I need a rock solid exposition of Permanent Life Insurance

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kflorian
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I need a rock solid exposition of Permanent Life Insurance

Post by kflorian » Fri May 23, 2014 5:25 pm

Help!

Up until this week my wife and I have been devout bogleheads and readers of Bernstein (I still am). We own three mutual funds (I'll leave it to the astute reader to guess which three and from which company). My lovely wife recently heard a pitch for a "permanent life insurance policy". As we know, "permanent life insurance" is usually the bane of the insurance world – but, she asserts, this product has "a very interesting twist".

Don't they all.

Hold onto your seats ladies and gentlemen....and I quote:

"If you die, of course, your beneficiaries receive the death benefit.

What if you continue to live? Instead of an illiquid death benefit, once you pass age 85, you can use the death benefits – withdrawing up to 1/10 of the death benefit per year. So if you have a $1M policy, you get $100,000 per year from age 85 to 95 to use however you want. (Or less per year if you prefer).

If you get sick and meet the same qualifications as the govt definition of disability (i.e. unable to accomplish more than 2 of the 6 ADLs – activities of daily living), then no matter what your age you can use up to $10,000 per month of the death benefit to pay for care.

The purpose of the policy is to protect you if you die, if you live too long, or if you get sick and don’t want to burden your family with your care.

The agent staid that for a 55-year-old man, you can get a $1M policy for about $10K per year, and the premium is guaranteed never to go up for the life of the policy. If you try to get LTC insurance, it costs a ton and the premiums are going up and up and up every year. This covers that need but also covers situations where you wouldn’t use your LTC insurance (like if you are healthy and just live a long time.)

Our overall financial life is very secure though not yet truly financially independent. Zero debt...two stable jobs....all the usual provisions and codicils in place. We have simple term policies to replace each others' income but even those are a luxury that either one could likely do fine without.

Why is this not a very expensive "front-loaded" investment?

I need a good reference article, with the credentials of a Bernstein or Ferri or Zweig, to help think through this madness.
Ken Florian

dhodson
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by dhodson » Fri May 23, 2014 5:32 pm

There is no twist here. This is just a hybrid product with a rider. Might want to search.

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bottlecap
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by bottlecap » Fri May 23, 2014 5:33 pm

Tell me how they make money selling this policy and I will tell you how it's not a good deal for you.

JT

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dratkinson
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by dratkinson » Fri May 23, 2014 6:34 pm

Believe actuarially we are all suppose to be dead before 85.

If we assume 7% market growth, then $10K (lump sum, beginning of period compounding) annual payments over 30 years grow to $1010K.

If we assume 10% market growth, then compounded payments grow to $1809K.

In the first case, they expect to keep $10K of what your payments earned after paying out $1M death benefit, in the second they expect to keep $800K.

Above 10.5% market growth rate ($2M at 85) and the company expects to keep more than they pay out.

In both cases, if you are alive, the company continues to earn returns on your total payments as they only pay out 1/10 of death benefit each year.


Do you keep making annual payments while you are disabled and withdrawing $10K/month in disability benefits? I'm assuming so (annual policy payments, monthly disability benefits)

Don't know how to figure in the disability benefits, but I'm sure that actuarially, it is a good deal for the insurance company no matter what happens.



That's the best I can do.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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mephistophles
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by mephistophles » Fri May 23, 2014 7:16 pm

kflorian wrote:Help!

I need a good reference article, with the credentials of a Bernstein or Ferri or Zweig, to help think through this madness.
All you need to give us is the name of the insurance company and the name of the policy. I don't think Bernstein, Ferri or Zweig would be the sources you want for evaluation of this policy.

Leeraar
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by Leeraar » Fri May 23, 2014 7:26 pm

Go to http://www.immediateannuities.com and see what $1 million will buy as income at various ages. At age 85, it's much more than $100,000 per year.

If you take withdrawals, I presume the benefit goes down. You do not say by how much.

Question: On your 85th birthday you take $100k from a $1M policy. You die later that night. What is the death benefit?

The more you deconstruct these things, the more it becomes apparent they are not a good deal. Run away now, or buy some of the components (term life, SPIA) that are worthwhile for most people.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

sdrone
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by sdrone » Fri May 23, 2014 7:30 pm

Hey, sounds like the old variable universal life insurance policy is back!

These were somewhat popular among wealthy people a decade or so ago, but haven't heard much from them since. The idea was that you would buy a large insurance policy and use it to "stash cash" in the form of large premiums. THe insurance company would then let you withdraw some of that money before you died.

kflorian
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by kflorian » Sat May 24, 2014 8:51 am

AIG - "Quality of Life....Insurance". Note that the ellipsis are part of the Registered Trademark name...naughty if you remove them.

with two optional riders, Accelerated Benefit and/or Disability Income.

I'm waiting for a formal answer to how AIG makes money but, reasonable to guess right now that there is a very long-term policy contract which, if abandoned, means losing any premiums paid.
Ken Florian

kflorian
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by kflorian » Sat May 24, 2014 8:54 am

Leeraar wrote:Go to http://www.immediateannuities.com and see what $1 million will buy as income at various ages. At age 85, it's much more than $100,000 per year.

If you take withdrawals, I presume the benefit goes down. You do not say by how much.

Question: On your 85th birthday you take $100k from a $1M policy. You die later that night. What is the death benefit?

The more you deconstruct these things, the more it becomes apparent they are not a good deal. Run away now, or buy some of the components (term life, SPIA) that are worthwhile for most people.

L.
$900,000 = $1,000,000 - $100,000.

"not a good deal". I cannot imagine how it would be.

I am almost embarrassed to put my name on this trhead but for the love of my wife of 30 years, I promised to do some research.
Ken Florian

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rkuklinski
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by rkuklinski » Sat May 24, 2014 9:10 am

I sense the income benefit after you reach 85 is the feature that is particularly enticing. I would do a search on "longevity insurance" and read some of the analysis of the coverage. Here is an example I found from WSJ:

http://online.wsj.com/news/articles/SB1 ... 3314354494

Longevity Insurance is essentially paying premiums now to potentially receive benefits if you reach a certain age. Sounds like the policy you are considering is combining a life insurance benefit with a longevity benefit.

Here is what Scott Burns had to say about longevity insurance:
Q: What are the pros and cons of longevity insurance for a 65-year-old with a family age limit of 85?

A: If by "family age limit of 85" you mean that most members of your family have not lived beyond age 85, I have to tell you that the figure doesn't tell you much. That's around the age that most people die.

And if you have a grandparent or parent who lived that long, you may come from a family with pretty good longevity.

As recently as 1940, for instance, the life expectancy at birth of the average American was 69.9 years, according to the United States Life Tables. You may be around longer than you think.

Longevity insurance — a policy that promises to start paying an income years later to those who survive — is another great insurance idea that suffers because it is offered by, yes, the insurance industry.

Basically, you're trusting them to be good with your money for, say, 20 years, and then give you back a whole lot more if you have been lucky and lived that long.

Do you think there is an insurance company in the United States that we can trust with our money for 20 years? I have my doubts. Diversified investing is a better bet.
http://seattletimes.com/html/businesste ... rns17.html
'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.'"

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HardKnocker
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by HardKnocker » Sat May 24, 2014 10:04 am

I suggest playing a trick on the insurance company and not dying.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

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Tozmo
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by Tozmo » Sat May 24, 2014 11:13 pm

HardKnocker wrote:I suggest playing a trick on the insurance company and not dying.
That would teach them:
1) Buy maximized permanent life insurance
2) Don't die
3) Profit

It is like my attempt to win the lottery:

1) Buy lottery ticket
2) Defeat math
3) Profit

I am working on step 2 for my trick. You work on step 2 for your trick and let me know if you figure it out.

Leeraar
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by Leeraar » Sun May 25, 2014 3:59 am

Life Expectancy:

The age for Social Security is about 82. This is much older than life expectancy at birth, because they are dealing only with people who have lived long enough to receive SS benefits.

Here is the table from the IRS RMD publication, with a couple of added columns:

Code: Select all

Age	Expec	Death	Change
56	28.7	85	Months
57	27.9	85	-9.6
58	27.0	85	-10.8
59	26.1	86	-10.8
60	25.2	86	-10.8
61	24.4	86	-9.6
62	23.5	86	-10.8
63	22.7	86	-9.6
64	21.8	86	-10.8
65	21.0	86	-9.6
66	20.2	87	-9.6
67	19.4	87	-9.6
68	18.6	87	-9.6
69	17.8	87	-9.6
70	17.0	87	-9.6
71	16.3	88	-8.4
72	15.5	88	-9.6
73	14.8	88	-8.4
74	14.1	89	-8.4
75	13.4	89	-8.4
76	12.7	89	-8.4
77	12.1	90	-7.2
78	11.4	90	-8.4
79	10.8	90	-7.2
80	10.2	91	-7.2
81	9.7	91	-6.0
82	9.1	92	-7.2
83	8.6	92	-6.0
84	8.1	93	-6.0
85	7.6	93	-6.0
86	7.1	94	-6.0
87	6.7	94	-4.8
88	6.3	95	-4.8
89	5.9	95	-4.8
90	5.5	96	-4.8
91	5.2	97	-3.6
92	4.9	97	-3.6
93	4.6	98	-3.6
94	4.3	99	-3.6
95	4.1	100	-2.4
96	3.8	100	-3.6
97	3.6	101	-2.4
98	3.4	102	-2.4
99	3.1	103	-3.6
100	2.9	103	-2.4
101	2.7	104	-2.4
102	2.5	105	-2.4
103	2.3	106	-2.4
104	2.1	107	-2.4
105	1.9	107	-2.4
106	1.7	108	-2.4
107	1.5	109	-2.4
108	1.4	110	-1.2
109	1.2	111	-2.4
110	1.1	112	-1.2

70 17.0 87 -9.6

If you are age 70 (which I took to be 70.49), your life expectancy is 17.0 years, which (rounded) takes you to age 87. From age 69 to 70, your life expectancy decreases by 9.6 months, not by a full year.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

Sagenick48
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Re: I need a rock solid exposition of Permanent Life Insuran

Post by Sagenick48 » Mon May 26, 2014 11:04 am

I keep telling you folks, but you don't seem to hear me, insurance is a game that you only win, financially, when you lose personally. You win (financially) the life insurance game when you die early (is that winning personally?).
The market goes up, the market goes down.

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