Whole life insurance

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Insurance Guy

Whole life insurance

Postby Insurance Guy » Sat Dec 08, 2007 3:08 pm

The purpose of this thread is to help people understand how whole life insurance works. What I'm finding is that many who argue against it, don't really understand it. We should be all able to agree that it is sometimes appropriate. You may think that it is appropriate 1/10,000,000,000 times and all who sell it are ripping people off either intentionally or due to their own ignorance. That's fine.

Since we can agree that it might be appropriate for one person on this planet, let's completely focus on this thread with understanding how it works. Specifically, my comments are focused on participating policies from mutual companies.

Do you believe the following statement?:

"With whole life insurance, some of the money goes to pay for the insurance and some goes into the cash value?"

If you believe that statement, you don't understand whole life insurance.

How about this statement?:

"The cash surrender value is the amount of money that a person will get if they don't want their policy any more"


It's a bit of trick, but if you believe that, you don't understand whole life insurance.

And this one?:

When you take a loan from your policy, you are borrowing money from yourself.


If you believe this, you don't understand whole life insurance.

This should be a good start. Hopefully, we will have some interest.

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dm200
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How about this question?

Postby dm200 » Sat Dec 08, 2007 3:33 pm

Do you believe the following statement?

Whole life insurance is overwhelmingly more profitable for the insurance agent trying to sell it to you

I do.

dan

Target2019
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Re: How about this question?

Postby Target2019 » Sat Dec 08, 2007 4:01 pm

dm200 wrote:Do you believe the following statement?

Whole life insurance is overwhelmingly more profitable for the insurance agent trying to sell it to you

I do.

dan

Did you mean whole life is more profitable for the insurance agent than term insurance? Or something else?

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ElJay
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Postby ElJay » Sat Dec 08, 2007 4:05 pm

Well you've started an interesting conversation with yourself. Quote something from an unknown source, declare that the quote is wrong, and then fail to provide any facts or justification as to why it's wrong. Consider me not enlightened by the OP.

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AshKK
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Postby AshKK » Sat Dec 08, 2007 4:39 pm

Insurance Guy,

As I started reading your post, I thought you were about to explain what whole life insurance really was. I will admit, I believed all three statements that you claim are a sign of poor understanding of whole life insurance. Would you now be kind enough to explain why they are false, and what whole life insurance really is?

Thanks!
Ash | | The 82nd Boglehead.

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Kenster1
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Postby Kenster1 » Sat Dec 08, 2007 5:36 pm

Whole Life Insurance is a form of Permanent Life Insurance that provides lifetime protection for as long as the premiums are paid. In some cases, whole life policies are designed to mature at age 100, which is the age when premium payments would end and the cash value would equal the face amount of the policy. At maturity, the face amount of the policy would be paid to an insured person who is still living.

Whole life insurance may be used as a form of investment, as it accrues interest over time. With whole life insurance you can receive dividends from your insurer, which you can then use to offset the cost of your policy, to increase the amount of your coverage, or even to buy a supplemental term life policy.

Whole Life Policy Premiums
Whole life policy premiums are divided into two parts: Death Benefit and Cash Value Account.

Death Benefit: Part of the premium in a whole life policy is used to cover the cost of the death benefit coverage over the insured person’s lifetime. The so-called "death benefit" refers to the amount of money paid or due to be paid when a person insured under a life insurance policy dies. This is paid directly to the beneficiaries of the insured.

Cash Value Account: The other part of a whole life policy is used to build a cash value account, which is paid to the beneficiary upon the death of the policyholder in addition to the death benefit. The interest accrued by the cash value account, usually at a fixed rate, is comparable to that of a savings account. This money can usually be borrowed against or withdrawn in times of need or emergency--one of the things that make a whole life policy attractive to prospective buyers. However, the money is not available right away; policyholders must wait for the cash value account to accumulate to a certain amount before they can borrow against or withdraw it. They must also not exceed the limits of the policy, or it will become forfeit and all coverage will be cancelled.


When should I consider buying a whole life policy?
Whole life insurance is generally used when the need for life insurance is lifelong, or permanent. In addition it has a built-in savings element since you will pay premiums and hence build up a cash value within the policy. Additionally, whole life insurance may be used as a part of your estate planning.

Premiums for whole life insurance can be much higher than premiums you would pay initially for the same amount of term insurance, but they are smaller than the premiums you would eventually pay if you were to keep renewing a term insurance policy until the insured's later years.

Whole life insurance is a good choice for you if you want to ensure that you have a life insurance policy in place for your entire lifetime and can comfortably afford the premiums, or if it fits within the framework of your estate or retirement plan.


What are some pros and cons of whole life insurance?

Pros:

- Predictable, in most cases premiums are fixed for the life of the insured.
- The beneficiaries receive the death benefit no matter when the insured dies, as long as premiums were paid.
- The policy may build up cash value, which grows tax deferred.
- If you surrender the policy at a later date, the cash value, if any, will be returned to you.
- If you stop making premium payments you can receive the cash value or use that cash value to provide a paid up insurance benefit. The company must provide either extended term insurance coverage or reduced paid paid-up coverage. While it is not required that both options be offered many companies do make both available.

Cons:

- A more complex product than term life insurance.
- Higher premiums than term life insurance.
- Could be costly if coverage lapses early.


From New York Life:

What can whole life do for you?
Whole life insurance provides basic insurance protection, plus...

- Mortgage protection: Proceeds from the death benefit can be used to help pay off mortgages and other outstanding debts in the event of a premature death.

- Estate preservation: Whole life insurance can provide funds to cover estate expenses and help avoid the need to sell assets and or borrow money to cover these expenses.

- Retirement funding: Cash values ** can be accessed through policy loans or surrenders to supplement a retirement income.

- Charitable giving: A whole life insurance policy can enable you to make a significant donation to your favorite qualified charity upon your death.

- Business needs: Whole life insurance can be an attractive executive and employee benefit and a means to assure a business's financial future.



Whole Life Insurance is permanent life insurance protection for your entire life, usually to age 100. A Whole Life policy is contractually guaranteed not to lapse, provided that you pay sufficient premiums each year to keep the policy in force. Besides permanent lifetime insurance protection, Whole Life Insurance features a savings element that allows you to build cash value on a tax-deferred basis. A portion of the premiums you pay build up the savings element of the policy and are invested by the company. The interest rate return on your investment is added to the savings portion of the policy. This is how the policy builds cash value. In addition to crediting your policy with interest, "participating" policies issued by mutual insurance companies may also give you the opportunity to earn dividends. Dividends are a NON-guaranteed return of part of the premium intended to reflect a company’s favorable operating experience.

Pros:

Whole Life Insurance has a savings element (cash value) which grows tax-deferred. If the contract is set up properly in advance, you might build up enough cash value to stop paying premiums by a certain age, or to borrow from the cash value (take a policy loan) during your lifetime on a tax-advantaged basis. Unlike Term Life Insurance, whose premiums eventually rise after the initial guarantee period, Whole Life Insurance premiums will not increase during your lifetime (as long as you pay the planned amount and repay any policy loans).

Cons:

You are not allowed to choose separate investment accounts, i.e., money market, stock or bond funds; the insurance company controls how and where your premium dollars are invested. Whole Life Insurance offers no premium flexibility or face amount flexibility; the plan you buy today remains fixed for life. It is therefore important to plan carefully, because Whole Life Insurance is not very good at adapting to insurance and/or retirement plans that change significantly.


SmartMoney:

Whole life insurance is expensive: You're paying not only for insurance but also for the investment portion. That extra cost might almost be worth it if these policies were a good investment vehicle. But usually they aren't. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement."

...

Leaving aside the fact that there are many better ways to save for retirement, these policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return. On top of that, there are up-front (but hidden) commissions that are typically 100% of your first year's premium. Worse, it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment.

...

That's not to say that whole life insurance is always a bad idea. Wealthy people can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy. And for the growing number of people in their late 40s or early 50s who are just starting families, whole life is at least worth a look.

...

One of the great problems with whole life is only an expert can tell if a policy you own or are considering will ever become a decent investment. James Hunt, actuary for the Consumer Federation of America, who has analyzed thousands of policies, notes that whole life policies hardly ever yield a reasonable return unless held for 20 years or more. So if you buy one be prepared to pay into it for the very long haul.

The key to a whole life policy is its internal rate of return -- the yield on the policy after all fees and charges are subtracted. A competent analysis can determine at a minimum whether the weight of the fees and charges built into one of these policies will ever allow a worthwhile return. Such an analysis will also pinpoint the minimum amount of cash value that you can derive from a policy at any given time interval.

Some financial planners, actuaries and accountants can perform internal rate of return analysis on your policy. The Consumer Federation has a service that will do this, calculating the real return year by year and comparing it with other investments. The fee is $50 for the first policy, $35 for each additional. Call 202-387-6121 for more information.
Last edited by Kenster1 on Sat Dec 08, 2007 6:13 pm, edited 2 times in total.
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Postby Kenster1 » Sat Dec 08, 2007 5:59 pm

Interesting Insurance lawsuits...

Jefferson-Pilot Life Insurance Lawsuit Alleges Misleading Sales Practices

Lawsuits have been filed against the Jefferson-Pilot Life Insurance Company claiming it used misleading sales practices when selling whole life and interest sensitive whole life insurance policies. If you or someone you know purchased a whole life or interest sensitive whole life insurance policy from Jefferson-Pilot between 1982 and 2002, you may have been charged too much to keep your policy in place. You may be entitled to compensation from Jefferson-Pilot for its alleged misleading sales practices and premium overcharging.

Q. What is Vanishing Premium Life Insurance?
A. Whole life and interest sensitive whole life policies that feature a “vanishing” or “disappearing” monthly or annual premium after a pre-established number of payments. In theory, the cash value of these policies produces an interest sensitive dividend over time, which is designed to pay the premium for the policy owner. The premium is then paid by the policy’s own dividend, eliminating the policy owner’s need to pay the premium.

Q. Why did the policy’s premium not vanish as predicted?
A. Despite Jefferson-Pilot’s predictions, falling interest rates prevented the policies’ dividends from adequately funding the policies’ premiums.

Q. What do the lawsuits allege Jefferson-Pilot did wrong? What were the misleading sales practices?
A. The lawsuits allege Jefferson-Pilot, as well as other insurers, sold these policies by presenting grand illustrations about how these “vanishing premium” policies worked. These illustrations, along with salesmen’s promises of a “vanishing premium”, helped convince thousands to purchase these policies. When policyholders complained about paying premiums beyond the promised timeline, they were told to read the fine print and disclaimers about interest rate changes and their possible effect on the “vanishing premium”. This practice has been considered to be as deceptive and illegal.


A class action has been filed against Philadelphia Life Insurance Company and its successor, Conseco, Inc., on behalf of persons who purchased certain whole life and universal life insurance policies. The action alleges that Philadelphia Life fraudulently induced policyholders to replace existing policies when it was not in their best interest, and promised them that their new premiums would never increase. The action seeks unspecified compensatory and punitive damages.

The action alleges that Philadelphia Life agents engaged in a practice known as "churning," where they lie to current policyholders, leading them to believe that it would be wise to replace their existing policies with new ones--the new policies in effect convert some of the old policy's value into company profits and agent commissions, but harm the policyholder by replacing the existing policy with one that is less valuable. Policyholders were allegedly told that they would be getting greater coverage for little or no extra charge. Agents also allegedly committed fraud when they promised policyholders what is referred to as a "level premium," one that is guaranteed to never rise beyond a fixed amount.

The action initially alleged that Philadelphia Life was guilty of selling single-premium payment and vanishing-premium policies. Allegedly, agents led policyholders to believe that after the payment of one payment, or a certain number of payments, the policies would be fully paid up and no additional money would ever be due. These policies were supposed to be backed by such strong investments that they would generate sufficient interest to pay for themselves. The court ruled that too much time had passed, so that these claims were barred by the statute of limitations. The court of appeals subsequently upheld the ruling, but ruled that the churning and level-premium allegations should be litigated.

Named plaintiff David H. Siegel purchased a $100,000 Philadelphia Life flexible premium adjustable life insurance policy in June 1986. He was promised that after five yearly payments of $2,643, he would never again have to pay on the policy. He was also promised that the death benefits would never be compromised.

In June 1991, after the policy was supposedly paid up, a Philadelphia Life agent approached Mr. Siegel with an offer. For the accumulated value in the $100,000 policy plus annual payments of $100, his coverage could be increased to $150,000. As long as he paid the $100, the policy would remain in force. The agent told Mr. Siegel that there would be no commissions or costs because he was the regional director of Philadelphia Life. There was allegedly no mention that premiums might increase in the future. The action alleges that the replacement of his old policy was decidedly contrary to his best interests. Mr. Siegel allegedly received no comparison of the costs and benefits of his original policy to the potential costs and benefits of the replacement policy.

In 1996, Mr. Siegel noted that the value of his coverage was decreasing. When he contacted the company, he was informed that charges for policy administration and cost of insurance had been regularly debited from the policy. At that time, he was allegedly told that his coverage would continue until age 100. In 1998, Mr. Siegel was informed that his coverage would terminate when he reached age 80 because the investments supporting his policy had not performed as expected. To increase his coverage to age 90 or 100, the action alleges that he would have to pay either $747 or $1,225, respectively. By purchasing the new policy, he had lost his guarantee of $100,000 in coverage for no more premiums, only to find that he would have to pay more than 10 times as much per year to maintain his coverage.
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Kenster1
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Postby Kenster1 » Sat Dec 08, 2007 6:15 pm

Consumer Federation of America Insurance Group Life
Insurance Rate of Return Service


Evaluate Life Insurance -- How the Service Works: CFA's Rate of Return (ROR) service estimates "true" investment returns on any cash value life insurance policy -- whole life, universal life or variable life. Using the Linton Yield Method, these returns are derived by comparing the cash value policy to the alternative of buying lower premium term insurance and investing the premium savings in a hypothetical alternative investment, such as a bank account or a mutual fund. You receive a computer printout showing average annual RORs for policy holding periods of (usually) 5, 10, 15 and 20 years. We also send a four-page explanation that includes much valuable information relevant to buying or owning cash value life insurance.

...

Evaluate Life Insurance -- Who Performs the Service?: James H. Hunt, a life insurance actuary with 45 years experience and a former insurance commissioner of Vermont, operates the ROR service.
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

likegarden
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Whole Life

Postby likegarden » Sat Dec 08, 2007 9:21 pm

Kenster1, thank you for posting this nice summary!

My wife has a very small whole life insurance policy sold to her in 1965 by an agent for New York Life Insurance who knew her father. In 1985 ours got churned by an agent of an area we had just moved into. Actually he had sold us an another policy which supposedly was to be paid by the original policy plus our original premiums. A few years thereafter I noticed that his promises did not work out, and I cancelled the additional policy. Therafter, a class action suit was won by New York State against NY Life to stop these practices, and we got reimbursed with about nothing.

Thanks for pointing this out. This seem to put Whole Life into the same category as most annuities and high cost / low return mutual funds = designed to make money for the seller. I love those low cost /high return Vanguard mutual funds and the two Boglehead/ Diehard sites.

Have a great day!
Bernd

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Re: Whole life insurance

Postby White Coat Investor » Sat Dec 08, 2007 9:38 pm

Insurance Guy wrote: If you believe that statement, you don't understand whole life insurance....It's a bit of trick, but if you believe that, you don't understand whole life insurance......If you believe this, you don't understand whole life insurance....This should be a good start. Hopefully, we will have some interest.


Interest in what? You haven't told us what it is, only what it isn't. Please "enlighten" us (since apparently the first 202 posts you made on the subject haven't yet done so.)
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Insurance Guy, I have question-

Postby lucky7 » Sat Dec 08, 2007 10:08 pm

The hypothetical I may have future interest is having whole life held/owned by beneficiaries (so will be outside my Estate) and so can be utilized for Estate planning. Perhaps some hypothetical scenarios with general numbers would be helpful. Thanks.

Bob
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jms969
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Postby jms969 » Sun Dec 09, 2007 11:57 am

The best week (most profitable in the long run for me) I ever had was 3 classes (one week) in a graduate finance course where the professor went into gory detail as to why you SHOULD NEVER BUY WHOLE LIFE INSURANCE and why it is such a scam...

I am not going to waste the time here to reiterate many of the other posters responses (that are quite accurate) other than to say the correct response to someone trying to sell you whole life is NO, period no other response needed (do not try to argue with an experienced Whole life Insurance salesman, they have been trained to overcome objections). Of course show the person the door...

Cheers,

JMS
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Insurance

Postby TimDex » Sun Dec 09, 2007 1:39 pm

A good explanation of insurance along with good advice can be found in E.F. Moody's book, "No Nonsense Finance." His website is at:

http://www.efmoody.com

I like his book, but disagree with Moody's assertion that you can time recessions. I do very much like his advice on insurance, long-term care, annuities and the like, and his explanation of risk is excellent and I really gained something from it. His excoriation of the financial services industry is fun to read. Some people may feel that he is not "100% Boglehead" but he is no Johnny-come-lately. He was advocating Vanguard and index funds in the nineties before there was a Vanguard Diehards site.

A tremendous disservice is done to consumers regarding the immutable need for cash buildup in a life insurance policy so it can be used for college, retirement, flower arrangement lessons, or whatever. I am not stating that an inherent cash buildup may not be necessary to keep a policy afloat, but let's get real. You supposedly need to buy insurance. So buy insurance. If you are going for the inside buildup of assets, you invariably are crossing two different purposes in the same contract.


What I like about Moody's book, despite the few disagreements I might have with him, is that he provides concise but necessary discussions of some topics we don't hit on much here, like LTC, insurance, real estate investing, etc.

Ok, of late, maybe we have been talking about insurance a little too much...

Tim
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Postby J.Fred.Muggs » Sun Dec 09, 2007 1:43 pm

Ok, so say that it is too late and you are already several years into a whole life policy. What should you do then?

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Postby White Coat Investor » Sun Dec 09, 2007 2:31 pm

J.Fred.Muggs wrote:Ok, so say that it is too late and you are already several years into a whole life policy. What should you do then?


#1 Make sure it isn't a good idea to hold onto it. At a certain point in a whole life policy, you should probably just hold onto it.

#2 Make sure you're adequately insured without this policy.

#3 Determine if you have a gain and it would be worthwhile to do a 1035 exchange.

#4 Take the cash and put it in a real investment.
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Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 2:39 pm

Let's start by thinking of the "cash value" of a whole life policy differently. (I've been guilty of this in some of my posts in trying to help people understand this, but let's try again.)

A whole life insurance policy does not have "cash value". We need to call it by it's proper name "Cash Surrender Value". The Cash Surrender Value is how much the insurance company is willing to give to you if you surrender your policy. Until you surrender this policy, the money does not belong to you. However, it can be counted as an asset since it can be turned into cash at any time.

When one accesses money from their insurance policy, they ARE NOT borrowing from the cash surrender value. They are borrowing from the death benefit. These difference may sound like semantics, but they are critical if one is really going to understand these products.

I've allowed myself to get into rates of return discussions, but the fact is that the rate of return of a life insurance policy really depends on year of death (along with other factors).

If you buy a Vanguard Mutual Fund, you always know the value of your holdings. It is the Net Asset Values of the holdings. You don't have to know your holdings. You can simply go on line and see that your fund is worth $337,695. Assuming no back end sales charges, you know that you can redeem your shares at anytime and get $337,695 (+/- fluctuations that day). What if you tried to get someone to buy this from you? Could you get someone to pay more for this? No and there is no reason for someone to pay less. You know the exact value.

If on the other hand, you own a closed end fund, the NAV doesn't matter because it is not redeemable. You must sell it to someone who wants to buy it. It gets sold on the open market and you may get more or less than the NAV.

Now let's look at life insurance with a cash surrender value of $337,695 and a death benefit of $1,000,000. Is the value of this asset if you want to sell it $337,695? No. The value of this asset, like any asset is exactly what someone is willing to pay for it. Look at the Cash Surrender Value (CSV) as the amount that the insurance company is willing to pay. What if we add some facts. The insured is 80 years old and in poor health. Is the value of this policy worth more than $337,695? Absolutely, because instead of surrendering it to the insurance company, the policy can be sold to a third party for more than the Cash Surrender Value. The value of all assets are based upon what one will pay. The value of life insurance at any time is based primarily on the death benefit and the health/age of the insured and not the cash surrender value.

The Cash Surrender Value is nothing more than the amount of money that the insurance company will give to you if you surrender your policy. This is the least possible that your policy can be worth.

Do you believe the following statement?:

"With whole life insurance, some of the money goes to pay for the insurance and some goes into the cash value?"


There is no separation. It is true in a universal life policy, but not in a whole life policy. In a whole life policy, all of the money goes to the insurance company to pay the premium and all expenses. Based upon profitabilty you will receive a dividend in relation to how you contributed to this profitablity.

How about this statement?:

Quote:
"The cash surrender value is the amount of money that a person will get if they don't want their policy any more"


It's a bit of trick, but if you believe that, you don't understand whole life insurance.


It's a trick because the cash surrender value is the minimum that one can get since they can either surrender the policy to the insurance company or sell it to a 3rd party.

And this one?:

Quote:
When you take a loan from your policy, you are borrowing money from yourself.


If you believe this, you don't understand whole life insurance.


As I've mentioned you are borrowing from the death benefit and not from money that belongs to you. The money only belongs to you if you surrender your policy. Why does interest need to be charged? For simplicity, let's pretend that life insurance companies only invested in bonds. You have a policy with $300,000 of CSV and $800,000 of death benefit. You decide to borrow $100,000 out of your policy because you want to invest in XYZ corp.

Let's look at this from the insurance companies point of view. In order for you to have this $100,000, they had to pull it out of one of their investments. If their typical investment is earning 6%, doesn't this loan cost them $6000? The insurance company charges interest because from their POV, lending money to you is identical to having the money invested in a bond. Because it is identical, your policy will perform as if the money was never removed (depends on the company).

Keep thinking that WL insurance sucks if you want, but you should really keep trying to understand it first. I'm happy to answer questions and stay with this conversation.

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Postby tfb » Sun Dec 09, 2007 3:27 pm

All three statements may not be technically true but they are still true for practical purposes.

"With whole life insurance, some of the money goes to pay for the insurance and some goes into the cash value?"


After I make my 10th payment of say $500, does my cash value increase? Does it increase by more than $500 or less than $500? If it increases by less than $500, where did the difference go? Effectively part of my payment went to insurance, part of it went into cash value.

"The cash surrender value is the amount of money that a person will get if they don't want their policy any more."


True for most people. There's no ready market for a policy held by a healthy 45-year-old who doesn't want the policy any more.

When you take a loan from your policy, you are borrowing money from yourself.


Does any insurance company give out loans more than the cash surrender value? If you surrender a policy with a loan outstanding, is it not subtracted from the cash value? For practical purposes, it feels like you are borrowing from yourself, doesn't it?
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Postby J.Fred.Muggs » Sun Dec 09, 2007 3:35 pm

EmergDoc wrote:
J.Fred.Muggs wrote:Ok, so say that it is too late and you are already several years into a whole life policy. What should you do then?


#1 Make sure it isn't a good idea to hold onto it. At a certain point in a whole life policy, you should probably just hold onto it.


How do you determine this?

Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 3:46 pm

Talk to your agent and get an inforce illustration.

1)Request to see what happens if you keep paying all premiums.
2) See what happens if you quit paying immediately. (You should have a choice between extended term insurance and a reduced paid up whole life policy.)
3)Request to see how much longer you need to keep paying premiums to have the policy stay in force forever.

#1 and #3 won't be accurate because they should be based on the current dividend scale. However, they also won't be an exaggeration. Typically, the results have just as good of a chance as being better than illustrated than worse.

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Postby tfb » Sun Dec 09, 2007 3:46 pm

J.Fred.Muggs wrote:
EmergDoc wrote:
J.Fred.Muggs wrote:Ok, so say that it is too late and you are already several years into a whole life policy. What should you do then?


#1 Make sure it isn't a good idea to hold onto it. At a certain point in a whole life policy, you should probably just hold onto it.


How do you determine this?


See http://www.consumerfed.org/evaluate_ins ... policy.cfm
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Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 3:55 pm

TFB, can you provide a link again to what you wrote about life insurance. I look forward to reading it.

After I make my 10th payment of say $500, does my cash value increase? Does it increase by more than $500 or less than $500? If it increases by less than $500, where did the difference go? Effectively part of my payment went to insurance, part of it went into cash value.


It is guranateed to increase. It may increase by more or less than $500. Regardless, none goes into the Cash Surrender Value. This is not some separate pot of money where cash gets put.

True for most people. There's no ready market for a policy held by a healthy 45-year-old who doesn't want the policy any more.


I would think that you are absolutely correct. Well, there may be a market, but it will be a very, very small one. (For the record, I think that life settlements are terrible for the industry and ultimately consumers of life insurance. If someone wants to talk about this, I'll be glad to on another thread.)

Does any insurance company give out loans more than the cash surrender value? If you surrender a policy with a loan outstanding, is it not subtracted from the cash value? For practical purposes, it feels like you are borrowing from yourself, doesn't it?


I assume that the first answer is "no". The second answer is "yes". It does feel like you are borrowing from yourself, but it's not the reality. The CSV will help to determine how much the company will lend to you. Think of it as collateral.

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Postby Ariel » Sun Dec 09, 2007 3:56 pm

Insurance Guy wrote:Talk to your agent and get an inforce illustration.

1)Request to see what happens if you keep paying all premiums.
2) See what happens if you quit paying immediately. (You should have a choice between extended term insurance and a reduced paid up whole life policy.)
3)Request to see how much longer you need to keep paying premiums to have the policy stay in force forever.

#1 and #3 won't be accurate because they should be based on the current dividend scale. However, they also won't be an exaggeration. Typically, the results have just as good of a chance as being better than illustrated than worse.

I've only followed these suddenly extensive insurance discussions in passing. Even leaving aside the costs associated with whole-life and similar stuff, and even allowing that they might be profitable vehicles in some circumstances, the lack of liquidity and tranparency would prevent me from even considering them as suitable means for either insurance or investment.
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 4:01 pm

Ariel, I don't know that it's not transparent, after all, you always know the death benefit. That being said, whole life is totally 100% the wrong vehicle for any money where liquidity is needed.

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Postby mickeyd » Sun Dec 09, 2007 4:06 pm

When one accesses money from their insurance policy, they ARE NOT borrowing from the cash surrender value. They are borrowing from the death benefit.


Not exactly true. When a policyholder takes a loan on a policy, it is a loan from the assets of the insurance company and the cash value of the WL policy is really collateral for the loan that the policyholder has taken.
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Postby Trebor » Sun Dec 09, 2007 4:44 pm

"When one accesses money from their insurance policy, they ARE NOT borrowing from the cash surrender value. They are borrowing from the death benefit."
You can't borrow more than the cash value.

Loans are touted as way to access your cash value in a "tax free" manner. It is true the government does not consider a loan income. You can also borrow from any security for "tax free" income by way of a margin account.

Whole life's priorities are wrong for the vast majority. "Legacy dollars" are a last priority for most of us. While we can come up with interesting theoretical end stage examples of value, they ignore all the compromises that were made along the way to keep the policy in force. Don't forget the example of the majority who drop their policy in the first ten years.

I agree that these products are complicated. Most don't even understand what they own. Years later they have to hire a third party to evaluate the policy and tell them how to proceed in a smart manner.

IMO, most can get along just fine without them.

Trebor

Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 6:56 pm

MickeyD, good explanation.

Whole life's priorities are wrong for the vast majority. "Legacy dollars" are a last priority for most of us. While we can come up with interesting theoretical end stage examples of value, they ignore all the compromises that were made along the way to keep the policy in force. Don't forget the example of the majority who drop their policy in the first ten years.


It's not just about legacy dollars. The death benefit helps the living by allowing them to spend more of their assets.

If someome is going to drop their policy early, it stinks for them. You'll get no argument from me. That doesn't make the product bad. It's similar to trying to make an argument that 401(k)s are bad since many people cash out at job changes and pays a penalty. That argument also doesn't hold much water. Whole life insurance is meant to be kept for one's whole life. 401(k)s are meant to be kept until age 59 1/2. If something is not used as intended, it probably won't be very good.

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Postby nisiprius » Sun Dec 09, 2007 7:33 pm

It's proverbial that one should never invest in anything one doesn't understand.

It seems to me equally wise never to buy insurance one doesn't understand.

You make a convincing case for whole life being something that most people don't understand.
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What I don't understand

Postby snowbound » Sun Dec 09, 2007 7:37 pm

Is how the OP can have 221 post in just 12 days?? Find a real hobby.
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Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 8:36 pm

Is how the OP can have 221 post in just 12 days?? Find a real hobby.


I really don't get it. Why the criticism? In case you are wondering why, which obviously you are not, I've had a sick wife and I have children that need constant attention, thus I've been homebound.

Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 9:08 pm

It's proverbial that one should never invest in anything one doesn't understand.

It seems to me equally wise never to buy insurance one doesn't understand.

You make a convincing case for whole life being something that most people don't understand.


AWESOME! This is the absolutely best post on this issue. You are 100% correct. When one doesn't understand whole life insurance, they should not be purchasing it.

When one doesn't understand whole life insurance, they should not be arguing that others should be buying term insurance and investing the difference. (Of course, undereducated insurance agents should not be saying that everyone should buy whole life.)

It's appropriate sometimes and sometimes it's not. When used appropriate, it's a great product. When used inapproprately, it's terrible.

Pay attention because when you read articles espousing BTID, the thing that you should notice right away is that it is almost never written by an insurance expert. Have you ever noticed that when you read an article about any subject in which you don't have expertise, the author seems to make valid points. However, when you read an article and you have more expertise than the author, the mistakes jump off the page. This is how I feel about BTID articles. I don't mind an opinion that BTID is often a better option, but not when the opinion is backed by incorrect assumptions and a misunderstanding of whole life insurance.

Companies like Northwestern Mutual, New York Life, and MassMutual haven't lasted for 150 years and become Fortune 100 companies by ripping off people (Not to mention being as strong as any company in any industry).

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Postby openminded » Sun Dec 09, 2007 9:23 pm

I see no reason to bash IG just because he doesnt conform.

Its great to have him around. He challanges you guys and provokes a debate.

I dont think I have read anything that IG has said that goes against the mantra!

I take no issue with anything IG has stated.

Is WL, usually inappropriate for the average joe? ABSOLUTEY, Are there tons of scum robbing people blind (read: steering toward 'unsuitable' products) with these policies? ABSOLUTEY......I dont see anything really that IG has said that contradicts this, although he does not embrace it either.

Keep up the good work IG.

and most of all...............
stay open-minded

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Postby openminded » Sun Dec 09, 2007 9:28 pm

oh and.....

IG has been very respectful and shows thick skin.

Seems like a decent guy for an insurance salesman :shock:

If I was uninformed, I would be glad to have him as my agent.

I think :idea:


Hey IG

What percentage of your clients are reccommended WL over Term?

Insurance Guy

Postby Insurance Guy » Sun Dec 09, 2007 9:49 pm

What percentage of your clients are reccommended WL over Term?


Thanks, openminded. The answer is very few. I've done some cases for estate planning where I've used all WL. I've also used it in some business cases. Early in my career, I sold some $100/month type whole life policies.

Now, I'll do some kiddie policies of $50,000 WL. (The reason for kiddie policies is to protect future insurability. A $50,000 policy gurantees that the child will be able to get $800,000 of coverage in the future regardless of health.)

Anyway, in general, it's not about recommending WL over term. Other than what I've mentioned, my WL clients, buy both WL and term. Give or take, my typical client probably has $200,000 of WL and $1,800,000 of term. I'd say that 70% of my clients own some whole life, but it would not surprise me if 70% of these started with all term insurance. Amount of insurance trumps type of insurance.

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Postby openminded » Sun Dec 09, 2007 10:13 pm

IG

You must have an affluent client base?

lets do this.....

Is there any reason for me to take out WL, in any amount at any time?

Both I and my spouse work decent jobs, plan to be 'self-insured' by working hard and saving and investing over the twenty years or our current term policy. Kids also out on own by then. Dont plan to leave any special legacy, I would be satisfied paying for my plywood casket and telling the kids "good luck". We already invest in retirement savings so dont need to be convinced that WL is a 'great way to save'

So is there any reason for me take out WL, in any amount at any time?

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Bogleheads................

Postby mephistophles » Sun Dec 09, 2007 11:25 pm

The Bogleheads Guide to Investing by Taylor Larimore, Mel Lindauer and Michael Le Boeuf, page 246, "if you need life insurance buy term insurance. It is the cheapest way to go and serves the purpose. Insurance companies love to push cash-value policies because it is a high profit item for the sales person and the company."

I think the leaders of our forum sum up the argument for term in very few words on just a few pages in their book. Their wisdom lies in their ability to be succinct, keep it simple, tell the truth and to keep the cost as low as possible to get the job done.

I am a career life insurance agent, manager and executive and independent agent and I agree with Mel, Taylor and Michael 100%.

Best regards,

ole meph

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Postby downshiftme » Mon Dec 10, 2007 5:10 am

Someone somewhere along this thread mentioned the possibility that a whole life policy in force could have a value if sold to a third party of greater than the cash surrender value. As I understand that, the purchaser of my policy then gets paid the death benefit amount (say, $1 million) when I die, but has to pay the premiums until then.

Not to say that I live in a soap opera, but why would I ever want an unrelated third party to have that knd of financial interest in my demise.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 6:35 am

The Bogleheads Guide to Investing by Taylor Larimore, Mel Lindauer and Michael Le Boeuf, page 246, "if you need life insurance buy term insurance. It is the cheapest way to go and serves the purpose. Insurance companies love to push cash-value policies because it is a high profit item for the sales person and the company."

I think the leaders of our forum sum up the argument for term in very few words on just a few pages in their book. Their wisdom lies in their ability to be succinct, keep it simple, tell the truth and to keep the cost as low as possible to get the job done.


They have to be succinct because it is not something that can be backed up with numbers. Taylor, Mel, or Michael, I'm sure that it would be helpful if you could come here and tell us why everybody should buy term insurance and how I am wrong that whole life can be appropriate for someone if they have taken care of other basic needs and the money going into whole life is money that would otherwise be going into conservative vehicles.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 6:41 am

Someone somewhere along this thread mentioned the possibility that a whole life policy in force could have a value if sold to a third party of greater than the cash surrender value. As I understand that, the purchaser of my policy then gets paid the death benefit amount (say, $1 million) when I die, but has to pay the premiums until then.

Not to say that I live in a soap opera, but why would I ever want an unrelated third party to have that kind of financial interest in my demise.


I'm against life settlements like I described for many reasons (deserves another thread if someone wants to discuss it). There is definitely something to be said for your point of view. However, it is done in such a way that policies are packaged together and purchasers don't know the insureds. I, like you, would not feel comfortable doing this. People buy policies because death benefits are a good investment.

One thing that nobody has been able to argue about whole life insurance is the fact that if we are looking at the death benefit, and I believe that we should always be looking at the death benefit, no investment can match this non-investment unless the investment takes significantly more risk.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 7:12 am

You must have an affluent client base?

lets do this.....

Is there any reason for me to take out WL, in any amount at any time?

Both I and my spouse work decent jobs, plan to be 'self-insured' by working hard and saving and investing over the twenty years or our current term policy. Kids also out on own by then. Dont plan to leave any special legacy, I would be satisfied paying for my plywood casket and telling the kids "good luck". We already invest in retirement savings so dont need to be convinced that WL is a 'great way to save'

So is there any reason for me take out WL, in any amount at any time?


Some of my clients are affluent. Some aren't.

The answer to your original question is "maybe". Is any of your long term money being invested conservatively? If "no", I can't see whole life making any sense. If "yes", what would happen if you took some of that long term money conservative money and put it into a whole life policy?

Let's just make up a scenario. You are 40 years old with no health issues and you can easily afford to put $5000/year into whole life insurance if it makes sense since you are currently investing about $1,000/month conservatively.

The $5000 will buy a policy that is in the neighborhood of $350,000. At age 70 based upon the current dividend scale, the death benefit would be about $670,000 and the cash surrender value of $365,000. To keep things simple, we'll ignore the fact that you can save money by lowering your term insurance, thus giving you more money to invest.

Let's assume that you can get 5% after tax on your conservative money. This $5000 will be worth $348,000. The benefit of the life insurance is the death benefit!

If you buy the life insurance with conservative dollars, it is realistic to have approximately the same net worth in the future. What changes is the fact that the death benefit allows one to spend more money.

2 couples each have $1,300,000 invested agressively. The first of these couples also has $700,000 invested/saved conservatively. The second couple has $350,000 invested/saved conservatively and $350,000 as the cash surrender value of a life insurance policy with a $670,000 death benefit.

Which couple has the higher net worth? They are the same. Which couple can spend more money in retirement? The couple with the life insurance.

Openminded, my suggestion to you would simply be if you putting away long term conservative dollars, explore the possibility of putting some of them into permanent life insurance. It may or may not make sense for you. If it will benefit you or your wife, do it. If it won't, then don't do it.

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Postby Raybo » Mon Dec 10, 2007 10:24 am

I realize I am coming to this party late and I am not a deeply experienced life insurance professional.

Nonetheless, I have owned two Whole Life insurance policies. The first one I bought when I was married with a big mortgage. When I got divorced and had paid down the mortgage, I cashed it in (for less than I had put into it).

The second one I got because I was maxing out all of my retirement accounts and still had money to invest. After talking with my financial planner, I decided to put some money into another whole life policy as a "separate bucket" of money that fit somewhere between an IRA and a Roth.

After spending time on this board and reading numerous investing books, I decided to cash that investment in as I realized 1) the money I paid into the insurance was going into loaded funds so I was losing 5% right off the top, 2) the expense ratios of the investments (given they were loaded funds) were way too high, 3) upon examining my assumptions about taxes, I realized they were flawed so my logic in making the investment was incorrect. When I retired (and no longer needed investment vehicles), I stopped paying the premium and after about a year, I cashed it in (again, receiving much less than I had put in).

As I see it, the tax advantages of whole life insurance means that instead of paying taxes to the government, you are paying fees to the insurance company. In my view, the fees overwhelm the tax advantages.

I also don't buy all the rosy numbers that are always trotted out as illustrations. There are lots of assumptions made, some of which involve insurance company decisions. While I don't know this, I would guess that there are just as many scenarios where whole life insurance comes out the loser as those where it is a winner. What's more, if I need money to fund long term care or some other catastrophe, the life insurance gets cashed in, just like a mutual fund would (with higher taxes, I believe). If I don't need the money, I don't need life insurance.

Ray
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

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NUMBERS................

Postby mephistophles » Mon Dec 10, 2007 12:13 pm

I can't believe that I am hearing insuranceguy say that Mel, Taylor and Michael had to be succinct in their book and "can not" back up their advice about buying low cost term with numbers.

Bear in mind Iguy, no one is saying that whole life is never a solution to insurance needs. All we have said is that typically these uses would be in the estate planning and business market and for a small minority of other situations.

What I have always said, and that our published authors above, seem to agree on is that term insurance is the best way to protect the financial interests of beneficiaries in the family market. By family market I mean those people who typically are raising families and the loss of income by the premature death of either parent needs to be taken care of.

Also, Iguy, you never answer questions directly. Please answer my questions to you in this and other threads.

meph

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Postby Valuethinker » Mon Dec 10, 2007 12:24 pm

Raybo wrote:
As I see it, the tax advantages of whole life insurance means that instead of paying taxes to the government, you are paying fees to the insurance company. In my view, the fees overwhelm the tax advantages.


I was an IT guy in life insurance in the 1980s.

You've basically summarised it. The market is efficient, in the sense there are no free lunches. The free lunch the government gives in tax breaks is consumed by the distribution channel (ie the life company and the agents).

Term life is to other life insurance industry products as index mutual funds are to other mutual fund industry products like active funds and load funds.

Whole life is kind of the load fund of the life insurance industry.

Term is cheap, simple and has transparent and competitive pricing. It's therefore a low margin item for most insurers.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 1:07 pm

Also, Iguy, you never answer questions directly. Please answer my questions to you in this and other threads.


Meph, to the best of my knowledge, I answer every question that you ask me. To whatever extent, I have not, I apologize. Ask a question and I will answer it. The only questions that I won't answer is any question that can serve to help identify me if somebody knows me.

You know that there is still that one big question that I have asked you which you refuse to answer. You brought up the subject of thousands of academic studies and I have respectfully asked you to point me in the direction of just one of them.

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Postby Live Free or Diehard » Mon Dec 10, 2007 1:42 pm

Valuethinker wrote:
Raybo wrote:
As I see it, the tax advantages of whole life insurance means that instead of paying taxes to the government, you are paying fees to the insurance company. In my view, the fees overwhelm the tax advantages.


I was an IT guy in life insurance in the 1980s.

I was an IT guy in life insurance in the 1990s. I spent nine years developing programs to project insurance values (dividends, guaranteed cash value, premiums) into the future on Illustrations (sales proposals and projections on in-force policies) for a couple of different companies. One big project I worked on was the NAIC Illustration. In 1996 several of the state insurance commisioners started passing laws that a simple illustration would have to be presented when the policy was delivered to the policy owner so that they would understand the policy. It also had to be signed and dated by the policy owner and retained by the Insurance company to prove that the policy owner understood the policy. This easy-to-understand illustration ended up being 6-10 pages long. It's difficult to understand why this insurance product has to be so complicated. Are life insurance companies still required to present the NAIC Illustration?

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KEEPING IT SIMPLE

Postby mephistophles » Mon Dec 10, 2007 2:01 pm

So, there you go again Iguy, not answering the question but posing one of your own.

The questios are: Do you back the thinking of Taylor, Mel and Michael in their book mentioned above? If you do not back the written remarks on the the subject of whole life in the Bogleheads guide, why not? What qualifications, if any, do you have that enables you to post repeatedly, as if you were knowledgeable on these subjects? Are you insurance licensed? Are you a CLU?

I post anonymously as ole meph. I don't think that telling one I am among the hundreds of thousands of insurance agents passing by nor that I am a CLU nor that I have 40 years of experience poses any danger to my anoymity.

I do not think that giveing us your qualificatin, if any, poses any threat to your identity being exposed here.

What I do think, based on reading your voluminious posts, since you joined here just a few months ago, is that you are on some kind of ego trip to push your private agenda of whole life.

What I do know is that you cannot be objective because of the proportionately large commissions whole life exacts as opposed to other solutions.

So, try answering these questions, which have been repeatedly asked of you in one context or another.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 3:13 pm

I'll repeat what I have already answered.

I have not read their book. All that I know about their insurance advice comes from what you have told me. The problem is that you have told me two different things:

Quote:
Their book, The Bogleheads Guide to Investing on page 246 states clearly that term insurance is the way to go to get the job done at the lowest cost.



This statement doesn't treat people as individuals. It is true sometimes and not true othertimes. It's true for those who have a temporary need and false for a permanent need.

Quote:
The Bogleheads Guide to Investing, written by Mel, Taylor and Michael recommends low cost term as the best solution for the insurance needs of the majority of those in what I call family markets.


I agree with this. Term is the best for the majority of those in the faimly market. It's just not best for everyone.

Insurance Guy

Postby Insurance Guy » Mon Dec 10, 2007 3:18 pm

I was an IT guy in life insurance in the 1990s. I spent nine years developing programs to project insurance values (dividends, guaranteed cash value, premiums) into the future on Illustrations (sales proposals and projections on in-force policies) for a couple of different companies. One big project I worked on was the NAIC Illustration. In 1996 several of the state insurance commisioners started passing laws that a simple illustration would have to be presented when the policy was delivered to the policy owner so that they would understand the policy. It also had to be signed and dated by the policy owner and retained by the Insurance company to prove that the policy owner understood the policy. This easy-to-understand illustration ended up being 6-10 pages long. It's difficult to understand why this insurance product has to be so complicated. Are life insurance companies still required to present the NAIC Illustration?


The NAIC illustration is terrible for consumers. Going through 10 pages of numbers can't accomplish much except confusing consumers. It still exists. The only time that is not needed is if all elements of the policy are guaranteed. It completely changed my selling style. I used to use illustrations and now I don't. I don't think that the insurance product is so complicated. However, the NAIC illustration is very complicated.

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Re: KEEPING IT SIMPLE

Postby mephistophles » Mon Dec 10, 2007 5:13 pm

mephistophles wrote:So, there you go again Iguy, not answering the question but posing one of your own.

The questios are: Do you back the thinking of Taylor, Mel and Michael in their book mentioned above? If you do not back the written remarks on the the subject of whole life in the Bogleheads guide, why not? What qualifications, if any, do you have that enables you to post repeatedly, as if you were knowledgeable on these subjects? Are you insurance licensed? Are you a CLU?

I post anonymously as ole meph. I don't think that telling one I am among the hundreds of thousands of insurance agents passing by nor that I am a CLU nor that I have 40 years of experience poses any danger to my anoymity.

Please just answer my questions, all of them, insuranceguy. Quit hiding your lack of qualifications and your lack of education and your lack of credentials.
I do not think that giveing us your qualificatin, if any, poses any threat to your identity being exposed here.

What I do think, based on reading your voluminious posts, since you joined here just a few months ago, is that you are on some kind of ego trip to push your private agenda of whole life.

What I do know is that you cannot be objective because of the proportionately large commissions whole life exacts as opposed to other solutions.

So, try answering these questions, which have been repeatedly asked of you in one context or another.

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I guy

Postby mephistophles » Mon Dec 10, 2007 5:16 pm

Please answer all the questions I asked of you.

What, if any, credentials do you have to post hear as a person who is knowledgeable about life insurance?

Why don't you have a CLU?

Why don't you read the Bogleheads book or learn the Boglehead philosophy of investing?

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Postby bearcat98 » Mon Dec 10, 2007 9:03 pm

Insurance Guy,

There's something that you've been saying that troubles me a bit. I think you will agree that:

1) Given expected rates of return, aggressive investments (total stock market, perhaps some slice and dice with emerging markets and small value or something else thrown in) are likely to give you a better total return than whole life insurance. On the other hand, whole life shows way less volatility. Therefore, you advocate comparing whole life to the more conservative portion of your portfolio.

2) You can access the cash value of your policy by taking out a loan from the insurance company, which results in you paying interest on money that came from you and is being let back to you. This makes whole life a less convenient and more expensive place to pull money from than many more ordinary investment vehicles. Therefore, you advocate not using whole life to invest money that you need to keep liquid.

My issue is this: most folks invest some money conservatively so they will have money to spend in retirement if their aggressive investments tank. Therefore, liquidity is an essential feature of the truly conservative portion of the typical retirees portfolio. In terms of planning for a person's life, then, whole life should go on the end of the spectrum where you expect higher returns...an illiquidity premium, in addition to the bond returns.

Of course, that's not necessarily true in terms of planning for a person's death. Even the folks who are picking at you pretty hard have agreed that whole life can have uses in the estate tax planning and business planning. I can also understand that some people are more concerned with protecting their financial legacy after death than with maximizing their legacy by investing aggressively when alive.

But it seems to me that the combination of conservative/mediocre returns with restricted access to the asset would make whole life inappropriate as a retirement planning tool. Let me know if you disagree.


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