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JimmyJoe said: rcmkensington said: I'd put UL or WL in the mix to CONSIDER for your situation.
Had to put my 2 cents in here. I TOTALLY disagree. I am licensed and have sold life insurance in California. UL and WL should be illegal. Term is better 100% of the time, no exceptions. Insurance is for INSURANCE, not an investment. Buy Term and invest the difference and you will always be better off.


Do you really believe that WL should be illegal? Insurance is for Insurance, not an investment. However, the fact that you are writing this leads me to believe that you don't really understand these products. I'm assuming that your insurance selling career was short lived.

Close to (if not all) 500 of the Fortune 500 companies will disagree that term is better 100% of the time. The vast majority of banks will disagree with you. The majority of wealthy people will disagree with you. When we combine those three groups, there may be a little bit of brainpower disagreeing with you.

I've also never heard any estate planning attorneys with that opinion. I don't even think that I've heard any CPAs ever voice that opinion.

xerty said: IE - I wanted to say thank you for your detailed explanation and Q&A. I may eventually have some questions, but for now I'm just happy to learn.

The kind words are appreciated.

Rorer714 said: What are your thoughts on a WL life policy bought 35 years ago by a 20 year old? It was by MetLife which was a MF company and now is a stock company. Sell or hold?

There aren't enough facts to attempt a specific answer. When you die, do you want to leave money behind or are you one of those people who want to die the same day that they've spent their last dime?

If it is the former, it will most likely make sense to keep the policy. If it is the latter, it probably makes sense to get rid of the policy. How to get rid of the policy is also an important consideration.

Of course, part of this equation is whether there is currently an insurance need.

JimmyJoe said: rcmkensington said: I'd put UL or WL in the mix to CONSIDER for your situation.
Had to put my 2 cents in here. I TOTALLY disagree. I am licensed and have sold life insurance in California. UL and WL should be illegal. Term is better 100% of the time, no exceptions. Insurance is for INSURANCE, not an investment. Buy Term and invest the difference and you will always be better off.

Interesting statement. First off, who actually invests the difference? Not the majority of Americans who need insurance. Secondly, if you buy a 30 year term policy in your 20's and become successful and your health changes in your 50's, chances are you still need life insurance, however you cannot apply for any other coverage. You are probably thinking, bs, you can convert a convertable policy to permanent. Have you looked at the terms of the convertable option in the back of your policy? 99.9% state that they will give the option to convert to a policy designated by the company. You think the term company will give you the super low cost wl/ul 2000? No way, they will give you the most bloated policy out there. When a client calls in the 29th year asking to convert, whats the company thinking....uh oh, this guy is sick and can't apply elsewhere. Term and permanent has their places and it is up to the advisor to properly sell it to their client. There are many fixed UL policies that fully disclose every fee and cost, have a good track record and are often much more cost effective then a WL. When funded to the same level as a whole life will normally easliy outperform the WL policy.

Term has it's place. It is a temporary solution to a permanent issue. Next, many large businesses and banks view insurance as an investment. Did you know that corporations are the largest holders of life insurance? They often purchase policies on their employees with the company as beneficiary and most are permanent. Suze Ormand and others are big proponents of term, but I bet they all have a permanant policy for estate planning and conservation.(much like how she says to invest in mutual funds, yet has very little in her portfolio percentagewise)

That's a good post, dynamice. It is fair to say that some people won't invest the difference, but there is also no reason to assume that those same people would continue paying their life insurance premiums. That's why we need to compare people who will do the right thing instead of people who won't.

He's making a very important point regarding convertibility. Being able to convert isn't much of a benefit when you can only convert into a bad product. This is typical with cheap term policies.

InsuranceExpert said: scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?


This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.


One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently. So what I've done is increased my monthly deposit into the UL policy each year to hopefully make up for the drop in overall interest rate. This annual increase kind of mirrors what my original pension would have been doing, had I chosen the survivor option. The big difference is that I am putting about $4K/year into the UL policy, vs $6K/yr (approx) that I would have had deducted from my pension.

As far as "running the numbers" is there a publicly available program (maybe even an Excel wks??) that I can use to project future results (I think that's called an "illustration")? In the annual reports I get on my UL, they just show projected end dates based on guaranteed interest rate and current rate. I'd like to know how it goes depending on how much I kick in each year.

Thanks for the insights.

Scott

scottsd said: InsuranceExpert said: scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?


This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.


One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently. So what I've done is increased my monthly deposit into the UL policy each year to hopefully make up for the drop in overall interest rate. This annual increase kind of mirrors what my original pension would have been doing, had I chosen the survivor option. The big difference is that I am putting about $4K/year into the UL policy, vs $6K/yr (approx) that I would have had deducted from my pension.

As far as "running the numbers" is there a publicly available program (maybe even an Excel wks??) that I can use to project future results (I think that's called an "illustration")? In the annual reports I get on my UL, they just show projected end dates based on guaranteed interest rate and current rate. I'd like to know how it goes depending on how much I kick in each year.

Thanks for the insights.

Scott


Therein lies the issue with fixed interest UL policies. Every year, behind closed doors the board of directors all huddle around and say, golly, how can we increase profits? Drop the renewal interest rates on the fixed products of course! All companies say that the rates are tied to the interest rate environment, but rarely do they say that they move them to increase profits. Back in the 80's when interest rates were in the double digits, UL policies illustratedsales proposals with those out of this world rate projected out 100 years. Highly unlikely. As a result, alot of ULs crashed and burned in the early 90's and that is why UL has a bad reputation. Most true rates year after year will hover around 4-5%. As long as you understand this movement of the rate, you are good to go.

This is the importance of finding an efficent passthrough UL like a well structured equity indexed UL. There is alot of garbage out there, but there are a few stellar ones with low fees, full disclosure and good cap rates. That way, your interest rate is true market, and not determined by a insurance fatcat. As for public information, unfortunately, that is private data and not publicly shared. There was a great article by the National Underwriter about the true rates of return on whole life though. Google it. The average WL paid out close to 3-4% even though they illustrate 7-8% with dividends.

InsuranceExpert said:
Here's a simple example, again with made up numbers. Mr. and Mrs. Smith are retired. If they put their money into a SPIA (single premium immediate annuity), they will receive and income of $5,000 a month for as long as either one of them is alive. What happens if Mr. Smith owns a big life insurance policy? He can buy a SPIA that pays $8,000/month but only pays for as long as he is alive. Results: They get to spend $8,000 instead of $5,000 while both of them are alive. Mr. Smith will still get to spend $8,000/month if his wife dies first. If Mr. Smith dies first, Mrs. Smith gets the life insurance proceeds and she'll be able to live comfortably for the rest of her life.

The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.

This sounds great, but it seems like a free lunch. I'm guessing the numbers don't add up in your example. In a perfectly effient world, wouldn't the cost of insurance exactly equal the difference in the expected total value of the benefits of the two annuities?


WL sample investment
Disclaimer

past rate of return
Disclaimer
I hate to put my personal stuff out there & hopefully I have eliminated most of my personal info from the quote but this is a quote that I received from a Northwestern Mutual rep (supposedly a reputable mutual company). Our life plans involve take a mid-life retirement for 10 yrs in about 8yrs (trust me you don't want to know) so the policy supposedly would pay us back $60k every other yr obviously assuming a 6% rate of return (again understanding that past performance is not a guarantee of future returns but there is a 4% min!). The rep also showed me how the company has always done well & even in tough times like right now is giving 6.5% rate of return. Besides the tax advantage he also mentioned that WL is guaranteed to give atleast a 4% rate by law. So what do you feel about this IE; B.S. or is this realistically possible? plus he wants me to put $40,540/yr right now for 8 yrs!!

scottsd said: InsuranceExpert said: scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?


This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.


One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently. So what I've done is increased my monthly deposit into the UL policy each year to hopefully make up for the drop in overall interest rate. This annual increase kind of mirrors what my original pension would have been doing, had I chosen the survivor option. The big difference is that I am putting about $4K/year into the UL policy, vs $6K/yr (approx) that I would have had deducted from my pension.

As far as "running the numbers" is there a publicly available program (maybe even an Excel wks??) that I can use to project future results (I think that's called an "illustration")? In the annual reports I get on my UL, they just show projected end dates based on guaranteed interest rate and current rate. I'd like to know how it goes depending on how much I kick in each year.

Thanks for the insights.

Scott


The interest rate on your policy has decreased because that is what has happened to interest rates in general. Are you still healthy? If so, my guess is that there is a better option for you. With the premium that you are paying, how long is the death benefit guaranteed at guaranteed rates?

dynamice said: scottsd said: InsuranceExpert said: scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?


This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.


One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently. So what I've done is increased my monthly deposit into the UL policy each year to hopefully make up for the drop in overall interest rate. This annual increase kind of mirrors what my original pension would have been doing, had I chosen the survivor option. The big difference is that I am putting about $4K/year into the UL policy, vs $6K/yr (approx) that I would have had deducted from my pension.

As far as "running the numbers" is there a publicly available program (maybe even an Excel wks??) that I can use to project future results (I think that's called an "illustration")? In the annual reports I get on my UL, they just show projected end dates based on guaranteed interest rate and current rate. I'd like to know how it goes depending on how much I kick in each year.

Thanks for the insights.

Scott


Therein lies the issue with fixed interest UL policies. Every year, behind closed doors the board of directors all huddle around and say, golly, how can we increase profits? Drop the renewal interest rates on the fixed products of course! All companies say that the rates are tied to the interest rate environment, but rarely do they say that they move them to increase profits. Back in the 80's when interest rates were in the double digits, UL policies illustratedsales proposals with those out of this world rate projected out 100 years. Highly unlikely. As a result, alot of ULs crashed and burned in the early 90's and that is why UL has a bad reputation. Most true rates year after year will hover around 4-5%. As long as you understand this movement of the rate, you are good to go.

This is the importance of finding an efficent passthrough UL like a well structured equity indexed UL. There is alot of garbage out there, but there are a few stellar ones with low fees, full disclosure and good cap rates. That way, your interest rate is true market, and not determined by a insurance fatcat. As for public information, unfortunately, that is private data and not publicly shared. There was a great article by the National Underwriter about the true rates of return on whole life though. Google it. The average WL paid out close to 3-4% even though they illustrate 7-8% with dividends.


I'm not a fan in general of UL other than GUL. However, the insurance fatcat analogy isn't correct. Interest rates are much lower thus performance is much lower. The Fatcats can't use artificially low rates. Artificially low rates will hurt a company. If interest rates go up, these rates will go up with them. Use logic on this one. If renewal rates are artificially low, what do healthy people do? Switch carriers. What do unhealthy people do? Stay put. Insurance companies can't do things that cause them to lose healthy people while being stuck with unhealthy people. Rates are low simply because interest rates have been low. There hasn't ever been a time that UL policies paid rates that were much different than prevailing interest rates.

As for EIUL, the insurance carriers could play games if they wanted to do so by changing calculation methods.

(EIUL is UL with a different method for determining interest. Long term, there is no reason to expect an EIUL to perform any better or worse than a traditional UL policy)

markjoto said: InsuranceExpert said:
Here's a simple example, again with made up numbers. Mr. and Mrs. Smith are retired. If they put their money into a SPIA (single premium immediate annuity), they will receive and income of $5,000 a month for as long as either one of them is alive. What happens if Mr. Smith owns a big life insurance policy? He can buy a SPIA that pays $8,000/month but only pays for as long as he is alive. Results: They get to spend $8,000 instead of $5,000 while both of them are alive. Mr. Smith will still get to spend $8,000/month if his wife dies first. If Mr. Smith dies first, Mrs. Smith gets the life insurance proceeds and she'll be able to live comfortably for the rest of her life.

The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.

This sounds great, but it seems like a free lunch. I'm guessing the numbers don't add up in your example. In a perfectly effient world, wouldn't the cost of insurance exactly equal the difference in the expected total value of the benefits of the two annuities?


1) It's not a perfectly efficent world. Sometimes the numbers work and sometimes they don't.
2) You are correct in your thought process. However that assumes that someone retires at 65 and buys the insurance at age 65. What if, instead, they did what I have been suggesting? For instance, at age 35, if they bought permanent insurance with money that otherwise would have gone into conservative investments/savings, at 65, they could then take the larger monthly payout. The annuity is based upon being age 65 and the insurance is based upon being age 35.

missmatch said: I hate to put my personal stuff out there & hopefully I have eliminated most of my personal info from the quote but this is a quote that I received from a Northwestern Mutual rep (supposedly a reputable mutual company). Our life plans involve take a mid-life retirement for 10 yrs in about 8yrs (trust me you don't want to know) so the policy supposedly would pay us back $60k every other yr obviously assuming a 6% rate of return (again understanding that past performance is not a guarantee of future returns but there is a 4% min!). The rep also showed me how the company has always done well & even in tough times like right now is giving 6.5% rate of return. Besides the tax advantage he also mentioned that WL is guaranteed to give atleast a 4% rate by law. So what do you feel about this IE; B.S. or is this realistically possible? plus he wants me to put $40,540/yr right now for 8 yrs!!

Northwestern Mutual is a reputable company. There's nothing on the quote that is B.S. To correct a couple things that you are saying, this is based upon the company having a 6% dividend scale. That is not a 6% rate of return. The same can be said about the 4%. The 4% isn't law. It is what they guarantee, but, again, it's not a rate of return.

Things that I'm noticing from looking at the illustration:
1) On the top, it says that 6% is less than the current rate. That was accurate, but is no longer accurate. 6% is what their new dividend scale is paying.
2)I'd like to see the next page of the illustration.
3)You need a new agent. Notice that part of this policy is $750,000 of term insurance. You are paying $2782 for this and will pay this for 8 years and then drop it. Let's pretend that this cost doesn't increase every year. It's still going to be $22,000. You can get the same thing for under $300/year. $300 x 8 =$2400. $20,000 is being thrown down the gutter.
4)There are big drops in the death benefit. Is there something that is going to happen that will cause your family to need much less coverage in the future than now?
5)It would be easy to design something for you that should do better than what is being proposed.

InsuranceExpert said: I'm not a fan in general of UL other than GUL. However, the insurance fatcat analogy isn't correct. Interest rates are much lower thus performance is much lower. The Fatcats can't use artificially low rates. Artificially low rates will hurt a company. If interest rates go up, these rates will go up with them. Use logic on this one. If renewal rates are artificially low, what do healthy people do? Switch carriers. What do unhealthy people do? Stay put. Insurance companies can't do things that cause them to lose healthy people while being stuck with unhealthy people. Rates are low simply because interest rates have been low. There hasn't ever been a time that UL policies paid rates that were much different than prevailing interest rates.

As for EIUL, the insurance carriers could play games if they wanted to do so by changing calculation methods.

(EIUL is UL with a different method for determining interest. Long term, there is no reason to expect an EIUL to perform any better or worse than a traditional UL policy)

Actually, we have UL policies in our files from a decade ago, and even as interest rates have held, the renewal rates have declined. There is no increase in fixed ul interest renewal rates now then before. It's the name of the game. Companies know that some policyholders will switch, but for the vast majority, a drop in .25-1% is not going to make them go through the hassle of finding a new carrier. They don't use artificially low rates, they use artifically high rates and tail them down to realistic rates. On the EIUL scale, thats why you find a policy with disclosed moving parts and with a good track record and high liquidity. Companies are more inclined to stay honest and on track when they know a clients excess account is totally liquid as opposed to one with high surrenders.

On the EIUL side, here is a decent insurance agent based article on the product vs whole life: Producers Web In life, there are no true gurantees.

On the WL side with NWM, I reccomend asking an independant agent to find a similar efficent fixed UL policy with the same premium in a minimum face/max cash scenario and I will promise you that your cash values will be higher then a whole life policy. Do the same to a EIUL and the cash value will be magnified. If your agent dosent understand what max cash/minimum face is, find another agent. 40k per year for 8 years is 320k. This is not a decision to take with one agents opinion.

InsuranceExpert, I just went through a discussion of WL vs UL with my State Farm agent and he showed that the rate of return for holding a $1.0MM WL was only 0.5% higher than a $1.0MM UL based on illustrated values over a 35 year holding period...I think the premium flexibility the UL offers is worth more than extra 0.5% return. You say that the flexibility of the UL isn't valuable, but I think it is. Also, the COI of WL is not less than UL, the company forces the premium to be level on WL so you pay the same COI over a lifetime which is the equivalent of paying less COI on a UL in the beginning and more COI later. Thanks for your input.

dynamice said: InsuranceExpert said: I'm not a fan in general of UL other than GUL. However, the insurance fatcat analogy isn't correct. Interest rates are much lower thus performance is much lower. The Fatcats can't use artificially low rates. Artificially low rates will hurt a company. If interest rates go up, these rates will go up with them. Use logic on this one. If renewal rates are artificially low, what do healthy people do? Switch carriers. What do unhealthy people do? Stay put. Insurance companies can't do things that cause them to lose healthy people while being stuck with unhealthy people. Rates are low simply because interest rates have been low. There hasn't ever been a time that UL policies paid rates that were much different than prevailing interest rates.

As for EIUL, the insurance carriers could play games if they wanted to do so by changing calculation methods.

(EIUL is UL with a different method for determining interest. Long term, there is no reason to expect an EIUL to perform any better or worse than a traditional UL policy)

Actually, we have UL policies in our files from a decade ago, and even as interest rates have held, the renewal rates have declined. There is no increase in fixed ul interest renewal rates now then before. It's the name of the game. Companies know that some policyholders will switch, but for the vast majority, a drop in .25-1% is not going to make them go through the hassle of finding a new carrier. They don't use artificially low rates, they use artifically high rates and tail them down to realistic rates. On the EIUL scale, thats why you find a policy with disclosed moving parts and with a good track record and high liquidity. Companies are more inclined to stay honest and on track when they know a clients excess account is totally liquid as opposed to one with high surrenders.

On the EIUL side, here is a decent insurance agent based article on the product vs whole life: Producers Web In life, there are no true gurantees.

On the WL side with NWM, I reccomend asking an independant agent to find a similar efficent fixed UL policy with the same premium in a minimum face/max cash scenario and I will promise you that your cash values will be higher then a whole life policy. Do the same to a EIUL and the cash value will be magnified. If your agent dosent understand what max cash/minimum face is, find another agent. 40k per year for 8 years is 320k. This is not a decision to take with one agents opinion.


It's not that interest rates have dropped on the policy while interest rates in the economy have stayed steady. Rather, it is because the policy interest rates have lagged interest rates in the economy. When interest rates are going down, this is a positive. On the ride down, the policy's interest rate will generally be above the interest rates in the economy. The exact opposite will happen on the way back up. As the interest rates of the economy rise, the policy's interest rates will go up, but they will lag. If interest rates top out for a couple of years, we'll see policy's interest rates going up while the general interest rates staying the same.

There is no such thing as a company with a good EIUL track record. The product is too new. There is no way to know what a company is going to do with the moving parts in the future. There is nothing about EIUL that should lead one to the conclusion that there is something about this crediting method that will lead to any higher returns than a traditional UL policy.

You still have the same basic problems. 1)Companies are in business for one reason only and that is to make maximum profit. The profit in UL products don't go to the policyholders. It's not an accident that no mutual companies have EIUL products. Please correct me if I'm wrong. 2)The flexibility combined with human nature often (usually?) stops these products from being funded like they need to be funded. Years after purchase, nobody has any incentive to make sure that the product is funded properly. 3)The increasing cost of insurance combined with problem 2 means that removing money out of a policy in the later years greatly increases the chance for a lapsed policy.

matthewbowman7182 said: InsuranceExpert, I just went through a discussion of WL vs UL with my State Farm agent and he showed that the rate of return for holding a $1.0MM WL was only 0.5% higher than a $1.0MM UL based on illustrated values over a 35 year holding period...I think the premium flexibility the UL offers is worth more than extra 0.5% return. You say that the flexibility of the UL isn't valuable, but I think it is. Also, the COI of WL is not less than UL, the company forces the premium to be level on WL so you pay the same COI over a lifetime which is the equivalent of paying less COI on a UL in the beginning and more COI later. Thanks for your input.


You are making a good point. UL is priced based upon an annual increasing insurance costs. WL is priced based upon costs that are level for life making the initial cost more. Both of these costs are artificially high to protect the insurance company in case mortality is higher than expected. Here's what you are missing. What happens when mortality isn't higher than expected? With the UL policy, the company benefits. With WL, it creates dividends which go back to the policyholder.

So, ultimately what happens, with a UL policy, one pays for a cost of insurance that is significantly more than actual mortality costs. With a participating WL policy, one ultimately pays for actual mortality costs.

Are you looking at the cash surrender value or the death benefit? It is the death benefit that matters.

The flexibility is dangerous. The reason for this is that flexibility greatly increases the chance of lapse in the future. Lapsing a policy means, in hindsight, that you have had a mediocre long term conservative taxable investment.

Also, keep in mind that it is much more dangerous to remove money out of a UL policy in the later years than it is with a WL policy. What happens when you remove money from your policy 35 years from now? What are the insurance costs? Not enough money going into the policy in the early years (premium flexibility), combined with constantly increasing insurance costs, combined with trying to remove money from a policy in the later years is a recipe for disaster for the policy holder and a boon for the insurance company and its owners. Companies love UL.

Let me ask you a question. If you were buying a policy for 10 years, what type of policy would you buy? 20 years? 30 years? I hope that the respective answers would be 10 year level term, 20 year level term and 30 year level term respectively. Level term results in much cheaper rates. To stretch that out, if you are buying a product for above 30 years why would you switch and go with an annual renewable (costs increasing every year)term policy? That is exactly what you are doing with UL.

Not only is it annual renewable term product (ART), but it comes with the added negative. You have two choices. 1)Pay increasing term costs forever regardless of whether the insurance makes sense or 2)Stop paying insurance costs and turn your tax free money into taxable money.

ART is designed to be a short term product, but when you buy a UL, you are turning this into a long term product. This benefits the insurance company and not the insured.

Is Northwestern Mutual the best company for a participating life policy? They seem to pay the highest dividends but are they investing in more risky assets? State Farm preaches security and conservatism with investments. I am either going with State Farm of Northwestern Mutual.

scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?
One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently.... [snip]
Scott

InsuranceExpert said:
This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.
...
The interest rate on your policy has decreased because that is what has happened to interest rates in general. Are you still healthy? If so, my guess is that there is a better option for you. With the premium that you are paying, how long is the death benefit guaranteed at guaranteed rates?


To answer your questions
-- Yes, I am still healthy -- probably healthier than when I took out the UL pociy 5 years ago
-- "how long is the DB guaranteed for": my latest policy illustration shows the UL DB lasting til I am about 78 years of age:
"Based on guaranteed interest rates & cost of insurance:
Policy will remain in force thru: XX/XXXX (AGE: 78)"
I think this assumes I stop paying in premiums and let the policy live off the accumulated CV.

So what would my "better option" be? Since this was a no-load policy, I didn't lose a lot of money to commissions or costs. So it wouldn't be a hardship for me to switch if that turned out to be the way to go.
Thanks

InsuranceExpert said: missmatch said: I hate to put my personal stuff out there & hopefully I have eliminated most of my personal info from the quote but this is a quote that I received from a Northwestern Mutual rep (supposedly a reputable mutual company). Our life plans involve take a mid-life retirement for 10 yrs in about 8yrs (trust me you don't want to know) so the policy supposedly would pay us back $60k every other yr obviously assuming a 6% rate of return (again understanding that past performance is not a guarantee of future returns but there is a 4% min!). The rep also showed me how the company has always done well & even in tough times like right now is giving 6.5% rate of return. Besides the tax advantage he also mentioned that WL is guaranteed to give atleast a 4% rate by law. So what do you feel about this IE; B.S. or is this realistically possible? plus he wants me to put $40,540/yr right now for 8 yrs!!

Northwestern Mutual is a reputable company. There's nothing on the quote that is B.S. To correct a couple things that you are saying, this is based upon the company having a 6% dividend scale. That is not a 6% rate of return. The same can be said about the 4%. The 4% isn't law. It is what they guarantee, but, again, it's not a rate of return.

Things that I'm noticing from looking at the illustration:
1) On the top, it says that 6% is less than the current rate. That was accurate, but is no longer accurate. 6% is what their new dividend scale is paying.
2)I'd like to see the next page of the illustration.
3)You need a new agent. Notice that part of this policy is $750,000 of term insurance. You are paying $2782 for this and will pay this for 8 years and then drop it. Let's pretend that this cost doesn't increase every year. It's still going to be $22,000. You can get the same thing for under $300/year. $300 x 8 =$2400. $20,000 is being thrown down the gutter.
4)There are big drops in the death benefit. Is there something that is going to happen that will cause your family to need much less coverage in the future than now?
5)It would be easy to design something for you that should do better than what is being proposed.



This is why I think UL and WL are so dangerous and caveat emptor is the order of the day. Other than term insurance, which is easy to comparison shop and understand, UL and WL are opaque inventions not unlike derivatives, credit default swaps and other creations. That is, they are very difficult to understand even for educated and sophisticated people -- never mind a dummy like me. You need professional advice. And, figuring out whether the advice you receive is good, bad or indifferent is not easy to assess. In this case, IE is basically saying "your insurance agent is either incompetent or a crook" And that's an agent for NW Mutual, supposedly one of the most honorable, financial strong, upstanding white shoe insurance companies.

I looked at the projection that IE read immediately as not something good. I really couldn't tell if it was good or bad --- and that's the reason no salesperson was ever able to sell me WL or UL insurance, especially since I'd ask a lot of questions and many times get answers that didn't make a lot of sense or inspire confidence. But, many consumers are not as wary as I (and most FWs) are and all sorts of stuff gets sold. You really need a knowledgeable, trustworthy advisor. Not easy to find in a commission driven industry where the guy advising you to buy WL or UL and not term gets a ton of commissions from the WL or UL policies, but very little from selling you term.

This is why UL and WL --- and in my view the life insurance business generally is a racket. Term insurance is fine. I have lots of it because I have young kids. But, UL and WL are really investment products -- and sold as such.

There are two problems, one is question of public policy, the other is of more concern to FWs -- the opaqueness of the UL and WL products that the industry sells.

The public policy issue is simple. The tax breaks the insurance industry has wrangled for itself is what lets it sell their exotic UL and WL products. The insurance company is not really selling insurance with UL and WL, it is selling investment and estate planning financial products. That's certainly the way saleman have pitched the UL and WL stuff to me. The premiums are after-tax money, of course. But any interest or dividends on the premiums are not taxable -- so long as the policy holder keeps the policy in force and doesn't surrender it. With UL, premiums go into disclosed investments that you can pick but generally with high commissions (remember, you're paying the investment advisor plus the insurance company). With WL, your premiums are given to insurance company which invests them whereever it invests. You have to trust the company (they all tout their historic track records) which will guarantee a chump change investment return but strongly pitch you projections at supposed recent or overall historical levels. The tax break (and aggressive selling of life insurance) means that lots of people get sold WL and UL products, which are so dizzying in their variety (GUL, UL, variable UL, WL to name just a few) that you need professional advice to understand them. The effect on the US treasury is not good and the tax break has been long criticized, Bloomberg Article on This but is politically sacrosanct.

The insurance industry has become very good at creating clever products and doing things like selling combination term and UL or term and WL -- I've even heard of UL and WL sort of wrapped together. Some of these combinations are clever and make sense for the individual -- particularly high net worth individuals, but also some middle class working stiffs like me who watch what they spend. The UL and WL stuff almost never make sense for middle class consumers who haven't got their financial ducks in a row.

All of this is driven by the tax breaks and that's how it's been pitched to me by insurance salesmen. No one would buy UL or WL, i.e. these products would not exist were it not for the tax break -- I can give the insurance company my money to invest and I don't have to pay taxes on any gains or dividends as I otherwise would in a non-retirement account. I can borrow the investment gains and duck the tax, or put the tax gains in my pocket bit by bit and first dollars are treated as non-taxable return of my premiums (which were already taxed). That is, I can pay myself back or borrow back up to what I've invested with the insurance company -- but only up to the cash value, and it isn't worth doing until many years have passed, i.e. you've pumped lots of money into the deal.

But, the way they structure the WL and UL products, if you don't pay your premiums for X years (My number is 10 to 15 years), your WL or UL investment is a terrible investment by any standard -- you'll lose your shirt. This is a major aspect of both WL and UL -- one which IE agrees with, but which no salesman who has pitched me has ever stated or emphasized to me. Most FW can figure this out, but you'd be amazed how many consumers don't understand it.


Fundamentally, the second problem is how complicated and opaque the UL and WL products really are, particularly when they get combined into exotic stuff like what missmatch posted. IE to his credit identified the problem with the NW Mutual policy missmatch posted. But I sure didn't --- I don't have the time or inclination to study the insurance industry's products in detail, and that's what it takes and then some --- or finding an honest and knowledgeable agent who knows the insurance racket well and finds you a good product from a good company, assuming you are financially strong enough to commit to pay premiums for many years.


The life insurance industry created the opaqueness and it feasts off of it. It has also gotten very good at hiding the stuff that makes WL or UL unsuitable investments for the clear majority of Americans --- high commissions on the money you have invested in the form of premiums, fat fees, fat management salaries, etc. This industry is not alone, of course -- mutual funds have long played a similar game for example, which is why many financial advisors say invest directly in stocks. That's a discussion for another day. But, the mutual fund industry is a model of disclosure compared with the life insurance industry.

The UL and WL policies are the big profit center for life insurance companies -- in large part because so many of them (I've read estimates of 90% see link above), lapse because people can't or won't keep making the monthly or yearly payment year in, year out for at least the 10 to 15 years necessary for the investment to pay off. The life insurance industry is so shameless that I've even heard the argument that it's worthwhile to sell the UL and WL (in particular) policies because the annual premiums and high penalty for early cancellation keep people investing and having life insurance they otherwise wouldn't. Nice argument, not true in practice.

Anyway, for a minority of consumers, but maybe some FWs, WL or UL make sense because of the tax benefits and the games you can play (borrowing the money back out or taking money back out tax free) after the policy has been around 10 or 15 years, etc. But I don't see any way that any FW person can answer the UL versus WL question for his case or any case without professional advice.

My advice in dealing with the insurance racket is 1) find yourself a knowledgeable and honest salesman (may you have better luck than I've had); 2) get yourself a second or third opinion from other salespeople for other companies -- no matter what (this could include asking IE who is a frequent FW poster. IE repeats the slick talk of the insurance industry as well as anyone I've seen or heard and will never admit that the life insurance business is fundamentally a racket. But, IE is knowledgeable and straightforward in responding to questions and seems to know his stuff very well --- trust me, that's hard to find); and 3) when in doubt, walk away from the insurance salesman

matthewbowman7182 said: Is Northwestern Mutual the best company for a participating life policy? They seem to pay the highest dividends but are they investing in more risky assets? State Farm preaches security and conservatism with investments. I am either going with State Farm of Northwestern Mutual.

It surprised me many years ago when I first found out that State Farm had a good whole life policy. My concern with State Farm isn't so much the company, but the agent and the agent's relationship to the company. A State Farm agent can only sell State Farm products so he has no choice to push you towards State Farm products regardless of whether they are the best for you. This is true regardless of his ethics. It's simply that if something else is better, he won't know it.

Northwestern Mutual is also a very good company with a good whole life product. Although a Northwestern Mutual agent contractually is limited in their ability to sell other products, they usually, but not always, can still sell other products fairly easily. There are two concerns that I would have with Northwestern Mutual. The first is that only a Northwestern agent can sell Northwestern products. This is a real negative for you in terms of getting quality service if your agent decides to leave the company. My other concern would be with the fact that it often makes lots of sense to borrow money from the policy. Northwestern pays a lower dividend on money that is borrowed. This hurts the performance of policies with loans. Some other companies don't pay a lower dividend. I don't know what State Farm does in this regard.

Both companies are very conservative with their portfolios. In fact, all of the companies that sell participating whole life policies are very conservative with their portfolios. It's not an accident that the big sellers of whole life policies are in the top 3% of all insurance companies for company strength.

scottsd said: scottsd said: One scenario that seems to me tailor made for UL is to do a "pension max" type of deal...
[snip]
Any thoughts on that?
One thing I noticed in the 5 or so years I've owned the UL policy, is that the interest rate on my CV has been steadily declining, from about 5% (at start), to about 4.25% currently.... [snip]
Scott

InsuranceExpert said:
This makes lots of sense. One must run the numbers, but it is often a superior solution...
[snip]
The existence of a life insurance policy allows one to spend a higher % of their net worth in retirement.
...
The interest rate on your policy has decreased because that is what has happened to interest rates in general. Are you still healthy? If so, my guess is that there is a better option for you. With the premium that you are paying, how long is the death benefit guaranteed at guaranteed rates?


To answer your questions
-- Yes, I am still healthy -- probably healthier than when I took out the UL pociy 5 years ago
-- "how long is the DB guaranteed for": my latest policy illustration shows the UL DB lasting til I am about 78 years of age:
"Based on guaranteed interest rates & cost of insurance:
Policy will remain in force thru: XX/XXXX (AGE: 78)"
I think this assumes I stop paying in premiums and let the policy live off the accumulated CV.

So what would my "better option" be? Since this was a no-load policy, I didn't lose a lot of money to commissions or costs. So it wouldn't be a hardship for me to switch if that turned out to be the way to go.
Thanks


Usually the guarantees are assuming that you keep paying in a certain amount. If you are doing this for "pension max", you want to do it in such a way that the death benefit lasts as long as possible on a guaranteed basis.

The possible better way to go is to simply talk to a good insurance broker to see if based upon the cash in your policy and the current premium to see if someone else will guarantee the death benefit for a longer period of time.

There's really no such thing as a "no-load" policy. A load is a sales charge. There are always selling expenses even if no commission is paid. Technically these policies are really "low-load". As I've explained several times, low-load policies almost always perform worse than fully loaded ones. The one advantage of low-load policies is that they usually have very low surrender charges.

Assuming you are still healthy, it would come as a big surprise to me if you couldn't do better for yourself.

InsuranceExpert said: rcmkensington said: InsuranceExpert said:
A WL policy only makes sense if it is going to be kept forever. Otherwise, it doesn't make sense.
A policy doesn't have to have a small cash surrender value in the early years. There are high early cash value policies. These policies have a cash surrender value that is close to the premiums paid in the early years. These types of policies are usually used in business settings when the business needs the CSV as an asset on their balance sheet. Long term, they don't perform quite as well.


You've said this several times. Why in the world would a WL policy with a high surrender value (which means much lower commissions up front to the salesman and more money goes toward the investment (oops, I mean cash value) perform more poorly in the long run than a "normal" WL policy where like 90% of the first year's premium goes in commission to the salesman. In the financial world, the more money you have working for you early on, the better the long term return and investment buildup --- which is why financial advisors say start investing at a young age.

rcmkensington, that's a lot of good thoughts in your post and I can agree with lots of it.

It is hard for the public to understand lots of this. I find much of that problem to be with the anti-WL crowd. If you spend any time reading my posts, it should, hopefully, come across that much of what I'm doing is posting things that are anti- the anti-WL posts as opposed to having a pro-WL agenda. The majority of what is written about WL insurance is incorrect and then it starts to get parroted by lots of other people so there is so much misinformation.

"Buy Term and Invest the Difference" is a sales pitch to buy term insurance. It was designed to get people to drop their WL policies. In the past, almost all life insurance was whole life. This is one of the few countries in which significant amounts of term insurance is sold.

WL is a product that works very well, but one must plan on keeping it for their whole life or it's not good.

My belief is that almost every adult who has someone financially depending on them or will in the future should own term insurance. Some of these people should own WL insurance also. If the WL is kept for life and is replacing conservative money, the person will ultimately be in better financial shape.

By the way, the insurance companies are pretty good with being honest with their illustrations. Most illustrations are done with their current dividend scale. This shows what will happen if nothing ever changes. It was refreshing in the 2nd half of this year to see companies force their agents to use a lower dividend scale because they were pretty sure that they would be lowering their dividend scale this year.

If the insurance business is a racket, it is a damn fine one for both the people who can inexpensively take care of the families with cheap term insurance and for the owners of the company. With a participating WL policy, it is the policyholders who are the owners of the company.

Best advice: Don't trust the insurance salesman. (Not a knock on insurance salesmen. I'd say the same thing about the doctor, lawyer, CPA, used car salesman.) Always get a second opinion. A second set of eyes is a good thing.

rcmkensington said: InsuranceExpert said: rcmkensington said: InsuranceExpert said:
A WL policy only makes sense if it is going to be kept forever. Otherwise, it doesn't make sense.
A policy doesn't have to have a small cash surrender value in the early years. There are high early cash value policies. These policies have a cash surrender value that is close to the premiums paid in the early years. These types of policies are usually used in business settings when the business needs the CSV as an asset on their balance sheet. Long term, they don't perform quite as well.


You've said this several times. Why in the world would a WL policy with a high surrender value (which means much lower commissions up front to the salesman and more money goes toward the investment (oops, I mean cash value) perform more poorly in the long run than a "normal" WL policy where like 90% of the first year's premium goes in commission to the salesman. In the financial world, the more money you have working for you early on, the better the long term return and investment buildup --- which is why financial advisors say start investing at a young age.


Life insurance isn't an investment, so when we start comparing it to one, the results may not make sense. The specific answer to your question is that by not paying a high up-front commission to the salesman, the insurance company is not lowering their expenses. Instead of paying a high up-front commission, they are simply paying a lower up front commission and more on an annual basis. In order to not pay a high front end commission, to compensate the salesman, the total commissions are a little bit higher. (The difference in long term performance is very slight.)

Again, let's remember that the policies that don't pay any commissions tend to not be competitive at all. Instead of paying someone a big upfront commission, they have to pay someone salary and benefits year after year.

The reason why a WL policy needs to be kept forever is that the true value is the death benefit. Cash surrender values were only created so that people would not get screwed if they couldn't keep a policy forever.

You know for a while I have been biting my lip and on the whole giving you, IE, green for a lot of good posts in other threads, but you had to pull me out and waste what is sure to be several hours of my next few days.

This time I'm glad that I have others beating me to some of the details that you continually decide to miss, and than misrepresent. Some posts by mathewbowman and dynamice have been spot on, and together they have mentioned some of the most important points I've brought up to IE.

I intend to keep my posts narrow to specific issues so that I don't end up wasting substantial time arguing over semantics.

First, matthewbowman7182 said: Also, the COI of WL is not less than UL, the company forces the premium to be level on WL so you pay the same COI over a lifetime which is the equivalent of paying less COI on a UL in the beginning and more COI later. Thanks for your input.
This is absolutely accurate, and a point that I have brought up to IE many times, but he always passes by it. Watch as he doesn't address it again. The fact is that insurance expenses has bulk discounts just like anything else. IE wants to give off the impression that the UL COI is the exact same thing as Annual Renewable Term elsewhere in the market. That is false. Annually Renewable term is much higher because of the fact that it has more expenses built into each of the premiums and no bulk discount. Matthew is correct because the discount in all permanent policies are pretty close to each other. It is just that UL decides to make COI the actual costs year over year(using the permanent policy discount), and WL uses a present value of all future increases in COI and charges that flat amount over the life of the contract. Here's the point COI is not cheaper in either UL or WL its about the same just applied at different times(that is using a present value model as money in the future is worth less than it is today). Personally I'd prefer the adjusting COI to the fixed COI. Why? Because A) I get to rack up more investment performance outside or inside a policy to better cover future COI costs than using a fixed rate model, B) (more importantly) if I decide to exchange the policy for another one(what is called a 1035 exchange) I haven't over payed for COI in my initial years.

dynamice said: This is the importance of finding an efficent passthrough UL like a well structured equity indexed UL. There is alot of garbage out there, but there are a few stellar ones with low fees, full disclosure and good cap rates. That way, your interest rate is true market, and not determined by a insurance fatcat. As for public information, unfortunately, that is private data and not publicly shared. There was a great article by the National Underwriter about the true rates of return on whole life though. Google it. The average WL paid out close to 3-4% even though they illustrate 7-8% with dividends.
With exception of the "fatcat" statements(lower interest under traditional UL is because it is conservatively invested in bonds which makes them give out comparable to a bond fund with higher fees taken out, I do acknowledge that a 25 basis point reduction for profit is possible), Dynamice you are absolutely correct on this statement. Why? A) There is full disclosure on how interest is computed on these policies. Granted they can be complicated, but a relatively smart person in a half an hour could pretty well understand how they work, and that is better than what you get from any other permanent life insurance product(I.E you ultimately don't get transparency on the interest rates you are credited). B) That these products lead to change in investment that the insurance company makes on behalf of the client. While WL and traditional UL goes to bond funds, IUL directs a substantial amount of the money to long term(1 year) index call options and small portion to bonds to fund the guarantee and floor. How do I know this, a few of my mentors were actuary's that initially designed these products. C) IUL can guarantee wash loans that is that the amount credited to the policy that year will be the interest rate charged on the loan. That means no losses on borrowed money during the bad times and no arbitrage on borrowed money during good times. So if you get credited 9% your interest rate is 9%, if the market tanks and you get credited 0% you get charged an interest rate of 0% on borrowed money. Traditional UL and WL always run a negative on your borrowed money. Example if you are earning 5% you will pay like 6% interest that means that you are losing 1% on borrowed money. Money borrowed at a wash equals Roth like distribution, money borrowed at a 1% loss Roth distribution with 1% rolling interest.

Now I have a couple of questions for IE that if he can answer I'll shut up forever about this subject and give him green for WL comments forever.

First question, how would it be possible for WL to return higher than the underlying assets they hold? WL is based on holding bonds and expenses are taken out of the returns of those bonds, and then some of them given back as dividends. You can't say that profits can lead to a higher return than underlying assets in the general fund. Those profits are generated from a spread between those underlying assets and the returns the company pays out. Read a balance sheet earnings make up a tiny portion of revenue(policyholders) at most you could move everybody's return by 50 basis points. Think about credit unions once, do they offer better rates than for profit banks? Note: I do fully understand that tax advantages amp the equivalent return, but WL agents including IE project actual returns higher than the underlying assets used to support them.

Second question, how can you say that policies based on bond investments are going to outperform ones based on equities investments? You could make that argument over a short period of time, but over the long term it appears history has proven that argument wrong.

Full disclosure: I'm in securities and Life. Before the crash our firm wrote a lot of IUL, after the crash we stopped as we thought that it was more beneficial to clients to be get returns out of the market as we focused on securities. (both right calls) Now the firm is writing some life products again, but more than I would like it to(inflation risk), as many clients can't get over their fears of market risk.

Let me guess, IE you probably tried to sell more WL from the beginning of the year until now didn't you? Way to really provide added value to your clients. How much did those poor ba$tard$ miss out on again?

dynamice, I read the article you linked to and its a good one. One little note though, his product selection I don't feel is the best out there. While an inflationary market could lead to a relatively low annual point to point returns in the coming years, over the long term higher beta is the norm. I delivered this exact presentation to a lot of big agents. Many of them had been using an assumed computational fluke to convince themselves that a similar product (10% cap and 150% par rate) was the best out there. I rather easily showed them that instead cap was king (best being 17%). Its the natural beta in the markets and if you look the historical annualized returns on any index you will see what I mean.

This is absolutely accurate, and a point that I have brought up to IE many times, but he always passes by it. Watch as he doesn't address it again. The fact is that insurance expenses has bulk discounts just like anything else. IE wants to give off the impression that the UL COI is the exact same thing as Annual Renewable Term elsewhere in the market. That is false. Annually Renewable term is much higher because of the fact that it has more expenses built into each of the premiums and no bulk discount. Matthew is correct because the discount in all permanent policies are pretty close to each other. It is just that UL decides to make COI the actual costs year over year(using the permanent policy discount), and WL uses a present value of all future increases in COI and charges that flat amount over the life of the contract. Here's the point COI is not cheaper in either UL or WL its about the same just applied at different times(that is using a present value model as money in the future is worth less than it is today). Personally I'd prefer the adjusting COI to the fixed COI. Why? Because A) I get to rack up more investment performance outside or inside a policy to better cover future COI costs than using a fixed rate model, B) (more importantly) if I decide to exchange the policy for another one(what is called a 1035 exchange) I haven't over payed for COI in my initial years.

Quite frankly, I have no idea what is meant by "bulk discounts". Who is getting a bulk discount? A person buying term insurance doesn't get a bulk discount and the person buying UL is given some sort of discount?

Anyway, you are misinterpreting what I have said, but I'll cut you some slack because based upon my words, I can see the ambiguity. What I always say is that UL combines overpriced ART (annually renewable term insurance) with a side fund. I am not calling the ART of UL more expensive than ART sold separately. I am saying that all ART is overpriced for a long term insurance need. In other words, if Joe buys a $1,000,000 of 30 year level term and Jim buys a UL policy, over those 30 years, Jim is going to probably pay insurance costs that triple (or substantially more) what Joe is paying. Additionally, Jim may be paying a sales load on every premium. If Joe is really healthy, he'll pay $20,100 in insurance costs to keep that coverage for 30 years. I bet that Jim is going to pay over $60,000. That fits my definition of "overpriced". Not only that, but Jim is stuck always having to pay for coverage because if he drops the coverage, the cash surrender value becomes taxable.

You are correct that an increasing COI would be equal to a level COI. However, what is missing from the equation is dividends. Both products must be priced so that if mortality is higher than assumed, the insurance company will still be ok. What happens when mortality is not higher than they assume? With UL, that is profit for the insurance company which will lead to happy stockholders. With a participating WL policy, that is profit for the insurance company which goes back to the policyholders. So, we really aren't comparing an increasing COI to a level COI. We are comparing an increasing COI to actual mortality. Actual mortality should always be lower than the COI. It it isn't, the company will increase the COI.

Now I have a couple of questions for IE that if he can answer I'll shut up forever about this subject and give him green for WL comments forever.

First question, how would it be possible for WL to return higher than the underlying assets they hold? WL is based on holding bonds and expenses are taken out of the returns of those bonds, and then some of them given back as dividends. You can't say that profits can lead to a higher return than underlying assets in the general fund. Those profits are generated from a spread between those underlying assets and the returns the company pays out. Read a balance sheet earnings make up a tiny portion of revenue(policyholders) at most you could move everybody's return by 50 basis points. Think about credit unions once, do they offer better rates than for profit banks? Note: I do fully understand that tax advantages amp the equivalent return, but WL agents including IE project actual returns higher than the underlying assets used to support them.

Second question, how can you say that policies based on bond investments are going to outperform ones based on equities investments? You could make that argument over a short period of time, but over the long term it appears history has proven that argument wrong.


Dshibb, I hope that you are a man of your word. Nobody has said that WL will pay more than their underlying portfolio. As a whole, it won't. However, it will for people who die before life expectancy. It will also come pretty darn close for the people who live to life expectancy and beyond and keep their policies in force. For all of those people who cashed in policies early or bought term coverage and lived, it certainly didn't give a rate of return anywhere close to the underlying portfolio.

As for policies based upon bond investments beating policies based upon equity investments, I would expect, if the fees were the same and we are talking the same type of policy, I would expect long term, the one on equity investments to outperform. For instance, a VUL would be expected to beat a UL long term if all of the expenses were the same. However, you are probably talking about an EIUL vs. a UL. My argument quite simply is that an EIUL is not based upon equity returns. An EIUL policy is based upon changes in an index. A change in an index is not an equity. An index fund is an equity. A change in an index is not an equity. An EIUL might outperform a traditional UL and it might underperform. We don't know. If you think that you know, you are fooling yourself. It's not an accident that only companies that are in business to make money for their stockholders sell these products.

Full disclosure: I'm in securities and Life. Before the crash our firm wrote a lot of IUL, after the crash we stopped as we thought that it was more beneficial to clients to be get returns out of the market as we focused on securities. (both right calls) Now the firm is writing some life products again, but more than I would like it to(inflation risk), as many clients can't get over their fears of market risk.

Let me guess, IE you probably tried to sell more WL from the beginning of the year until now didn't you? Way to really provide added value to your clients. How much did those poor ba$tard$ miss out on again?



Dshibb, I really wish that you didn't post this. I didn't want to have to defend myself from personal attacks and I don't have any great desire to attack you. However, once again you are posting like a college kid with no real world experience.

I've been doing this for 20 years. I have never had a client make a long term insurance decision based upon guesses on what would happen in the market short term. It sounds absolutely assanine that your dad's firm would sell or not sell life insurance based upon guesses (or their stunning brilliance)about the short term direction of the stock market.

My short term opinion of the market will always have zero influence on long term insurance decisions. Money that goes into life insurance policies is not money that would otherwise be in the market.

May you learn FOR your clients and not ON your clients.

No I am saying that expenses charged by an insurance company amount to less annually(using a present value method) over longer contracts than shorter contracts.(Bulk discount is a term I used to make it seem simpler.

20 year term has a better expense breakdown than 2 10 year contracts, 30 has better than 2 15 year contracts and permanent insurance has better expense breakdown over the life of the contract than a collection of term contracts until life expectancy. ART has the worst expense breakdown because its held over the shortest time frame(for example: sales expenses are taken out much faster and if held longer much of those expenses will just go to the insurance company's bottom line instead of making longer held ART cheaper). Increasing COI is not the same as ART. Granted ART is also based on increasing COI, but it constitutes much higher expense break downs across the board than a permanent product that relies on increasing COI. ART is increasing COI plus a more expensive short term amortization of expenses, UL is just increasing COI with a long term amortization of other expenses---huge difference. ART is a bad deal, but that doesn't make increasing COI a bad deal, they aren't the same thing.

"In other words, if Joe buys a $1,000,000 of 30 year level term and Jim buys a UL policy, over those 30 years, Jim is going to probably pay insurance costs that triple (or substantially more) what Joe is paying."
While this statement is correct. Your causality is false. He isn't paying more because of increasing COI that is actually a force for good in this cancellation. He is paying more because his premiums are a flat amount designed to carry him past life expectancy. So they are higher. The fact that he has increasing COI means that he didn't way, way over pay over those 30 years and therefor his cancellation wont be as big of a punishment if he did that for whole life.

"You are correct that an increasing COI would be equal to a level COI."
I appreciate this admission. And dividends don't matter if you had a whole life policy with increasing COI you would earn more dividends during the early years instead of just during the later years. The net affect would be a wash in regards to this issue.

And please drop the whole profits crap. It doesn't really matter, the profit margin is usually insignificant. Stock companies are at negative profit margins right now under your theory that would mean that those insurance companies have done a better job pricing there products competitively to the consumer than the mutuals. Again credit unions don't offer substantively better deals than for profit banks why because that question doesn't matter. There is only two things that matter to performance, value, and pricing. One is efficiency and the second is scale.

"Nobody has said that WL will pay more than their underlying portfolio."
You and others have quoted returns in the past that have exceeded average returns under a bond portfolio. How is that possible if that is what the conservative mutual insurance company is holding in its general fund on behalf of its policy holders?

Again I remind you that this discussion that we have in past is based on life expectancy because that is how the insurance company is pricing products(and you stand the same chance of dying earlier or later).

"My argument quite simply is that an EIUL is not based upon equity returns."
Yes it is. Okay when you buy a mutual fund, etf, ADR, etc. you don't hold the underlying assets in the portfolio. They hold them on behalf of you. When you purchase a IUL contract they buy 1 year call options on behalf of you. The crediting method is based on equities and will payout according to only positive equity returns adjusted every year. If you want almost the exact same performance as IUL just buy a small portion of bonds and 1 year call options on an index. The cash value increase will be the about the same as the performance of that investment strategy, the only difference is the change in the tax status of the investment strategy.

Insurance Expert, you are misconstruing all the elements that would lead us to stop selling IUL during 2009.

1) Peoples situation: Most people had a lot of there assets tied up in stock and lost a substantial amount of money. The problem comes when you try to convince them to sell of portions of stock to fund a new insurance vehicle. I'm sure that you had people do this and we didn't want to unless the client was adamant about it.

2) Consider the product. IUL is essentially a Roth like vehicle holding 1 year index call options and some bonds and a cap and participation rate to fund the floor. It's a tax planning vehicle towards self insurance. Now either your going to have clients participate in the actual market at no cap or in this with a cap. Under that scenario its a no brainer if you take into account the next piece.

3) The economic environment: The actual economic downside risk was becoming less of a problem. Contrary to what a lot of people think natural bottoms in the market can exist because if the cash on hand starts to dwarf stock prices the company or the third party will buy up the stock providing price stability. With limited natural downside risk the decision to not subject clients to a cap on there annual return is a good one.

Pointing these things out are what a financial adviser not an insurance salesman is supposed to do. During most of 2009 the insurance products sold were primarily term insurance and we recommended permanent insurance only at a later time. Since September we are becoming more open to showing other techniques like Indexed products in a more positive light. There is some disagreement though between us as I have been more adamant about using more flexible alternatives than indexed products to cover downside risk.

dshibb said: No I am saying that expenses charged by an insurance company amount to less annually(using a present value method) over longer contracts than shorter contracts.(Bulk discount is a term I used to make it seem simpler.

20 year term has a better expense breakdown than 2 10 year contracts, 30 has better than 2 15 year contracts and permanent insurance has better expense breakdown over the life of the contract than a collection of term contracts until life expectancy. ART has the worst expense breakdown because its held over the shortest time frame(for example: sales expenses are taken out much faster and if held longer much of those expenses will just go to the insurance company's bottom line instead of making longer held ART cheaper). Increasing COI is not the same as ART. Granted ART is also based on increasing COI, but it constitutes much higher expense break downs across the board than a permanent product that relies on increasing COI. ART is increasing COI plus a more expensive short term amortization of expenses, UL is just increasing COI with a long term amortization of other expenses---huge difference. ART is a bad deal, but that doesn't make increasing COI a bad deal, they aren't the same thing.

"In other words, if Joe buys a $1,000,000 of 30 year level term and Jim buys a UL policy, over those 30 years, Jim is going to probably pay insurance costs that triple (or substantially more) what Joe is paying."
While this statement is correct. Your causality is false. He isn't paying more because of increasing COI that is actually a force for good in this cancellation. He is paying more because his premiums are a flat amount designed to carry him past life expectancy. So they are higher. The fact that he has increasing COI means that he didn't way, way over pay over those 30 years and therefor his cancellation wont be as big of a punishment if he did that for whole life.

"You are correct that an increasing COI would be equal to a level COI."
I appreciate this admission. And dividends don't matter if you had a whole life policy with increasing COI you would earn more dividends during the early years instead of just during the later years. The net affect would be a wash in regards to this issue.

And please drop the whole profits crap. It doesn't really matter, the profit margin is usually insignificant. Stock companies are at negative profit margins right now under your theory that would mean that those insurance companies have done a better job pricing there products competitively to the consumer than the mutuals. Again credit unions don't offer substantively better deals than for profit banks why because that question doesn't matter. There is only two things that matter to performance, value, and pricing. One is efficiency and the second is scale.


Dshibb, conversations with you are not worth the time. A little bit of knowledge is dangerous. You are agreeing that the COI is much more than someone will pay in a term policy, yet somehow, this is a good deal.

Dividends do matter. You are trying to say that dividends don't matter because a WL policy would still pay them if they had increasing mortality charges. We're comparing a WL policy in which dividends are paid to a UL policy that must overcharge for insurance.

It doesn't matter if the stock companies are losing money now. It is long term that matters. If they are losing money long term, they don't have a viable business model. If they make money long term, the policyholders don't benefit. Either way, it's a losing proposition for the policyholders.

dshibb said: "Nobody has said that WL will pay more than their underlying portfolio."
You and others have quoted returns in the past that have exceeded average returns under a bond portfolio. How is that possible if that is what the conservative mutual insurance company is holding in its general fund on behalf of its policy holders?

Again I remind you that this discussion that we have in past is based on life expectancy because that is how the insurance company is pricing products(and you stand the same chance of dying earlier or later).

"My argument quite simply is that an EIUL is not based upon equity returns."
Yes it is. Okay when you buy a mutual fund, etf, ADR, etc. you don't hold the underlying assets in the portfolio. They hold them on behalf of you. When you purchase a IUL contract they buy 1 year call options on behalf of you. The crediting method is based on equities and will payout according to only positive equity returns adjusted every year. If you want almost the exact same performance as IUL just buy a small portion of bonds and 1 year call options on an index. The cash value increase will be the about the same as the performance of that investment strategy, the only difference is the change in the tax status of the investment strategy.


Nobody has quoted long term returns that are higher than what is being earned in the general account of the insurance company.

Don't confuse the insurance company's hedging strategy with what the insured is getting. The insured is getting credited based upon the change in the index. Caps, etc. can be changed. We don't know what will happen long term. Look at the contract that the insured buys. Last that I checked, it is a contract. Nowhere does it say that the client is getting call options and bonds. They are being credited based upon a change in an index and a change in an index is not an equity. If this would give more money to the insured without more risk, wouldn't it make sense for the insurance company to invest lots of their money in this way? They don't because it may lead to higher returns and may lead to lower returns.

dshibb said: Insurance Expert, you are misconstruing all the elements that would lead us to stop selling IUL during 2009.

1) Peoples situation: Most people had a lot of there assets tied up in stock and lost a substantial amount of money. The problem comes when you try to convince them to sell of portions of stock to fund a new insurance vehicle. I'm sure that you had people do this and we didn't want to unless the client was adamant about it.

2) Consider the product. IUL is essentially a Roth like vehicle holding 1 year index call options and some bonds and a cap and participation rate to fund the floor. It's a tax planning vehicle towards self insurance. Now either your going to have clients participate in the actual market at no cap or in this with a cap. Under that scenario its a no brainer if you take into account the next piece.

3) The economic environment: The actual economic downside risk was becoming less of a problem. Contrary to what a lot of people think natural bottoms in the market can exist because if the cash on hand starts to dwarf stock prices the company or the third party will buy up the stock providing price stability. With limited natural downside risk the decision to not subject clients to a cap on there annual return is a good one.

Pointing these things out are what a financial adviser not an insurance salesman is supposed to do. During most of 2009 the insurance products sold were primarily term insurance and we recommended permanent insurance only at a later time. Since September we are becoming more open to showing other techniques like Indexed products in a more positive light. There is some disagreement though between us as I have been more adamant about using more flexible alternatives than indexed products to cover downside risk.


I sure hope that when you aren't doing anonymous postings that you don't say things like "IUL is essentially a Roth Like Vehicle..."

You are extremely dangerous. It's a Roth Like Vehicle if Roth IRAs came with huge insurance expenses and were tax deferred instead of tax free.

"You are agreeing that the COI is much more than someone will pay in a term policy, yet somehow, this is a good deal."
No I'm not. Its a comparison of apples and oranges. What I am saying is that a permanent policy held for the purposes of temporary coverage is a bad idea regardless, but its not do to how COI is expensed. It is because it is a permanent product. What I'm saying is that flat COI in WL doesn't provide any extra value to rising COI in UL. If anything the rising COI in UL is better because of flexibility in 1035 exchanges.

There is no overcharge for insurance. That's the whole point. Its just a different way of applying it. what I said in that regard is that if you had 2 whole life policies that paid out the same dividend rates over time. And WL A had increasing COI and WL B had flat COI performance would be the same at life expectancy. WL A would perform better if you died, surrendered, or exchanged before life expectancy and WL B would perform better if you died, surrendered, or exchanged after life expectancy.


Its not a losing proposition if the overall profit margin isn't that high which is true. Stock companies price things almost the exact same as non profit or mutual companies, the only difference is that stock companies have access to the capital markets to expand and distribute fixed costs better than those non profit companies.

dshibb said: "You are agreeing that the COI is much more than someone will pay in a term policy, yet somehow, this is a good deal."
No I'm not. Its a comparison of apples and oranges. What I am saying is that a permanent policy held for the purposes of temporary coverage is a bad idea regardless, but its not do to how COI is expensed. It is because it is a permanent product. What I'm saying is that flat COI in WL doesn't provide any extra value to rising COI in UL. If anything the rising COI in UL is better because of flexibility in 1035 exchanges.

There is no overcharge for insurance. That's the whole point. Its just a different way of applying it. what I said in that regard is that if you had 2 whole life policies that paid out the same dividend rates over time. And WL A had increasing COI and WL B had flat COI performance would be the same at life expectancy. WL A would perform better if you died, surrendered, or exchanged before life expectancy and WL B would perform better if you died, surrendered, or exchanged after life expectancy.


Its not a losing proposition if the overall profit margin isn't that high which is true. Stock companies price things almost the exact same as non profit or mutual companies, the only difference is that stock companies have access to the capital markets to expand and distribute fixed costs better than those non profit companies.


Ok, dshibb, there is no overcharge for insurance. The insured would just pay 3x as much over a 30 year period + admin costs + policy fees + sales load + possibly M&E, but there is no overcharge. You win. For the life of me, I can't figure out how someone would be better off with this than buying term insurance an investing separately. Oops, nevermind, I just figured it out. "IUL is like a Roth IRA."

Stock companies do price things the same way as mutual companies. The difference is that they don't pay dividends to the policy holders. A stock company's job is to make money from the policy holders so that stock holders can earn a profit.

You are correct that it is a crediting strategy, but based on performance of equities. You are arguing semantics. The purchase of one of those contracts leads to a change in the companies "hedging strategies". I.e. they are only purchasing enough of these instruments to cover the contracts that they have outstanding. They are not purchasing them for their fixed accounts because they don't correlate with those policies. In the event that they bought call options to cover a bunch of bond like contracts they could receive no return that year from the call options, and be forced pay out a the bond return which was higher. If the going rate for bonds is 6% and the guaranteed was 4%, they could mess up there risk pool by only giving out the 4% and even that would cause losses and if they gave out the 6% they might not make it. That is why they hold assets that correlate with the contracts they put out. But historically LEAP options return less than to equal to holding equities and more than holding bonds.

I can say something a long the lines of, "Legally I'm supposed to point out to you that IUL is an insurance product and not intended to be used as an investment vehicle. But, it has certain qualities similar to investment products..." I would then explain it using similarities and differences to Roth as needed.

But lets just be frank. A Roth is a vehicle that uses after tax dollars, has tax deferred growth, and can be withdrawn tax free. An IUL contract uses after tax dollars, has tax deferred growth, and can have basis withdrawn tax free and have a wash loan that essentially is monetarily no different than a tax free withdrawal. A wash loan is called a loan as nothing more than an accounting gimmick to the IRS. And that is something I don't want to be saying on this forum because the only thing that truly scares people in this industry is a change in the tax laws in reference to max non-mec funded policy loans.

I acknowledge that there could be changes in the moving parts. And I'll admit this is another smaller reason why we backed off in 09. Option prices spiked to insane amounts and we started hearing from some people that the moving parts could change. Well, they didn't. The terms of the contracts barely moved during that probably the highest priced option period in history. Also, the policies are still pretty liquid. If one did change there moving parts, you could just 1035 into another policy, or withdraw/loan out almost all of it and use of one of the new free riders to change the terms of contract to a GUL with an extremely low net DB.

You are comparing premium cost of a 30 year term to a permanent policy. I seriously wonder about all that knowledge and experience you have in the industry.

What I'm saying is dddddduuuuuuuhhhhhh the 30yr term is going to be cheaper. Please learn to read as I've tried to say this multiple times. And I've tried to explain that it isn't what we are arguing about. What I am saying is that if you had someone that had a life expectancy of 90 and he was 30 and he had the option of buying 2 30 year policies back to back(and more term if he lived longer) or 1 permanent policy which strategy do you think would be cheaper????? The difference between these strategies is what could be construed as a bulk discount.



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