Can whole life ever beat regular [conservative] investing?

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Tyr0ne
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Can whole life ever beat regular [conservative] investing?

Post by Tyr0ne » Fri Feb 07, 2014 8:39 pm

I must preface this question by admitting that my gut tells me this may a very dumb question. However, my life insurance knowledge is severely lacking.

My parents are both retired and getting to the age where they are sharing their finances with me (my brother and I are both grown adults now). My Dad bought a whole life policy from Northwestern Mutual about 30 years ago, and will take it to his grave that this policy is pure gold. He is a very stubborn man, so my questions about the policy have been very subtle, and the conversations short-lived. He SWEARS that it is making very good money, and that the cash value is actually growing faster than his other investments (which makes me think his wealth manager has him with a very conservative allocation). My parents were very frugal people and have more than enough liquid money to live a very long and comfortable retirement, and my brother and I are both in solid and steady careers, so there isn't really anything to "insure" at this point.

Is it actually possible that his whole life policy is doing as well as he thinks? From what I gather, it is dangerous to assume that cashing out is always the best answer. My instincts tell me that this policy is quite huge in size, so despite my urge to just let it go, I kind of want to pry further, as I feel I have some sort of duty to at least try and figure out what the best course of action is.
There are times when, at least for now, one must be content to love the questions themselves - Neil deGrasse Tyson

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yatesd
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Re: Can whole life ever beat regular [conservative] investin

Post by yatesd » Fri Feb 07, 2014 8:43 pm

Two thoughts...

- Maybe he timed the policy at the peak of bond interest rates and secured a decent deal?
- Even though I don't like whole life (or insurance companies in general), I don't assume that a policy in effect for many years isn't worth keeping

mnvalue
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Re: Can whole life ever beat regular [conservative] investin

Post by mnvalue » Fri Feb 07, 2014 9:09 pm

Does he have some sort of most recent statement and one from a year before that? Assuming he's not paying into it, just divide out the cash values (or the death benefit, whichever is larger) to see how much it grew in a year. If it compares close enough to a bond fund, then leave it alone.

I think I'm just re-stating your own thinking here, but... Whether it's performing well enough now for someone with a conservative allocation is different from whether one should buy one in the first place (since it likely has a huge effective "loan" in the form of high up-front costs) or whether it's an appropriate long-term investment for a young person (it's probably not, since it won't keep up with an allocation that has stocks).

BreakfastTaco
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Re: Can whole life ever beat regular [conservative] investin

Post by BreakfastTaco » Fri Feb 07, 2014 9:10 pm

Whole life isn't for everyone, but don't forget certain policies provide:

1) Asset protection
2) A disability pays the premium
3) Certain illnesses allow you to take from the death benefit while you are still alive

Whether that matters to you or is of any use is up for a very heated debate I am not able to really discuss. Obviously if you are going to consider such a policy you need to get a well established agent who can set you with the appropriate policy with riders.

Dandy
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Re: Can whole life ever beat regular [conservative] investin

Post by Dandy » Sat Feb 08, 2014 10:38 am

Whole life policies that have been in force for 30 years can be a good deal as far as dividends and increase in cash value. BUT you have to run the numbers. Your dad has already paid a stiff price (higher premiums than the same face value if he had bought term) but current dividends may pay most if not all of his premiums. And the longer he has it the more likely the numbers will improve.

Whole life dividends are based on the experience of that particular class of policyholders. i.e. their mortality, expenses and income. Insurance companies make conservative assumptions so as the number of policyholders in his class reduce due to death or redemption the remaining class members can often do quite well. We are not talking winning the lottery just that their dividends can be quite nice.
A couple of thoughts:
1. Does he still need this insurance? Does he need all of the face amount? He may have taken a large policy to cover his young wife and children and now his needs are not as great. He may be able to take a reduced paid up policy and avoid any future premiums and I believe still get dividends (but also reduced)
2. What is he doing with his dividends? When a policyholder is young they are often encouraged to use the dividends to buy paid up additional insurance or accumulate the dividends.
a, Paid up Additional Insurance (PUA's) As you get older, especially if you don't have pressing needs for more insurance, the paid up additional insurance that you get with your insurance is not a good deal e.g. you might have a dividend of $100 that buys $110 of additional insurance. You might be better off having dividends in cash or pay premiums. If dad has had dividends purchase additional insurance you can also cash in those PUAs - it won't affect the face value of the insurance.
b. Agents like to have their customers have the dividends left to accumulate. This provides a future fund to sell them more products. If dad has chosen that option see how much interest is being paid on those accumulated dividends. He can redeem those dividends without affecting the face amount of insurance.

My guess is that after 30 years the dividends will make the insurance cheap. The main question is how much insurance does dad need?

jaj2276
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Re: Can whole life ever beat regular [conservative] investin

Post by jaj2276 » Sat Feb 08, 2014 11:24 am

From reading every single one of these threads (I find them fascinating for some reason), I think it's likely (although not certain) that your dad's policy is a good one *now* but only because he's 30 years into the policy.

Which leads me to my question. Is there a way to find out what historical term insurance premiums? The answer to your dad's question is likely "ya, it's doing great now, but if you had taken out term 30 years ago and invested the difference in a bond fund (or even a 30 yr treasury bond?), here's where you would be now." It might be petty to do this, but if your dad keeps bringing up how great the policy is (and I'm not saying this is the case), at least you can bring the conversation to an end with this information.

My insurance agent two years ago was trying to pitch me whole life. She provided all the illustrations showing cash value at the end of each year, etc., given both guaranteed and current dividend rates. The spreadsheet showed that over my likely 50 year time frame (of which I would only need life insurance for less than 30 years), the whole life would have "won" if I died in a small 8 year window. Even then, the difference wasn't large. However, if I died early or died later than that window, the term + invest the difference won out big time (it was comically how much larger the value was if I lived in to my 90s). If I died early, the difference was big too because of course I got paid out in insurance from either policy but I then had "cash value" from the premium difference that I would have invested.

Kielke
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Re: Can whole life ever beat regular [conservative] investin

Post by Kielke » Sat Feb 08, 2014 11:58 am

My understanding of Whole Life, and you may want to run this past your father to see what he says. Upon his death, only the death benefit is paid out to the policy holder, the entire cash value stays with the insurance company. So if by some chance the cash value is somewhat close to or over the death benefit, especially if everyone in the family is financially sound with or without this money, it may be worth just cashing it out now.

dhodson
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Re: Can whole life ever beat regular [conservative] investin

Post by dhodson » Sat Feb 08, 2014 12:17 pm

That's a bad idea

First the csv is much less than the death benefit

2nd the death benefit is income tax free. Cashing it out would make all gains taxable at income rates.


The answer to the question is no however. The reason why is mostly bc they take that money and invest it within primarily bonds. They have huge fees and commissions to pay not including the actual insurance. The return must take this into account. The only thing propping up the return is that most polices lapse/surrender so they infrequently pay a death benefit.

Now your father likely should keep the policy bc most of the drag on return is now gone. You can't change that. Once you have lost all that money, you should just keep what you have paid for. Google their dividend history and you will see it has been going down for a long time.

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HomerJ
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Re: Can whole life ever beat regular [conservative] investin

Post by HomerJ » Sat Feb 08, 2014 12:30 pm

Tyr0ne wrote:He SWEARS that it is making very good money, and that the cash value is actually growing faster than his other investments (which makes me think his wealth manager has him with a very conservative allocation).
Maybe right now it's growing faster than bonds (it's certainly not growing faster than his stock investments right now)... but if he had put all those premiums into the stock market, or even the bond market starting back in 1984 (30 years ago), he would be a MUCH richer man today.

Should he keep it now? Probably. Most of the costs come out in the early years. Should you buy one? Absolutely not.

Dandy
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Re: Can whole life ever beat regular [conservative] investin

Post by Dandy » Sat Feb 08, 2014 12:38 pm

Which leads me to my question. Is there a way to find out what historical term insurance premiums

Don't know how to get historical rates. Rates for term insurance has been dropping dramatically over the past decade or so. I think the best argument to convince dad on what to do is running current numbers not showing how bad a decision he may have made 30 years ago. If you run the numbers and keeping the current policy or reducing the face amount and paying no premiums - he can accept the change without feeling bad about his decision.

By the way when dad bought the policy 30 years ago whole life was much more popular and term rates were much higher. His intent to provide coverage to his family was the right thing to do even if he most likely could have made a better choice of insurance type.

dhodson
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Re: Can whole life ever beat regular [conservative] investin

Post by dhodson » Sat Feb 08, 2014 12:56 pm

You are going about this wrong

Term rates are irrelevant to his decision

Call company and ask for an in force illustration

Look at the guaranteed and illustrated columns

Expect something in between

You could do better than illustrated but that requires dividends to go the opposite direction

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Watty
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Re: Can whole life ever beat regular [conservative] investin

Post by Watty » Sat Feb 08, 2014 1:33 pm

One thing to keep in mind 30 years ago back in 1984 low cost index funds were pretty uncommon and that by having money in the life insurance policy he avoided the dot common bubble and all the problems over the last few years.

I'm pretty sure that if he had bought term insurance instead and just started dollar cost averaging his money into the rare 1984 index funds and consistently added money for 30 years without changing his plan at a bad time then he would have a lot more now.

That probably would not be what would have happened though. A more likely alternative investing history for him would something like; in 1984 he would have bought a mutual fund with a 5% load and 2% expense ratio, got into the dot com bubble when it was to late, then bailed out of stocks at the market low in the early 2000's.

At this point comparing his life insurance to what he could have done, if he had done everything right, is pretty pointless and it is very possible that just sticking with it now is by far a better choice once you look at the details.

As a more general question though is that if a typically terrible investment can turn out to be a good choice a small percentage of the time? The answer is yes.

Variable annuities are almost always a terrible investment choice but many of then gave guaranteed returns long before the current near zero interest rates so some of these have performed so well that they have more than made up for the high costs associated with it. As with many things it is sometimes better to be lucky than smart which pretty much describes what happen to people that bought variable annuities at the right time. They have performed so well that that some insurance companies are now trying to get out of their guaranteed returns.

dhodson
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Re: Can whole life ever beat regular [conservative] investin

Post by dhodson » Sat Feb 08, 2014 1:38 pm

Same is true of penny stocks

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