UL: Collateralizing a future investment loan
This is (sort of) complex, but bear with me.......
Question.... Why go to this trouble when you can run a simple UL illustrator or a spreadsheet template?
Answer.... Only integrating the UL/Loan/investment strategy in the complete financial environment (tax, inflation, salary, CPP/OAS, ATI....) will give the client and planner the full picture. It is a matter of accuracy/inclusiveness vs simplicity/approximation.
The assumption is, that you are illustrating Universal Life and its potential to provide future life insured income.
Note that the income derives not from the UL itself, rather the subject takes out an investment loan at a future time using the UL balance as collateral. We will assume that the UL data has been entered and works properly.
We are going to concentrate on the loan.... Here is the way the loan is modelled:
First of all, the 'future-ness' of the loan.
Bringing up the LOAN window, you will notice at the bottom left there is a 'LOAN STARTS' and 'LOAN ENDS' field. For a current loan then, these are normally set to the subject's current age. However, for our situation, we are going to set these ahead in time.
If our hero were 50 say, we would compute/smooth and observe the size of the UL over time. This will give us an idea as to how large the loan could be. (you will have to eyeball this yourself)
Now, we have to pick an age at which this future loan will take effect, how large the loan should be, and over which time frame (1 or more years) the loan will be sourced.
Also, the loan will be set up as a 'no-pmt' (reverse mortgage-type) loan.
Let's say, that the projected UL balance at say, age 70 were $250K. And that based on our experience we can secure investment loans of $50,000 per year over 4 years starting at that age.
i.e. we want a future phased 'no-pmt' loan of $50k per year over 4 years (70-73). Here is the data.....
First, enter $50000 in the loan amount.
Next, enter '100' in the amortization length. (or '99' if you want an LOC-type loan)
Next, enter Loan starts as 70, and Loan ends as 73.
That's not quite everything:- a 'future' loan is slightly different than a 'now' loan in that the proceeds from the loan have to be identified in the model. (unless, of course the loan was for acquiring a car say.)
However, for an investment loan such as we are modelling, we must show where the proceeds are going. In this example we assume that the loan will be funding simple 'GIC-type' nonreg investments. In such a case, simply drop the proceeds ($50,000 over the range 70-73) into the data entry grid's non taxable income column.
We are done.
BTW.... in order for this to make any positive difference, the loan rate should be in excess of the UL growth. (apologies if this is self evident)