Real price of WL insurance?

[Dave020]

"It is not exactly deemed "take it to the bank financial advice" on one of these forums"

Bingo.

I guess maybe rather than imply some mystical behind the curtain act.. The first question to Carol should be "what would you like your insurance to do for you and how long do you feel you'll need it?"

I think she was clear that it is income protection for the kids and to cover a future mortgage that she is saving for.

I have not said anything about she should have A over B. IN fact, if you go back to my post you should note several times where I mention there are more than "two choices", because there are more than two. Has she been made aware of that?

To me, having been in the life insurance industry with two major players, this seems a truly inappropriate product for the situation, period. $3500 per year as she is a single mom supporing two teenagers, funding retirement through two vehicles and trying to save for a home purchase, when she can probably insure with level term at 2% of that price. Convertible term life insurance will provide her the ability to protect, continue on with her savings, budget and retirement planning, and save $$ properly for a home purchase. Later, if she wants she can convert some or all of it to permanent insurance as her budget allows.

On a side note if permanent life is such a bad choice, could one of you experts explain the need for the creation of the MEC? If wl was such crap, why did the IRS expend the time and energy and money to create this tax law? Why would they need to put this restriction in place for a bad investment? I mean is that the role of the IRS?

Sure, happy to! IRS does not want those with the capability to overfund permanent insurance contracts to do so with impunity as those life insurance contracts are bulletproof from creditors, ex-spouses, lawsuits and, most of all, the IRS. IRS cannot attach a lien on a life insurance contract or its CSV. Without MEC rules, any yahoo (especially a rich one) could slam major $$ into one of these and create an unattachable asset. It would, without MEC, become the perfect tax shelter.

"If you've been around a while you'll know it's not what you earn, it's what you get to keep. I own different investments qualified and non qualified, real estate and whole life. Whole life is the only one I don't really worry about. It's not an S&P fund or tech stock. It's simply a AAA bond fund that earns a conservative rate of return and doesn't go "backwards". It's a low risk investment/protection that allows me to invest more aggressively in other areas. It's part of the big picture.

True, however the picture she laid out in this thread is not one where she needs to further diversify her positions, at least at this time. At this time Carol said she is interested in insuring a risk, cutting her expenses at home and saving for a house all while currently funding 2 retirement plans. There is no way, in this situation, anything other than lowest cost quality coverage is appropriate.

Now I don't know if it is or isn't a solution for Carol as I don't know Carol yet. I may understand her situation, but I need to know more about her and more importantly her understanding of risk to start whipping out "the solution" (as if they're were only one anyway guys... c'mon)

Risk is irrelevant in this situation. She's not looking for an investment or long-term savings vehicle here, just pure protection in case.

 

[Newby]

Neither term or whole-life insurance are investments.

Carol should buy the minimal amount that will fit her needs.

First she needs to figure out how much social security would pay to her children if she died. Then how much more would she need to insure so they have X amount of money until they reach around age 25.

Unlike people who need to depend on the income for the rest of their life and not eat up the principle, they are just starting their working years (at age 25) where they will earn income for the rest of their lives. So they CAN eat up the principle as this is just an emergency fund.

So the way I would arrive at the solution for Carol is:

1. Determine how much they will need each year if she dies tomorrow and she wants them protected until they reach age 25 (or what ever age she determines is correct.)

2. Subtract the amount social security would pay the kids.

3. Of the amount that is left, how much coverage will she need if the money is invested at 4% (or whatever Carol agrees is a worst case interest rate) and the principle and interest are used up when the youngest child (both are teenagers now) reaches age 25.

That is how much insurance Carol NEEDS. Her other want is insurance to protect a mortgage which doesn't even exist yet. That's a want, not a need.

Carol can probably get by with a pretty small term life policy. I would quote her that from the cheapest company available and also quote additional coverage to give her an option.

Then I would also quote her the price of a UL policy (guaranteed to age 100) and a regular participating whole-life.

I would rather see someone buy the UL or whole-life for the correct amount than see them over-purchase a larger than needed term policy. But I would much rather have them understand ALL their options and make their own choices.

Her first question was if the life insurance company "keeps your cash value" on whole-life when you die. I would make sure she understands they do not.

I would explain it this way:
With whole-life insurance, if you buy a $100,000 policy, you are insured on day one for $100,000. But as the years go by and you build cash value, the amount you are insured for reduces and you are self-insuring for the balance with your cash value. By the time you reach age 100 you actually have no insurance and are fully self-insured with your own cash value.

You can do the same thing with term insurance and side investments as long as you DO THE INVESTMENTS. And get rid of the term coverage as soon as you don't need it any more. The mistake people make with term is they see it as a big lottery ticket and they want to keep playing and they end up paying too much when they get older.

If you know you are going to keep purchasing the term or converting it to whole-life down the road, you are better off buying whole-life or UL from day one. Or a combination of term and whole-life.

People's personalities and the way they feel about money play into the equation. If they can't walk-away from the term policy when it is time to, they may have regrets that they chose it.

 

[LGilmore]

"With whole-life insurance, if you buy a $100,000 policy, you are insured on day one for $100,000. But as the years go by and you build cash value, the amount you are insured for reduces and you are self-insuring for the balance with your cash value. By the time you reach age 100 you actually have no insurance and are fully self-insured with your own cash value."

I think that's universal life...

A

 

[LGilmore]

wow it goes from not posting to posting mid word.

A dividend paying whole life offers the option of increasing death benefit over time. Cash values from dividends can be used several ways from a side type account, purchase paid up additions and even to reduce the premium aka Term in reverse. That way the largest premium is in the first years you own it, the premium reduces each year by the dividend paid. Which actually would be the ideal insurance policy, one that gets cheaper over time yet maintains a death benefit. hmm..

 

[LGilmore]

"having been in the life insurance industry with two major players"

and W&R before that right? but how long?

"Sure, happy to! IRS does not want those with the capability to overfund permanent insurance contracts to do so with impunity as those life insurance contracts are bulletproof from creditors, ex-spouses, lawsuits and, most of all, the IRS."

So even though none of the things you cited above have nadda to do with rate of return, why should they be important? What percentage of return would you be willing to give up for that protection? So if a WL returns 5-6% because of the safety against the things you mentioned above is it a bad place to put money you don't want or can't risk to lose? Is it a unreasonable rate of return when you include your comments about features?


" IRS cannot attach a lien on a life insurance contract or its CSV."

You know I'm not 100% positive that is correct. The IRS pretty much is a special case. They may have the power to attach. I'd have to look it back up.

" Without MEC rules, any yahoo (especially a rich one) could slam major $$ into one of these and create an unattachable asset. It would, without MEC, become the perfect tax shelter."

So the MEC only applies to large face policies? Certainly the "rich" would have no need for any policies below several million... You called it the perfect tax shelter before MEC, what is it now? 90%, 70% 50% 0% perfect? You've made a good arguement for a WL with how you've address the issue of MEC... A WL has protections for the owner that other investments apparently don't offer. How bout that? is that important?

And since I have one in med school and one in an expensive LAC Whole life does wonderful things for you with FASFA... If you don't know what FASFA is you haven't had a kid in college yet.... You will also learn the letters "EFC". Expected Family Confiscation... WL is phantom savings that can't be used against you for having them. Again not a rate of return but hmmm.. possibly important? Maybe the difference between a grant and/or work study and a larger EFC? hmmm?


"Risk is irrelevant in this situation."

Risk is always relevant. ALWAYS. You've encourage other uses for funds without knowledge of her risk tolerances... wouldn't it be prudent to learn more about her stomach for investing than assume an automated "invest in abcd"? Or is a roller coaster investment a good thing for a novice?

I am not disagreeing with anybody here that a WL is probably not the best choice for her, but I am disagreeing with the knee jerk "buy term and invest the difference" solution without any understanding of her risk tolerances and investment knowledge of this person. That is malpractice folks. If she follows your advice but is illsuited for her investment choices can she sue and win? absolutely. Risk tolerance is always important.

 

[Dave020]

"having been in the life insurance industry with two major players"

and W&R before that right? but how long?

No, that would be:
Northwestern Mutual Life 1997-2000
MassMutual (2000-2002)

I'd say those are pretty big hitters in the whole life arena, wouldn't you?

W&R was investments, not life insurance

"Sure, happy to! IRS does not want those with the capability to overfund permanent insurance contracts to do so with impunity as those life insurance contracts are bulletproof from creditors, ex-spouses, lawsuits and, most of all, the IRS."

So even though none of the things you cited above have nadda to do with rate of return, why should they be important? What percentage of return would you be willing to give up for that protection? So if a WL returns 5-6% because of the safety against the things you mentioned above is it a bad place to put money you don't want or can't risk to lose? Is it a unreasonable rate of return when you include your comments about features?

You asked why MEC rules were in place, they are nothing to do with ROR on a policy, they are in place to prohibit using a policy for something other than its intended purpose, insurance.

" IRS cannot attach a lien on a life insurance contract or its CSV."

You know I'm not 100% positive that is correct. The IRS pretty much is a special case. They may have the power to attach. I'd have to look it back up.

" Without MEC rules, any yahoo (especially a rich one) could slam major $$ into one of these and create an unattachable asset. It would, without MEC, become the perfect tax shelter."

So the MEC only applies to large face policies? Certainly the "rich" would have no need for any policies below several million... You called it the perfect tax shelter before MEC, what is it now? 90%, 70% 50% 0% perfect? You've made a good arguement for a WL with how you've address the issue of MEC... A WL has protections for the owner that other investments apparently don't offer. How bout that? is that important?

No, I said a MEC would create the perfect tax shelter if it was allowed. Anyone could fund a MEC, rich or poor. IRS does not want tax-deferred unlimited accumulation coupled with the ability to borrow later tax-free.

And since I have one in med school and one in an expensive LAC Whole life does wonderful things for you with FASFA... If you don't know what FASFA is you haven't had a kid in college yet.... You will also learn the letters "EFC". Expected Family Confiscation... WL is phantom savings that can't be used against you for having them. Again not a rate of return but hmmm.. possibly important? Maybe the difference between a grant and/or work study and a larger EFC? hmmm?

And if you could MEC and get away with it, you could shelter tons of money away in WL and get full financial aid. Yet another good reason to prohibit MEC.

"Risk is irrelevant in this situation."

Risk is always relevant. ALWAYS. You've encourage other uses for funds without knowledge of her risk tolerances... wouldn't it be prudent to learn more about her stomach for investing than assume an automated "invest in abcd"? Or is a roller coaster investment a good thing for a novice?

I am not disagreeing with anybody here that a WL is probably not the best choice for her, but I am disagreeing with the knee jerk "buy term and invest the difference" solution without any understanding of her risk tolerances and investment knowledge of this person. That is malpractice folks. If she follows your advice but is illsuited for her investment choices can she sue and win? absolutely. Risk tolerance is always important.

She is on a very limited budget with little to put out for probably a significant death benefit. The risk for her is not having sufficient insurance coverage, not how it performs. She is not looking for diversification of investment assets, she wants DB coverage. You can't sell her enough DB with WL without oh, say, taking away her ability to buy a house in a few years. She the perfect term candidate. Low premium, budget-friendly and convertible down the road if and when things change. It's not like she's not funding investments now, she has 401(k) and Roth IRA going.

Agents often push whole life now versus later.

 

[LGilmore]

"No, that would be:
Northwestern Mutual Life 1997-2000
MassMutual (2000-2002)

I'd say those are pretty big hitters in the whole life arena, wouldn't you?

W&R was investments, not life insurance"


Yes, big hitters but you had a cup of coffee at each of them... is waddle and reed still around?


"You asked why MEC rules were in place, they are nothing to do with ROR on a policy, they are in place to prohibit using a policy for something other than its intended purpose, insurance."

So it was and is possible to have insurance be more than "insurance"? Again you laid several positives out there that for many would make a WL an attractive choice for a safe place to hide money, even now. My question to you is what is a reasonable rate of return for that safety? Or does safety matter?

"IRS does not want tax-deferred unlimited accumulation coupled with the ability to borrow later tax-free."

So they would slap that on a bad choice for parking money safely? Would the death benefit growing over time be a way to maintain the mec corridor (thus allowing the rules to be bent a bit) and thus still allow for a reasonable safe return along with a inflation protected death benefit?


"Agents often push whole life now versus later."

Not in this case. I am pushing something different. Just because she has a roth and a 401(k) does not by any stretch of the immagination means she knows what she is doing or why? Maybe her Roth is an annuity, maybe her 401 is all company stock? So that is why I have said, I don't know enough about her situation yet to say with absolute certainty she should do A over B or C...etc... I don't just sell whole life, I sell just about everything as I carry a big tool box....

 

[Dave020]

We can go back and forth on this all day, in the end my "cups of coffee" were sufficient to see, taste and feel the industry.

I think you have missed the point completely in your attempt to promote the value of WL insurance (which in the right situations has value).

Let's lay the case out without regard to trying to decipher little nuances in investment strategies and other such nonsense.

Client -
Single female with two children in school
Very limited budget for insurance premiums
Needs a substantial amount of LI coverage for income replacement (500k+)
Trying to REDUCE monthly outlay and expenses to meet family's needs
Is trying to save to buy a home in 2-3 years

So you are saying that, given this scenario, you are going to recommend she spend $3500 a year on whole life insurance when she can get sufficient DB on term for 1/10 that amount?

You see, it only takes one cup of coffee to see through all of the mutual guys, what they sell, how they sell.

So when she's ready to buy that house are you going to want to be the one to explain to her why her $10,500 premium has a CSV of $1500???

Oh, that's right, you have to see the big picture, ignore the man behind the curtain and look was down here at age 70 and you'll be rich!

 

[Dave020]

I'll tell you another little funny story.

Just before I left NML, (the cup of coffee was getting very bitter by then)and not too long after the GA made an in-house presentation that would violate every NASD standard out there (and you know the new agents gobble that crap up), a person working at the GA accessed the HO database and took a look at the life insurance portfolio's of the GA and all of the senior, big hitter agents.

Want to guess how much WL insurance they owned?

I'll give you a hint....NONE!!!!

All term, term and more term.

Now why would an agent pushing WL insurance preaching "you have to own what you sell" buy only term life insurance?

And anyone would wonder why I didn't stay for another cup of coffee and a danish!

 

[moonlightandmargaritas]

And anyone would wonder why I didn't stay for another cup of coffee and a danish!

They weren't free?