Permanent Life Insurance

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rhodnius
Posts: 73
Joined: Sat May 30, 2015 5:07 pm

Permanent Life Insurance

Post by rhodnius »

Hello fellow Bogleheads,

My friend and his wife have been sold 2 permanent life insurances by an insurance agent. They pay around $700+ and $900+ each per month. He wants a Boglehead analysis of the email that was sent to him to convince him to drop them and just get a term life insurance instead. The email was sent to him after he opened up the idea of dropping the permanent life insurances to his insurance seller. My friend has no kids currently and both of them are working. I would appreciate your input/analysis. Below is the email.
-------------------------------------------------------


Hope you guys had a great weekend. I wanted to get this email to you guys, before our next conversation. I know that you guys are wondering and questioning why we got the permanent life insurance in the first place. So I wanted to go back over this in particular but also to talk about it in the context of your overall financial plan. I have attached the last financial plan that we created. I would like to update this for two reasons first to give you two a better sense of what you are track for and secondly, to help you both understand why we got the insurance in place and where it comes in play. So I believe for next time if you guys can send me over your most recent 401k statements I can update the financial plan.


Here are a couple pieces that talk about the life insurance. When looking at the life insurance. I don’t consider it an either invest or put money into insurance. I believe that they best plan has both, so remember that this was just a piece of everything you two should be doing not the only piece. I believe that the cash-value life insurance can be used alongside your investments to give you a better long-term outcome. There are a few ways this can be done. First the use of cash-value life insurance can keep you guys from having to pull money from investment accounts at non-optimum times. The article below (managing uncertainty illustrates this and also back-test this strategy over the course of 20 year time periods starting in 1973 thru present) in all time periods this strategy worked out to optimize investment spin down.


Another reason for putting money into the policies is that we want to diversify not only our investment account but diversify into different assets. I have attached two articles below that compare the life insurance with other assets. Now I don’t compare cash-values inside a traditional permanent policy to the S&P 500 because stock investments are very risky. Cash-values should be risk-like assets. Now having cash-values allows you guys to take more risk in your investment accounts (particularly your retirement accounts and non-qualified accounts) and allows you to take more risk for a longer time period. Most investors decrease their risks in their investment accounts as they get older. However, with the cash-values you two can feel comfortable with taking more risk for a longer time. Also the cash-value inside life insurance is protected from creditors at varying amounts from state to state. Which may not matter to an average person but for a physician it is more critical.

The article below also talks about how banks use cash-value life insurance as a part of their portfolio.


Also I know that we can do these things with Natasha's policy however, I like the permanent insurance on Troy for two particular reasons first. First, with Troy being 10-11 years older it is probable that you will need long-term care or die before Natasha's . Your policy will do one of two things. First if you need long-term care it will preserve the investment accounts. Secondly, if you die first the death benefit can be used to convert IRA/401k into Roth IRA, using the tax-free death benefit to pay the taxes due. A third reason that I forgot to mention is that knowing that the death benefit is there we can spin down the investment accounts quicker knowing that investment accounts will be replenished if needed by tax-free death benefit to make sure Natasha's has enough for retirement.


On Troy’s policy attached below I showed two different illustrations one putting the dividends back into the policy. When this is done the death benefit, cash-values and future long-term care benefit. The other option which I believe you two will like and is a middle of the road solution is to use the dividends to decrease the premium. This will decrease your current cash outlay will maintain future death benefit which can be used for future Long-term care benefit, use of cash value during a down market or Roth conversion of IRA/401k accounts or legacy planning. One thing to remember is that the reason why we got it now is probably not how you’ll use it down the road.

Putting dividends back into the policy to increase the cash-value, death benefit, and future long-term care benefit:

Using dividends to reduce premiums


I know that you guys read different financial articles. One thing I would recommend is googling the differences between a “mutual insurance company vs. a stock insurance company” there are a couple significant differences between the two.

When you are doing your research a couple things. Read articles from Financial professionals such as CPAs, CFP, CFA, Ph.D, CHFC, etc. One that I like is Ed Slott, CPA who is considered by most in the industry and wall street as an IRA and retirement expert he has some great articles. Also his website is not full of advertisements. He specializes in Tax and estate planning. You can google him.

I’m pretty sure there are things that I’m not thinking of at this time but let me know when works in the next week or two to continue our meeting from last time. I would like to update the financial plan to go over next time also. Also next time I’ll show you guys my policies as I mentioned I do the same as I recommend which I believe is very important that your advisor believes in what they recommend that they put their own money and own the same products that they recommend.

I hope you two have a great week and look forward to our next conversation.
Last edited by rhodnius on Tue Feb 14, 2017 4:38 am, edited 1 time in total.
pintail07
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Re: Permanent Life Insurance

Post by pintail07 »

The "you guys" comment continuously became tedious. Bet this guy is from Northwestern Mutual or New York Life. Drop the agent, drop the policies after obtaining term insurance, period.
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Frugal Al
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Re: Permanent Life Insurance

Post by Frugal Al »

The insurance agent seems to be offering boiler plate justification for permanent insurance. It appears the agent believes, as they are often taught, that everyone needs some permanent insurance. I don't see any of the conditions present that sometimes makes permanent insurance a reasonable product: business transference, illiquid estate planning, caring for long term disabled dependents, to name a few. The general guidance often offered here applies: 1) don't commingle insurance and investments, and 2) most people don't need permanent insurance. I'll go further and point out that there isn't an OBVIOUS need for life insurance of any kind in this particular case--though there may be one. I do find it laughable that the insurance advisor is recommending applying the dividends to the premium to decrease the couple's financial outlay, which apparently approaches whopping $20k per year. Seems like a lot for life insurance, but we don't know the coverage amount or the couple's ages.

Clearly the couple is producing good income. There may be legitimate financial planning needs that MIGHT make permanent insurance a reasonable recommendation. If the couple really cares about the recommendations here, they really should make a post with more complete information.
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dwickenh
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Re: Permanent Life Insurance

Post by dwickenh »

If your friend has a little time for some reading, he may want to check out the White Coat Investor's website for info also.

http://whitecoatinvestor.com/

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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David Jay
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Re: Permanent Life Insurance

Post by David Jay »

Bottom line on all "permanent" (whole life, universal life, variable life) policies:

Can they verbalize (put into words) a specific need for a permanent benefit (for instance, do they know specifically that someone will be dependent on them and unable to care for themselves after they die at age 85 or 90)? If not, they are not a candidate for a permanent policy. Period. End of discussion.

Every other claimed benefit from permanent life policy can be done more efficiently with alternate vehicles.
Last edited by David Jay on Mon Feb 13, 2017 2:56 pm, edited 2 times in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
BruDude
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Re: Permanent Life Insurance

Post by BruDude »

The agent needs to learn how to write a more professional email, that's for sure...
NotWhoYouThink
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Re: Permanent Life Insurance

Post by NotWhoYouThink »

Obviously the email rambles all over the place, and trying to argue point by point is playing the game the salesman wants to play. He can throw up nonsense arguments longer than you can throw rocks at them. When you are tired of arguing, he wins.

If he used their real names, you should edit your post to remove or change them.

Life insurance is what you buy to protect your family in case you die before you earn enough to support them through launch (for kids) or retirement (for spouse). No other reason to have it, except for some potential tax benefits for very very high net worth families. If they put their money in retirement savings now, they will stop needing life insurance when they are 50 or 60 or so, because they will have saved enough for retirement, even if they both live! So if they buy term, they can stop paying for it as soon as they no longer need it.
b42
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Re: Permanent Life Insurance

Post by b42 »

To compare, I'd do the following:

Go to term4sale.com and get some general quotes for 20/30 year term life policies for the same death benefit for both husband and wife. Figure out how much those policies would cost in total. Compare to the $1600 a month they currently pay now. My guess is the term life policies will be 60-90% cheaper, and then they can take their "savings" and invest it in an account they fully control. Say they end up with $1000 extra to invest. Over 10 years that's $120k in contributions (plus whatever the market returns), and they could turn into their "long term care" fund.

Also, the whole part about using the death benefit to pay taxes on a Roth conversion seems odd. So you buy an overpriced, commission-heavy project and hold onto it for decades in order to blow it all on taxes?

What state are they in? Is the whole "protected from creditors" benefit even valid? Are there limits to the protection?

"Pulling money" from the cash-value...wouldn't there be some sort of cost for doing this like interest? Are they making the assumption the alternative is to withdraw from a retirement account and pay a penalty? Doesn't an emergency fund take care of this?

I always like the "convince me why I should drop this coverage" questions from people who already have whole life insurance :) . It should rephrased "Let me convince you why I should keep this coverage".
inbox788
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Re: Permanent Life Insurance

Post by inbox788 »

Did anyone ask if the advisor is a fiduciary? How is he being paid? Is he independent or part of an insurance company or brokerage? Is he collecting good commissions on the insurance products AND getting a nice AUM for the investments?

Sounds like the folks here have a fair amount of wealth, and need the individualized full services of this advisor. It's not clear the advisor (or anyone in that position) is always going to be looking out for their best interest, and the clients are probably unaware of how much it's costing them directly and indirectly. Taking full control over their situation is the other extreme, which they may not be able to achieve if they're having trouble with just this aspect. They've already put their entire financial future in this persons hands, why veer off on just this particular item?
Ivymd
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Re: Permanent Life Insurance

Post by Ivymd »

dwickenh wrote:If your friend has a little time for some reading, he may want to check out the White Coat Investor's website for info also.

http://whitecoatinvestor.com/

Dan
+1
Tal-
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Re: Permanent Life Insurance

Post by Tal- »

The short answer is: Run.

The longer answer is that policies like this are often intuitively appealing, but are virtually never the right move. The talking points of the policies make them sound great – protecting family if you pass, doing life insurance and investments all at once, diversification of assets, long-term care protections and so on. The issue is that investing this money somewhere else, such as a diversified portfolio, or bond fund, or cd ladder, or even a savings account – all are probably better options.

Investment grade/whole/permanent/etc. life insurance have very few merits, and should rarely be used. If the person has $5M+ in assets, doesn’t care about fees, and wants to focus on estate taxes – these plans have merit. Or, if the person is unable or unwilling to get term coverage for their insurance needs – those plans have merit. Outside of those two situations, which virtually never occur, tools like this fail as both an investment and as insurance.
Debt is to personal finance as a knife is to cooking.
cpants
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Re: Permanent Life Insurance

Post by cpants »

Agree that your friend needs White Coat Investor's site badly. They try and sell all docs on this scam right at the end of residency when you are signing up for needed disability insurance. Surprised he didn't put in something about how the insurance cash value is an asset protected from malpractice liability. I've heard that before. I was lucky to have some guidance at that point in my career from WCI's site and a trusted accountant, or I probably would have been taken on a ride for 10-15k a year in premiums for at least a few years.

Why would you ever choose an insurance agent to be your financial planner??
pintail07
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Re: Permanent Life Insurance

Post by pintail07 »

I would recommend any future financial product recommendation be reviewed by your accountant and lawyer.
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White Coat Investor
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Re: Permanent Life Insurance

Post by White Coat Investor »

rhodnius wrote: First the use of cash-value life insurance can keep you guys from having to pull money from investment accounts at non-optimum times.

You don't "pull from" WLI. You borrow against it. You can also borrow against your home, your car, or even your next paycheck at "non-optimum times." Or alternatively, you can spend from your emergency fund or even sell some of the bonds in your portfolio. I find this argument for WLI to be true, but weak. It is not necessary to have a WLI policy for this purpose.
rhodnius wrote:Another reason for putting money into the policies is that we want to diversify not only our investment account but diversify into different assets.
I find WLI to be an unattractive asset class. You can diversify into horse manure if you like. That doesn't make horse manure an attractive asset class.
For instance, what other asset class is guaranteed to not break even for 7-15 years after purchase?
rhodnius wrote: Also the cash-value inside life insurance is protected from creditors at varying amounts from state to state. Which may not matter to an average person but for a physician it is more critical.
A typical doc has a 1/10,000 chance of being sued successfully for an amount above malpractice policy limits. While WLI cash value is often protected from creditors, it's an unnecessary purchase for that alone.
rhodnius wrote: First, with Troy being 10-11 years older it is probable that you will need long-term care or die before Natasha's . Your policy will do one of two things. First if you need long-term care it will preserve the investment accounts.
Most docs should be able to self-insure LTC needs. If not, buy LTC insurance, not WLI.
rhodnius wrote:Secondly, if you die first the death benefit can be used to convert IRA/401k into Roth IRA, using the tax-free death benefit to pay the taxes due.
Or alternatively, you can just use all that extra money you would have if you hadn't bought the WLI to do Roth conversions.
rhodnius wrote: we can spin down the investment accounts quicker knowing that investment accounts will be replenished if needed by tax-free death benefit to make sure Natasha's has enough for retirement.
I find a SPIA a better tool than WLI if you need permission to spend your money for what you saved it up for.
rhodnius wrote:One thing to remember is that the reason why we got it now is probably not how you’ll use it down the road.
Because the reason "we got it now" is because he needed a big commission now to fund his kid's college and that motorcycle. That reason won't work for you down the road. Are you aware he was paid 50-110% of your first year's premiums to sell you this policy?
rhodnius wrote:I know that you guys read different financial articles.
Thank goodness.

I'm sorry this has happened to you. If it makes you feel any better, it has happened to something like 1/3 of doctors in my estimation.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
rhodnius
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Joined: Sat May 30, 2015 5:07 pm

Re: Permanent Life Insurance

Post by rhodnius »

Hello,

Let me begin by saying: Happy Valentine's Day!

Lots of very helpful information and I truly appreciate them. I did change their names for identity protection purposes. Both live in Michigan. I don't know the coverage amount and the limits to the protection. I'm also not sure how the insurance agent is being paid but I guess it may be very similar to other life insurance agents which is around 80%-100% of the first year's policy premium as commission and 15%-25% of the premium in subsequent years (commissions + other costs). From what I gather, he works for Northwestern Mutual and from the email, it seems like he's also partially acting as a "financial adviser". Thank you to the WCI as well for the point-by-point critique of the email. All your "pro bono" pieces of advice are very helpful.
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StevieG72
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Re: Permanent Life Insurance

Post by StevieG72 »

BruDude wrote:The agent needs to learn how to write a more professional email, that's for sure...
+1
Fools think their own way is right, but the wise listen to others.
blastoff
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Re: Permanent Life Insurance

Post by blastoff »

StevieG72 wrote:
BruDude wrote:The agent needs to learn how to write a more professional email, that's for sure...
+1
I would not take advice from someone who can't form a sentence. I don't think we have a case of a smart person being unprofessional...
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bayareainvestor
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Re: Permanent Life Insurance

Post by bayareainvestor »

Beautifully explained in a flow chart by https://www.whitecoatinvestor.com

Image

Conclusion: Most of use cases end up with - "Don't buy permanent life insurance"

Credits: https://www.whitecoatinvestor.com/12-qu ... insurance/
“If you buy things you do not need, soon you will have to sell things you need.” -- Warren Buffet
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Stinky
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Re: Permanent Life Insurance

Post by Stinky »

bayareainvestor wrote: Fri Aug 31, 2018 11:29 pm Beautifully explained in a flow chart by https://www.whitecoatinvestor.com

Image

Conclusion: Most of use cases end up with - "Don't buy permanent life insurance"

Credits: https://www.whitecoatinvestor.com/12-qu ... insurance/
Basically, all roads lead to “don’t buy permanent life insurance”.

Sounds about right to me.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
GoldStar
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Re: Permanent Life Insurance

Post by GoldStar »

BruDude wrote: Mon Feb 13, 2017 8:41 am The agent needs to learn how to write a more professional email, that's for sure...
To say the least....

OP: I would just say to your friends "Are you really taking financial advice from this guy who can't string his words together into coherent sentences? Don't take financial advice from an insurance salesman and especially one who never made it through grammar school!" Then give then the flow chart above.
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Nate79
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Re: Permanent Life Insurance

Post by Nate79 »

Why did you bump an old thread?
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