Two ways to spend the same money. Buy the $10,000,000 premium-financed indexed life policy Diamond Patni proposed, or invest that same out of pocket in an index fund (VOO tracks the S&P 500, QQQ the Nasdaq-100). The question is what Alyssa's heirs actually receive, and when each approach pulls ahead.
Policy figures from the Diamond Patni illustration (prop-alyssa.pdf, carrier LSW, preferred class, illustrated index credit 6.84%, loan rate starting 5.95% and assumed to fall). All policy values below are illustrated and not guaranteed. Index returns of 7% and 10% are assumptions, not predictions.
The insurance pays its death benefit the moment the policy is in force. The index account is only ever worth what has been contributed plus growth. This is the heart of the tradeoff.
| Death in year (Alyssa age) | You have paid | Insurance tax-free | Index @10%, in trust | Index @10%, personal | Index @7%, personal |
|---|---|---|---|---|---|
| Year 3 (age 37) | $210,000 | $10,052,596 | $254,870 | $152,922 | $144,478 |
| Year 5 (age 39) | $350,000 | $10,146,457 | $470,093 | $282,056 | $258,438 |
| Year 10 (age 44) | $700,000 | $10,652,003 | $1,227,182 | $736,309 | $620,911 |
| Year 15 (age 49) | $1,050,000 | $11,527,679 | $2,446,481 | $1,467,889 | $1,129,298 |
| Year 20 (age 54) | $1,050,000 | $12,619,810 | $3,940,082 | $2,364,049 | $1,583,899 |
| Year 25 (age 59) | $1,050,000 | $14,324,324 | $6,345,542 | $3,807,325 | $2,221,501 |
| Year 30 (age 64) | $1,050,000 | $16,928,632 | $10,219,559 | $6,131,735 | $3,115,769 |
| Year 35 (age 69) | $1,050,000 | $20,902,419 | $16,458,701 | $9,875,221 | $4,370,028 |
| Year 40 (age 74) | $1,050,000 | $26,889,522 | $26,506,903 | $15,904,142 | $6,129,190 |
Insurance column: net death benefit from prop-alyssa.pdf, income-tax-free (IRC 101) and estate-tax-free if owned by an irrevocable life insurance trust. Index columns: future value of $70,000/year for 15 years at the assumed rate (computed). "Personal" applies the 40% federal estate tax (IRC 2001(c)); "in trust" assumes the account escapes estate tax but would forfeit the step-up in basis (IRC 1014).
The crossover is the year after which, if Alyssa is still alive, investing would have beaten the policy's tax-free payout. It depends on the return you assume and whether the index money is itself shielded from estate tax.
| Assumed annual return | Index held in a trust (estate-tax-free) | Index held personally (minus 40% estate tax) |
|---|---|---|
| 7% per year (assumption) | Never, through age 94 | Never, through age 94 |
| 10% per year (assumption) | Year 41, age 75 | Year 56, age 90 |
Crossover computed against the policy's illustrated net death benefit (prop-alyssa.pdf). At 10% in trust, index reaches $29,157,594 vs the policy's $28,404,768 in year 41. At 10% personal, index reaches $73,079,103 vs $72,109,992 in year 56.
| Dimension | Financed IUL | Index funds |
|---|---|---|
| Large payout if death is early | Yes, full $10M | No, only what is saved |
| Income-tax-free at death | Yes (IRC 101) | Step-up, no gains tax (IRC 1014) |
| Avoids 40% estate tax | Yes, if trust-owned | No, unless held in a trust |
| Full liquidity and control | No, surrender charges, lockup | Yes, sell anytime |
| Fees | High: insurance, admin, loan interest | Tiny: fraction of a percent |
| Bank leverage and collateral calls | Yes, a real risk | None |
| Upside if markets run | Capped (6.84% illustrated) | Uncapped |
It is not really "stocks or insurance." It is "how much do you need a guaranteed payout at an unknown date, and how much of the estate-tax bill must be cash no matter what." A term policy on Alyssa could hedge the early-death gap cheaply while the index funds do the long-run compounding, which is worth pricing as a third option.