked directly? I posted a message on CompuServe's Actuaries Online, looking for defenders. No one came forward, but several actuaries eagerly joined in the attack.

I asked a compliance officer at a large insurer. The verdict: "It doesn't look good to me."

How can such pathetic sales practices exist in an industry that employs one of the largest pools of mathematical talent in the U.S.? You can't blame this one on a few rogue agents. It requires the collaboration or acquiescence of agents, management, actuaries, trade organizations, software developers, and publishers.

The compliance police are destroying the religion of life insurance, some complain. The miracle of discounted dollars proves that it is still alive and well. The main tenet of that religion has always been that the end justifies the means. We're the good guys. We invest America's savings. We save widows and orphans from destitution. Therefore, anything goes, because it's all for a good cause.

The irony is that the use of life insurance in estate planning can be defended without resorting to financial quackery. For competitive policies held until death, the expected present value of the premiums might be 85% of the expected present value of the death benefits, using reasonable assumptions. But a defensible 15% "discount" isn't as impressive as a phony 75%, so a few high-commission sales might be lost.

Clearly, we need more lawsuits. The life insurance industry hasn't gotten the message yet.

Glenn S. Daily is a fee-only insurance consultant in New York City.

He can be reached at

[Originally published in the December 31, 1995 issue of Probe.]