Another Whole Life Insurance thread - logical?

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AZK
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Another Whole Life Insurance thread - logical?

Post by AZK »

The financial advisor who I have disability insurance through (medical resident), is interested in getting me to invest through his company (I've pretty much already deferred as most of his funds cost 1.5-2%). He is also suggesting I get whole life insurance. He is saying that it's a great diversifier when one is going about building personal wealth. He says if I was making <150k a year then it would be pointless, but "for someone with big earning potential" it's another way to diversify and spread wealth. My initial thought was the only wealth I'm spreading is into his pocket, but then he laid out some numbers for me, and would like to set up a formal meeting. What am I missing?

FWIW, married, no kids, but probably in the next 2-3 years, no debt, emergency fund in place, low 6 figure portfolio, retirement accounts maxed yearly.


Rep: I have also attached a couple articles discussing Permanent Life Insurance. This is another way to diversify your portfolio even more and plan for any market situation that may come your way in retirement. It is very age sensitive in regards to pricing, so the earlier you start the less it costs and the better the cash values grow. You should both consider a minimum of $500,000 of the 20 pay as you do not have a Death Benefit need at the current time, but you do have a need to build a well diversified Financial Strategy.
Age plays a significant role in the way a policy grows and the tax-free cash values to which you will have access over your lifetime. You MUST be healthy in order to qualify for this type of coverage and diversification.

Me: Either way, after doing some reading, I'm not sure if I see the advantage of whole life vs. term. I'm looking at life insurance as something that would maintain our current lifestyle in the event either one of us passed away. As of right now, neither one of us would really have any change financially if that were to happen. Once we have kids, obviously all bets are off, but I can't see why it wouldn't be a better idea to pay for term life insurance and invest the rest vs. paying for whole. Using rough estimates, if whole insurance is roughly 7k/year and term is probably around <$700/year, from an investment perspective, I'd surely come out ahead investing $6300/year for the next 20 years...would you agree?

Rep:In regards to limited pay permanent life insurance I would actually disagree with your comment. Most of my clients that I start working with have the same presumption at first, until they understand it. Honestly, it does depend on your income potential as to which way is best (permanent life insurance, term life insurance and invest the difference or a combination of both).

If your income potential is never going to be above 150k, then buying a high amount of term (for death benefit protection when you start a family) and investing the difference is the most appropriate way to go. On the other hand if your income potential is much higher, then having a high level of term for death benefit protection as well as some level of limited-pay permanent is appropriate (this amount is dependant again on income - i.e. 250k or 850k...). This gives you a strategic advantage in retirement when you must be concerned with market returns, taxes, estate taxes, and passing multi-generational wealth. If you knew you were going to die in less than twenty years then term is totally the way to go. You would only purchase permanent if you have a higher income, are going to be in a higher tax bracket and you plan on retiring at some point.

This will be much easier going through in person, but I will give you a quick example using your numbers from below. $7,000 invested into a 20 pay permanent life insurance policy vs. $600 per year for term insurance and $6,400 invested in the market in your brokerage account (using your ten year average of 7%) for 20 years. Brokerage Account (taxable, and I know the ways to reduce taxes in these types of accounts, i.e. - tax loss harvesting, etc...) but let's assume for simplicity that the market always goes up every year from here until you reach retirement and you average 7% (every year). Limited Pay life insurance grows tax-free.

Example Below
In ten years at 7% average, your tax equivalent yield in this account is 5.6% (assuming long term capital gains remain at 20% after 2012) = $93,825 cash; plus 500k of term life insuracne death benefit protection
In ten years in your permanent life insurance policy = $69,094 cash; plus $522,419 of death benefit protection
In twenty years in your brokerage account = $244,581 cash; (term life insurance is gone if you purchased a 20 year policy)
In twenty years in your permanent life insurance policy = $212,994 cash; plus $649,888 of death benefit protection
In thirty years in your brokerage = $421,756 cash; no death benefit protection
In thirty years in your permanent life insurance policy = $388,412 cash; plus $865,842 of death benefit protection
In thirty-seven years (at age 65) in your brokerage = $617,602 cash; no death benefit protection
In thirty-seven years (at age 65) in your permanent life insurance policy = $583,415 cash; plus $1,069,681 of death benefit protection

Now you start to harvest the assets
Now you start to harvest the accounts - $100,000 withdrawn every three years. The reason I choose every three years as the example is because since 1897 (see attachment) the market has a down year 35% of the time. Assuming that average holds true, that means approximately three to four times every ten years when we are in retirement. As I am sure you know, the worst time to harvest an equity asset (that is directly correlated to the market) is when your account is down. Because once you make the withdraw, the withdrawn cash has NO CHANCE of recovery. As you know, that is how your Brokerage account withdraws would work.
With a X policy it works a little differently and the dividend you receive is based on the accounts cash value as well as any outstanding loan you may have taken from yourself (i.e. - that is why it also comes in tax-free). The way you harvest this type of account is to take cash surrenders up to your basis (i.e. - the amount you invested into the policy to avoid double taxation) and then you take a loan from your policy for any future withdraws so you can still receive a full dividend. See page 14 - 15 of your attachment.
Your brokerage account would be scaled back (the risk would be reduced to protect the principal at this point) and assuming you still net a 4% (after taxes) from age 66 - age 90, you would end up with $84,097 in your brokerage vs. $285,269 in cash and a $503,909 death benefit at age 90 in your life insurance policy (see attached 20 pay example page 15). Formula for Brokerage - ($617,602 - $100,000 = $517,602 pv, 3n, 4i, fv = $582,231 (before your next withdraw), ($582,231 - $100,000 = $482,231 pv, 3n, 4i, fv = $542,444). This continued for 7 more withdraws of the same timeline (every 3 years) with the same 4% net return would equal $84,097 at age 90.
Honestly, I would not waste my time nor yours if I did not think a short meeting would be of value. At least after we meet and go through this, you will be able to make an informed decision moving forward.


So, what am I missing? I'd like to have a better understanding.

Thanks.
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White Coat Investor
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Post by White Coat Investor »

You're missing the fact that he gets paid a lot if you buy a whole life insurance policy. Your job isn't to convince him he's wrong, he won't be. You know he's already an investing dunce as he's trying to get you into 1.5-2% ER funds. Why would you trust him on this? Just buy your disability insurance and move on. I wouldn't even buy term life from this chump. Go to term4sale.com and get that, read a couple bogleheadish books, and move on.

Making more than $150K a year doesn't mean whole life is a good idea for you. I don't even have to wade through his numbers to know that, but 7 years of owning a whole life policy (that still had a negative return) certainly convinced me.

P.S. I guess when the alternative is a 2% ER fund, perhaps whole life insurance isn't so bad.

P.P.S. Look at the ten year numbers. Most people don't keep their whole life policies longer than 5-10 years.

P.P.P.S Also keep in mind his numbers are projected, not guaranteed. Run the scenario with the guaranteed figures and compare. I found my actual whole life "returns" were a whole lot closer to the guaranteed figures than the projected.
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grabiner
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Re: Another Whole Life Insurance thread - logical?

Post by grabiner »

AZK wrote: $7,000 invested into a 20 pay permanent life insurance policy vs. $600 per year for term insurance and $6,400 invested in the market in your brokerage account (using your ten year average of 7%) for 20 years. Brokerage Account (taxable, and I know the ways to reduce taxes in these types of accounts, i.e. - tax loss harvesting, etc...) but let's assume for simplicity that the market always goes up every year from here until you reach retirement and you average 7% (every year). Limited Pay life insurance grows tax-free.

Example Below
In ten years at 7% average, your tax equivalent yield in this account is 5.6% (assuming long term capital gains remain at 20% after 2012)
There's the flaw. You don't sell your portfolio every year; if the stock market goes up by 7%, your portfolio increases by 6.7% under current law (2% yield, all qualified dividends), 6.5% if qualified dividends go away, and then 20% of your gains (about 15% of the total portfolio value) are lost to taxes.

The difference between 5.6% and 6.7% isn't much in one year, but it compounds to a 32% increase over 27 years, which is the average holding period.
In thirty-seven years (at age 65) in your brokerage = $617,602 cash; no death benefit protection
This would be about $900,000 with better tax assumptions, and about $780,000 after tax.
In thirty-seven years (at age 65) in your permanent life insurance policy = $583,415 cash; plus $1,069,681 of death benefit protection
Note that with the correct numbers, the after-tax value of the policy is higher than the after-tax value of the life insurance (ignoring the death benefit which you no longer need).
Now you start to harvest the accounts - $100,000 withdrawn every three years.
That would be a reasonable safe withdrawal rate from a $900,000 portfolio.
The reason I choose every three years as the example is because since 1897 (see attachment) the market has a down year 35% of the time. Assuming that average holds true, that means approximately three to four times every ten years when we are in retirement. As I am sure you know, the worst time to harvest an equity asset (that is directly correlated to the market) is when your account is down. Because once you make the withdraw, the withdrawn cash has NO CHANCE of recovery. As you know, that is how your Brokerage account withdraws would work.
Alternatively, you could buy an annuity at that point. If you want to withdraw $33,333 a year and annuity rates are 6% at your age, you could convert $500,000 of the stock portfolio to an annuity and leave the rest of the money (about $320,000 not yet taxed) in the stock market.

(Neither the stock nor the insurance calculation deals with inflation; it would make more sense for you to buy an inflation-adjusted annuity, or to take inflation-adjusted withdrawals from the life insurance.

You do have to work out the numbers, because of the tax issues involved.
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Post by fishndoc »

There is a reason your Rep's presentation is confusing (and partially inaccurate) - to confuse the "investor" (some have a harsher term).

The overly simple summary: You give your hard earned money to the insurance company, they invest this in the same markets you would if you kept your money (bond and stock market), subtract a generous commission for your agent and expenses and profit for the insurance company, and give you what is left over.

The alternative is you keep your money, buy inexpensive term insurance, and then invest your funds into a low cost, tax efficient portfolio of bonds and diversified equities, and keep ALL the profits for yourself.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
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Post by alec »

AZK,

I'd do what you would advise a patient to do if the patient was not comfortable or did not like the proposed medical plan you, or another doctor, laid out:

Get a second opinion.

Get an analysis from someone who has no conflict of interest - i.e. his compensation doesn't depend on you buying something.

For example, you wouldn't trust a car salesman because you know the more you spend for the car, the more he makes. Thus, you know up front that he's going to try to get you to buy the most expensive car and packages.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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Taylor Larimore
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"What am I missing?

Post by Taylor Larimore »

Hi AZK:
What am I missing?
The rep said:
You do not have a Death Benefit need at the current time.
In my opinion as a former life insurance salesman, it is foolish to pay for insurance you don't need.

I also believe that it is usually much better (if you need life insurance) to buy term and invest the difference.
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by halfnine »

EmergDoc wrote: Also keep in mind his numbers are projected, not guaranteed. Run the scenario with the guaranteed figures and compare. I found my actual whole life "returns" were a whole lot closer to the guaranteed figures than the projected.
I think this is the most important issue. Definitely need to run the numbers with the guaranteed figures.
$7,000 invested into a 20 pay permanent life insurance policy vs. $600 per year for term insurance and $6,400 invested in the market in your brokerage account (using your ten year average of 7%) for 20 years. Brokerage Account (taxable, and I know the ways to reduce taxes in these types of accounts, i.e. - tax loss harvesting, etc...) but let's assume for simplicity that the market always goes up every year from here until you reach retirement and you average 7% (every year).
I think this is also the incorrect analogy here from the agent. If we are comparing apples to apples, the insurance policy is going to replace the bond portion of one's portfolio, not what is invested in the stock market.
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Post by BruceM »

A different approach...

When you give an insurace company (or any other institution) your excess $$, they must invest those $$ in the same markets that you do...and with todays tax efficient and very low cost investment alternatives available to you, the old argument that your "cash value accumulates tax free" makes even less sense than it ever has. But you have one guarantee that is absolute: you will pay substantial fees and endure illiquidity.

And referring to this individual as your 'advisor' is like referring to your local auto sales rep as your "transportation consultant."

The conversation you're having with this sales rep are the same pitches insurance companies have always made.

Its up to you.

BruceM
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Post by frugalhen »

Buy term, it is what insurance is supposed to be.

Permanent life or whole life is good for one person, the agent. Run.
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Post by BruDude »

I hope your agent has some good E&O insurance. I would never send an e-mail like that. Wow. :shock:
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Post by Oneanddone »

In my opinion as a former life insurance salesman, it is foolish to pay for insurance you don't need.

With the cost of term insurance so inexpensive, does it make sense to advise someone who is having sex with their wife and is planning to have kids in the next couple of years to not buy coverage?

Isn't this the equivalent of telling a young medical resident to not put a future insurability option rider on their disability policy?

The upside of waiting is relatively small while the downside is very large.

In short, I'm saying that spending a few hundred dollars to protect one's insurability doesn't strike me as something that can be dismissed as a foolish decision.
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Post by Oneanddone »

AZK, this is just general commentary and not to be taken as advice. I don't know what you should do. I do know that you should take what your agent says with a grain of salt because his job is to sell you something. I would also suggest the same with those on this board since most of the people giving advice don't have life insurance expertise and seem to have some sort of vested interest against permanent coverage.

1)Amount of coverage is far more important than type of coverage.
2)Whole life insurance is not an investment. It is life insurance. However, owning whole life insurance does impact your portfolio. Because you have a death benefit that never goes away, it will allow you to spend more of your money in retirement.
3)Whole life insurance is a terrible place to put short term money.
4)Whole life insurance is an asset that is guaranteed to grow every year.
5)If it was free, it would be an awesome product.
6)It is expensive, so there must be money to pay for it.
7)If it is purchased with money that would otherwise be put away in a conservative manner, a "buy term and invest the difference" comparison will come out in favor of WL and from the period of time between the end of the term and around life expectancy, the difference will probably be substantial.
8)I have no idea if it makes sense for you, but I wouldn't automatically dismiss the idea without looking at it and understanding more.
9)The numbers may make sense for it and at the same time it may still be wise to not purchase it.

This is my advice for you:
Buy term insurance immediately based upon your need if your wife told you that she was pregnant today. Let whole life insurance become a secondary topic and not the primary one.
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Re: Another Whole Life Insurance thread - logical?

Post by HomerJ »

grabiner wrote:You do have to work out the numbers, because of the tax issues involved.
Tax issues for "high earning people" is mostly a BS screen to get you to buy whole life...

There are plenty of tax-efficient funds to invest in after you max out your 401k and IRAs..

You can buy I-bonds... no taxes until you redeem
You can buy municipal bonds
You can buy the SP 500 Index Fund or Total Stock Market Index Fund (Most people are going to want to have 50% or more of their portfolio in this ANYWAY).

Those index funds don't have capital gains... you know why? Because the only time they sell a stock is if it's totally tanked and is removed from the Index (i.e. capital losses). They don't sell the stocks that have gone way up... You don't get taxed until YOU sell (just like withdrawing money from life insurance)

I own TSM... I'm paying 0.3% in dividend taxes this year on the money I have invested in there... I'd rather pay 0.3% of my taxable portfolio in taxes with a 0.1% fee than have a tax-free portfolio with 2%-3% in fees

Whole life insurance is NOT a good investment for someone like you... I'd probably go ahead and get 30-year term now, before you have the kids (since you plan to), but there's no reason to buy whole life...

Of course the insurance salesman is going to tell you that you need insurance. It's like asking a barber if you need a haircut.
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Post by HomerJ »

BruceM wrote:And referring to this individual as your 'advisor' is like referring to your local auto sales rep as your "transportation consultant."
Heh, I like that... Always remember these guys are salesmen... They like to pretend they are professionals like doctors and lawyers and engineers, but any high school dropout can become a "financial advisor"*

That said, there are good ones who study hard, learn everything they can, and do their best for their clients...

But the barrier to entry is extremely low.
Last edited by HomerJ on Wed Feb 09, 2011 9:10 am, edited 1 time in total.
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Post by HomerJ »

Oneanddone wrote: I would also suggest the same with those on this board since most of the people giving advice don't have life insurance expertise and seem to have some sort of vested interest against permanent coverage.
(1) None of us make any money convincing people to not buy whole life insurance
(2) We do have some former life insurance salesmen on these boards
(3) 98% of people have no need for whole life insurance*
(4) The only people on this board who ever argue FOR whole life insurance are current life insurance salesmen.

*We are open-minded to the 2% who have a disabled child or a business partnership to cover... The problem is that 90% of the posts on this board about whole life insurance are "Hey, I don't have any kids, but my advisor is telling me that as "high income" person I should buy an expensive whole life policy. The projected (i.e. made-up) numbers look pretty good!"
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Post by Oneanddone »

It's not about being for or against whole life insurance. It should just be about understanding it. At least, that is what my posts on the subject are for.

Here's an example:
The projected (i.e. made-up) numbers look pretty good!"
The numbers are not projections and are not made up. If you look at an illustration, there are two sets of numbers. One set are the guarantees. The other set is based upon a certain dividend scale. This other set must be what the company is currently paying or lower. This is the non-guaranteed side. Let's assume that it is the current dividend scale that is being illustrated.

What this says is that if the dividend scale never changes, this is EXACTLY what you will have. It is not a claim that this is what will happen. In fact, we know that it won't.

The guaranteed column can be looked at in one of two ways. 1)It is the worst case scenario. If a company that has always paid a dividend ceases to ever pay one again, this is exactly what will happen. Just like we know that the non-guaranteed side won't be accurate, the guaranteed side won't be accurate. 2)However, if one always takes their dividends in cash, the guaranteed column will always be 100% accurate.

So, what should one expect? Should they expect the guarantees? Should they expect the non-guaranteed numbers? Should they expect something in between? The reality is that we don't know. The primary driver of the numbers is interest rates. If interest rates remain super low well into the future, the numbers will be close to the guarantees. If they are very high, the policies will perform much better than the non-guaranteed column.

Personally, I don't think that it matters too much because the same will be true for alternative financial choices.
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Post by HomerJ »

Oneanddone wrote:Personally, I don't think that it matters too much because the same will be true for alternative financial choices.
Sure the alternative choices will give about the same returns.... until you include in the high fees from whole life.

If bonds in the real world return 6%, whole life will return 4%.

Unless you're saying that the giant commission for the salesman, and the fees to pay the CEO and all his employees salaries isn't removed from your money?

Seriously, whole life commisions sometimes equal the entire 1st year's premium... Not even counting all the ongoing fees, how does the insurance company, investing in the same bonds I can invest in, make me more money when they've already given away that giant commission...

Note even their "projected" returns in the OP shows negative return after 10 years. The "actual" returns will likely be much less (as confirmed by my parents who had a life insurance policy and other posters on this board with real life experience)
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Post by fishndoc »

Simple math works against permanent insurance as an investment:

As already pointed out, there are no secret markets that the insurance company has access to & individuals don't - your premiums are invested in the same equity and bond markets.

There is no real tax advantages, as any tax deferral of insurance investments are more than neutralized by the fees extracted. And, in withdrawal insurance profits are ordinary income, taxable index funds are capital gains.

So, you give your money to the Insurance company, who invests in the same markets for the same returns, then deducts high fees, and then you get a worse tax treatment when you withdraw.

Unless Insurance Companies figure out a way to print money, it's a losing proposition for the "investor".
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Post by BruDude »

I will throw this caveat out there about whole life - if you are a physician in a state where cash value life insurance is a protected asset from the claims of creditors, a whole life policy can be a good place to park your money in case you ever get sued for malpractice. Very few states protect the full cash value, but there are some that do, like Florida.
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Post by Oneanddone »

You guys seem to be missing something basic. Life insurance isn't an investment. It is life insurance. The rate of return isn't the cash surrender value. It is the death benefit at the time of death.

The fact that money can be removed from a policy before death is a nice feature, but it certainly isn't the reason to buy it. It should only be purchased if one can benefit from having a permanent death benefit.

The insurer certainly doesn't have any magic when it comes to investing the money. It is a losing proposition for those who drop their policies. It doesn't have to be a losing proposition for those who keep their policies.

Simple math works against life insurance as an investment. It doesn't work against it as life insurance.
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Post by Oneanddone »

Note even their "projected" returns in the OP shows negative return after 10 years. The "actual" returns will likely be much less (as confirmed by my parents who had a life insurance policy and other posters on this board with real life experience)
This completely has to do with when one purchased their policy. If one purchased their policy and interest rates in general decreased from then until now, what you are saying is correct. However, if a policy is purchased in a lower interest rate environment, the policy will generally out perform the illustration.
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Re: Another Whole Life Insurance thread - logical?

Post by Hedonic Regression »

AZK wrote: He says if I was making <150k a year then it would be pointless, but "for someone with big earning potential" it's another way to diversify and spread wealth.
Right there! "Spread the wealth!" :)
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Re: Another Whole Life Insurance thread - logical?

Post by bottlecap »

AZK wrote:So, what am I missing? I'd like to have a better understanding.
What he's not telling you, which is, if the market actually does return 7%, you're only going to receive 5% of that after the expense ratios. Even assuming his numbers are correct, I'll take the tax equivalent yield of 5.6% rather than the 5%. Also consider than you have know control over how the assets are invested, so the investments might grow at less than 7% minus 2%. There is no guarantee except the fees.

If he didn't make more money off of this than term, he wouldn't sell it to you.

JT
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Re: Another Whole Life Insurance thread - logical?

Post by BruDude »

bottlecap wrote:If he didn't make more money off of this than term, he wouldn't sell it to you.

JT
That's a pretty weak argument. I make less money selling HSA health insurance plans than low-deductible co-pay plans. I push for people to understand and use the HSA plans even though I make less because they're better for the client.
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Post by mephistophles »

Does anyone, beside me, see the pattern in this and other whole life threads?
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Post by skibbi9 »

I'm not sure why people are pushing to grab a term policy now either.

Basically I think its useless to grab a life policy until you have something to protect (a Husband/Wife, Children, House, etc).

And not to bore people but I don't think that Term insurance is going to change in price significantly. We've already had post-XXX term for about 11 years (when rates were going to skyrocket) and as long as insurers can keep getting the policies off shore without having to take the huge capital costs/charges in the first few years there really shouldn't be a change, you know besides you aging and getting to possibly a higher mortality table.
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Post by BruDude »

skibbi9 wrote:I'm not sure why people are pushing to grab a term policy now either.

Basically I think its useless to grab a life policy until you have something to protect (a Husband/Wife, Children, House, etc).

And not to bore people but I don't think that Term insurance is going to change in price significantly. We've already had post-XXX term for about 11 years (when rates were going to skyrocket) and as long as insurers can keep getting the policies off shore without having to take the huge capital costs/charges in the first few years there really shouldn't be a change, you know besides you aging and getting to possibly a higher mortality table.
The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
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Post by halfnine »

I am going to try a different approach because it is what I'd do if considering whole life.

1. Recognize that at least the first ten years are going to be a losing proposition but that doesn't necessarily mean that long term it won't work out to be better.
2. Compare only based on the guaranteed rates
2. Look at what I think I could get in return (with absolute certainty) if buying term and investing the difference. Keeping in mind that:
a. what is in the cash value is going to be a replacement for an assortment of CD's, bonds, etc (but not the equity) that would otherwise have been in my portfolio.
b. the whole life will grow tax-deferred and I will have to determine whether the buy term and invest the difference will or will not be tax deferred (this will depend based on many factors including income since my tax deferred % of total income could be small with a large salary, my percent bond asset allocation and how it varies over the years, etc)
c. that loans from cash value account will not diminish my dividend payouts in the policy but this would not be true for invest the difference.

At the end of the day all one can do is run the numbers and see if it is or is not viable for you. All the other arguments....the sales people get a hefty commission, 98% of the people don't need it, etc are irrelevant (and quite frankly who cares) if the numbers work out for your situation.
Oneanddone
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Post by Oneanddone »

mephistophles wrote:Does anyone, beside me, see the pattern in this and other whole life threads?
I think that there is a reason for the pattern. Anybody who has been on the site for decent amount of time or has read many of the old threads knows that any post that talks about whole life will be completely critical of it and those who speak positively will be accused of being shills. Therefore, new whole life threads will only be started by people who are relatively new and then you'll post something that skirts around the edges of being accusatory without quite crossing the line.

Anyway, that is the pattern that I see.
Oneanddone
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Post by Oneanddone »

halfnine wrote:I am going to try a different approach because it is what I'd do if considering whole life.

1. Recognize that at least the first ten years are going to be a losing proposition but that doesn't necessarily mean that long term it won't work out to be better.
2. Compare only based on the guaranteed rates
2. Look at what I think I could get in return (with absolute certainty) if buying term and investing the difference. Keeping in mind that:
a. what is in the cash value is going to be a replacement for an assortment of CD's, bonds, etc (but not the equity) that would otherwise have been in my portfolio.
b. the whole life will grow tax-deferred and I will have to determine whether the buy term and invest the difference will or will not be tax deferred (this will depend based on many factors including income since my tax deferred % of total income could be small with a large salary, my percent bond asset allocation and how it varies over the years, etc)
c. that loans from cash value account will not diminish my dividend payouts in the policy but this would not be true for invest the difference.

At the end of the day all one can do is run the numbers and see if it is or is not viable for you. All the other arguments....the sales people get a hefty commission, 98% of the people don't need it, etc are irrelevant (and quite frankly who cares) if the numbers work out for your situation.
halfnine, I think that this is a very good post. My question/comment to you would be whether we are stacking the deck against whole life by focusing on the guarantees. It strikes me as peculiar that the guarantees of whole life are used as a negative. If we compared guarantees to guarantees, WL would actually blow away all non-insurance alternatives, yet we know that isn't accurate.

Bogleheads, just to understand guarantees, let me explain something via an example.

Ex. Jim purchased a $100,000 policy. Because of reinvestment of the dividends, the policy now has a death benefit of $130,000 and a cash surrender value of $35,000. He is 15 years into the policy. With the original illustration, the guarantees at this point were a $100,000 death benefit and a cash surrender value of $20,000.

Despite that, going forward, even if a dividend is never paid again, his death benefit will never be less than $130,000 and his cash surrender value will be higher than $35,000 the next year.

The point with that is that if a dividend is paid just once (and they've never not been paid), the policy will perform better than the guarantees.
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mephistophles
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Post by mephistophles »

Oneanddone wrote:
mephistophles wrote:Does anyone, beside me, see the pattern in this and other whole life threads?
I think that there is a reason for the pattern. Anybody who has been on the site for decent amount of time or has read many of the old threads knows that any post that talks about whole life will be completely critical of it and those who speak positively will be accused of being shills. Therefore, new whole life threads will only be started by people who are relatively new and then you'll post something that skirts around the edges of being accusatory without quite crossing the line.

Anyway, that is the pattern that I see.
onedone,
I have always given whole life and permanent insurance a fair shake. If you would take the time to read the insurance chapters in "The Bogleheads Guide to Retirement Planning" you would see exactly when and where permanent insurance is a an excellent solution to clients problems. It is all there--in black and white- and written by Bogleheads for those who truly want to understand life insurance and how best to use it. There are also a number of posts written by me on this forum explaining the proper use of permanent insurance.
I would suggest that you research the above and do your due diligence and you might learn a great deal about the proper use of of all types of life insurance.
Regards,
ole meph
skibbi9
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Post by skibbi9 »

I just bought the book (should be here soon), I think my mom has a lot of reading to do and wanted to best help her out.
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HomerJ
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Post by HomerJ »

Oneanddone wrote:If we compared guarantees to guarantees, WL would actually blow away all non-insurance alternatives, yet we know that isn't accurate.
You've been pretty good up to now... You've done the best job of any of the life insurance salesmen we've had on this site by sticking to the line, "It's not an investment, it's insurance"...

But now you're stepping over... Are you now saying that WL is a better investment than all non-insurance alternatives?

Very few people NEED permanent life insurance... Once the kids are grown, once you have retirement savings, dying does not impose financial hardship... If we have saved enough money to support me and my wife in retirement, surely we have enough to support just her in retirement, if I die.

So if one does not need permanent life insurance, why bother with WL? As an investment, it CANNOT do better, on average, than investments outside WL...

Again, I ask you... where does the giant commision come from? Where do the fees come from? They come from MY money... Those are large constant drains on MY investment returns... Insurance companies cannot beat other investments...

Everyone I know who has bought WL has regretted it. NONE of them EVER got the rosy "projected" returns.

I don't trust car salesmen... I don't trust insurance salesmen...

It's a complicated product that doesn't disclose the fee structure. It's devious. And in way too many cases it's pushed to people who don't need it and/or can't afford it.
Oneanddone
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Post by Oneanddone »

I think that we all suffer from confirmation bias. We believe any information that backs up our viewpoint while quickly dismissing what the other side.

You'll have a much easier time with my posts if you can ever stop looking at me as someone trying to sell a product. I know that this is difficult to do. However, if you take me at face value, you will ultimately see that I'm nothing more than a guy who likes to make sure that people have correct information.

Now, go back to what you quoted of my post. I'll bold the part that you ignored in your response.
If we compared guarantees to guarantees, WL would actually blow away all non-insurance alternatives, yet we know that isn't accurate.
In doing a comparison between WL and BTID, there are three ways to do it.

Guarantees vs. Guarantees (WL wins easily)
BTID expectations vs WL Guarantees (BTID wins easily)
expectations vs. expectations (this is the fair way)

The point that I was making is simply that it is unfair to look at WL and only look at the guarantees unless we are going to do that with the other side of the equation. However, if we look at guarantees on both sides we come to the nonsensical conclusion that WL is always much better.

Comparisons need to be fair.

As for "NEEDING" a specific product, it is not the best way to think about something. I think that the better question is whether one can benefit from a product.
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Post by Hedonic Regression »

Oneanddone wrote:I think that we all suffer from confirmation bias. We believe any information that backs up our viewpoint while quickly dismissing what the other side.
...
As for "NEEDING" a specific product, it is not the best way to think about something. I think that the better question is whether one can benefit from a product.
I think it's possible to create a fair view of insurance products, mostly by looking at it would take to run a stable insurance product. "lift the shroud' as it were. Really, it's impossible for me to take a contract a face value without considering that for every buyer (me), there's a seller (the actuaries and other math nerds at the insurance company). I assume if it's too good, the company is going to run itself out of business! Apple may product products I'd never in my wildest dreams be able to design and build, true value -- financial companies try, they push risk & returns around wildly, but it still more resembles sand in a cardboard box than a pretty laptop of glass and silicon.

The first Boglehead axiom, which has got to be taken on faith, but does have a lot of evidence to back it up is that market returns are market returns, and if you have an efficient portfolio for a given risk level it's not possible to do better other than to change the risk profile. This leads us to assume that there's no such thing as hedge fund wizardry either inside or outside the insurance company. Moreover, my corollary is that anyone were to have alpha, most will keep the benefits to themselves, take 2&20+ off it and basically give back market returns.

We pretty much need to agree that insurance companies can't make more money off my money than I can. Otherwise all assumptions are off. Most people on this forum will not listen to any argument that claims insurance companies have alpha. At best they have efficient portfolios for their risk profiles. Given that insurance companies present a very low risk file to their beneficiary, returns must necessarily be low to suit that profile.

After that, a stable insurance company is going to have (payouts) < (market returns - costs). If it is going to stay in business, costs are also much higher than say, Vanguard's, so payouts need to be reduced.

The financial alchemy of the insurance industry is that they are not only taking on the usual market risk, but also taking on my risk, either of death, disability, car accident, etc. They are able to guess with good accuracy my likelihood of suffering an event, and make a bet on it such that they will come out ahead. That juices up my returns should I suffer the event, but I have to realize the insurance company already calculated they'll come out ahead by offering me the contract -- and they're likely right or they wouldn't be in business.

So, much like with deciding if I want a 80/20 or 20/80 portfolio, I need to decide what my willingness and capacity to handle risk is. Should I take the risk on myself I'll come out ahead, but what I need is that capacity. It's not right or wrong to decide to knowingly shoulder risks or pay the premium to hedge the risk. In the end the insurance company has done the math to say your expected value is less should you take the hedge. Humans are notoriously bad at believing they'll win the lottery, and even worse at believing their next flight is going to crash. Good stats education pushes those emotional responses away and forces you look at the hard numbers.

My conversations with insurance agents usually involve them trying to pushing greed and fear buttons. That can be annoying to no end for someone who knows that emotional arguments tend to sidestep rational analysis of risks and expected outcomes.

The most swaying argument an insurance agent can make to me would be: "We have a 99% track record not challenging valid claims, and this is a good price for your risk profile. We think you have a 5% chance of dying over the next 30 years, etc. Your payout is 40x your premiums due to our expected market gains over your expected time to live."
Oneanddone
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Post by Oneanddone »

I think it's possible to create a fair view of insurance products, mostly by looking at it would take to run a stable insurance product. "lift the shroud' as it were. Really, it's impossible for me to take a contract a face value without considering that for every buyer (me), there's a seller (the actuaries and other math nerds at the insurance company). I assume if it's too good, the company is going to run itself out of business!
There is something that often gets forgotten. What you are saying is true in the aggregate, but we need to look at things on the individual level.

On the aggregate, the insurance company must "win" and the policyowners must "lose" or else the insurance company can't stay in business. Keep in mind that when we are talking about whole life insurance, we are primarily talking about (at least I am) participating whole life policies from mutual companies. This is important because the company is owned by the policy holders. The more profitable that they are, the more that they pay in dividends.

Most life insurance policies (regardless of type) don't end up resulting in death claims. This benefits those who own participating whole life contracts and keep them until death.

So, while it is true that the insurance company can't pay out more than they collect and earn on the aggregate, they certainly can on the individual basis to those who hold their policies until death. The "losers" are those who drop their policies with no death claims.

In short, all that I'm saying is that all of the people who buy insurance, but never have claims need to be factored into the mix. It is because of these people that those who hold insurance until death can benefit.
Last edited by Oneanddone on Thu Feb 10, 2011 7:21 am, edited 1 time in total.
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bottlecap
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Re: Another Whole Life Insurance thread - logical?

Post by bottlecap »

BruDude wrote:
bottlecap wrote:If he didn't make more money off of this than term, he wouldn't sell it to you.

JT
That's a pretty weak argument. I make less money selling HSA health insurance plans than low-deductible co-pay plans. I push for people to understand and use the HSA plans even though I make less because they're better for the client.
Your evidence is anecdotal. But the fact remains, and has been argued about over and over again on this forum alone, that it is a rare instance in which whole life makes any sense. I'm ready to consider your argument otherwise.

JT
leonard
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Post by leonard »

BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
bluemarlin08
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Post by bluemarlin08 »

Sold whole life in the 1980's, mainly second to die for estate purposes. But as time goes by it seems the permanent market is moving toward these basically level term to age 120 for permanent insurance. On occassion I review various whole life applications, never agreed with the argument.
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Post by BruDude »

leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
I don't know who InsuranceGuy is, but sounds like good info to me. You can ask all of the people who call me after a major health issue whether buying a term policy when it's not "needed" would have been a good idea.
leonard
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Post by leonard »

BruDude wrote:
leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
I don't know who InsuranceGuy is, but sounds like good info to me. You can ask all of the people who call me after a major health issue whether buying a term policy when it's not "needed" would have been a good idea.
Checking someone's IP address sounds like a good idea to me.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
BruDude
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Post by BruDude »

leonard wrote:
BruDude wrote:
leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
I don't know who InsuranceGuy is, but sounds like good info to me. You can ask all of the people who call me after a major health issue whether buying a term policy when it's not "needed" would have been a good idea.
Checking someone's IP address sounds like a good idea to me.
Are you saying that I am InsuranceGuy? If so, check away, because I can assure you this is the first and only name I've ever used to post here.
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bearwolf
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Post by bearwolf »

leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
I don't sell insurance, but I do have a spouse that has cancer. And yes we can't get affordable insurance. Fortunately we are at a place where we no longer need insurance, but if we were in less fortunate circumstances it would not be possible. She was diagnosed in her early 40's.

BearWolf
Oneanddone
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Post by Oneanddone »

leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
We better not let multiple people get away with posting good insurance information. We've all (insurance agents) unfortunately have seen countless times where people needed coverage and could not get it because they delayed the purchase.
leonard
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Post by leonard »

Oneanddone wrote:We better not let multiple people get away with posting good insurance information.
Agreed. It would be terrible to have InsuranceGuy return under a different userID to begin repolluting every single thread even marginally related to insurance with the merits of buying "preinsurance" and buying whole life.

Interesting that the people who are most interested in selling insurance to ensure futurability insurability are the folks that make a little extra off such a transaction.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
leonard
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Post by leonard »

BruDude wrote:
leonard wrote:
BruDude wrote:
leonard wrote:
BruDude wrote:The purpose of buying a term policy when it's not "needed" is to lock in the insurability for the future. What happens when you wait to buy it, then find out you have cancer and can't get it? Happens all too often. Most people that are married have a need for life insurance.
InsuranceGuy made this argument as well. Almost verbatim.
I don't know who InsuranceGuy is, but sounds like good info to me. You can ask all of the people who call me after a major health issue whether buying a term policy when it's not "needed" would have been a good idea.
Checking someone's IP address sounds like a good idea to me.
Are you saying that I am InsuranceGuy? If so, check away, because I can assure you this is the first and only name I've ever used to post here.
Worth a double check, IMO. But, that would be a mod call, not mine.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Eric
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Post by Eric »

leonard wrote:Interesting that the people who are most interested in selling insurance to ensure futurability insurability are the folks that make a little extra off such a transaction.
In fairness, aren't the commissions on term life very small? I wouldn't think very many people could be corrupted that easily. But perhaps I'm being naive.

For the record, I'm not a fan of life insurance generally. But when it came to buying term insurance on my life, I probably overinsured simply because the marginal cost of extra coverage was so small. It didn't seem worth thinking about very hard, I figured better to buy too much than too little when the cost wasn't material. In the same vein, while I personally wouldn't buy insurance at all if I didn't have a present need (rather than just a hypothetical/future need), the cost of term insurance is low enough that I could understand someone else reaching a different decision.
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kenyan
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Post by kenyan »

I'm in the process of buying myself some term life right now, but I've been amazed how ingrained that whole life insurance thinking must be. I've been told by multiple people - friends and family - that I should make sure to get a policy that makes sure I end up with some money in the end. Just last night, as I was describing the term life policy I was applying for to my mother, she asked me if all the money I paid in would just be gone at the end of it.

Well...yes, if I don't die. Just like my car insurance, medical insurance, renters' insurance, disability insurance...

I suppose that I would rather my insurance be insurance, and my investments be investments. Remember those TV/VCR combos? They sucked. I'll take a nice TV and a nice VCR rather than a watered-down version of both.

That said, I suppose I *could* see a use for this product for people who are bad at otherwise saving money. Then again, I really don't understand all of the various permanent life/whole life products out there, so maybe they're not even good for those people.
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HomerJ
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Post by HomerJ »

kenyan wrote:I suppose that I would rather my insurance be insurance, and my investments be investments. Remember those TV/VCR combos? They sucked.
Heh, I like that analogy...
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AZK
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Post by AZK »

After all this discussion and some derailment I think I'm going definitely stay away from Whole Life and purchase Term when my wife and I want to get pregnant....

Thanks to all.
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