Life insurance is a fairly complex financial product and any meaningful discussion about this is probably best suited to financial coaching at this point in time. However, I will say that I discourage anyone from buying anything until or unless they are willing to understand at least the basic principles behind how it works (which is the point of my financial coaching service). Indexed life is the most complicated, since it combines the most complex form of insurance (universal life) with a complicated investment strategy (equity indexing).

Yes, some policies cost more than others. However, as I mentioned before, the cost index goes negative on some well designed policies so I think the internal costs you speak of can be made a moot point depending on what you’re looking at. A negative cost (a gain) is better than even a .2 to .5% cost Even if the cost index does not go negative, it’s always going down. But, you’re right, some of them are expensive. So are some mutual funds. I wouldn’t call every mutual fund expensive though (I’m assuming you mean a bond index, since comparing to an equity index would be relatively meaningless from valuation analysis standpoint).

RE: “guaranteed”. Yes, that simply means that the underlying investment has a promise to pay. With whole life, those are the bonds. If they pay, they’ll pay the stated rate. I think the insurance business has done a pretty decent job. According to economist Jesus Huerta deSoto, in the last 200 years, very few insurers have become insolvent. With pensions, many of them make promises that they have no way to back up since they’re either unfunded or invest in non-guaranteed investments. They want that 8 percent, which is understandable. But, you cannot promise that, and they do. The ones that do come through for employees are those 412(i) plans. But, they use fixed life insurance and annuity policies and always pay the promised benefits.

I think if you’re knowledgeable about what you’re doing and you understand the risks in your strategy and have compensated for them or at least know that they are there and are willing to take them on, then you’ll be OK from a planning perspective.

I like you link on average annualy performance, as that is what I’ve always thought when I’ve actually done the math before. I also agree that equities should not be the base to anyone’s portfolio. My portfolio has a base that includes CDs, Bonds, Insurance (Term, which I believe offers a base hedge to a portfolio) and real estate. I then utilize tax-free equity vehicles (ROTH, 529).

I do realize that owning anything that doesn’t say “guaranteed” return on it, does imply some level of risk. (of course that will vary based on the asset class adn type of investment). But I’m also a little sceptical of anything that says they can “guarantee” something for the next 25-100 years. I’ve company pension plans, pre-paid 529 plans, and even the great social security, run into actuarial problems. Some have ended up not be as “guaranteed” as they would have liked you to beleve when you got in. I know good companies have had great track records over many years. I just don’t fall head-over-heals for their promises of the future.

You’re welcome. Yes, I know that there are a lot of agents in favor of using WL as a “end all, be all” product. It has its place. It accomplishes a lot, but it obviously cannot do everything. I disagree with your estimation that it is expensive. I’ve noticed you’ve implied this before. The facts do not support that conclusion.

The cost index for well designed policies always ends up rather low, meaning the out of pocket premiums required to pay for the insurance costs decrease over time. In some cases it goes negative due to the investment function of the policy. I know a common argument is that whole life is “expensive.” The reality is that the mortality costs are the same for all policy types, since they are all based off of the same mortality tables. You’d be just as accurate to say that “term life is an expensive way to buy insurance and save money.” The investment function of the policy is what some people don’t care for in whole life, since it’s based on bonds. That’s a different matter. A matter of investment philosophy.

As a foundation, I do not like mutual funds, stocks, or equities in general. I do, however, like them very much for the volatility factor they give when seeking higher investment returns for a portion of one’s portfolio. The issue I have with equities is that the averages calculated in spreadsheets for these products tends to be somewhat misleading (see: http://www.twintierfinancial.com/?p=34), though this is what is normally done since using fundamental analysis and value investing to predict real returns is much harder and requires some education and a bit of specialized knowledge. You don’t have this problem with insurance, since 1) the risk is spread out not only among various bond issues, but among millions of policyholders and 2) the underlying investments pay a fixed return which doesn’t not vary, aside from dividends, which trend very slowly and are relatively predictable.

Best,
David

Again, thank you for your detailed explanation. I do think you’re right about the “gurus” painting all WL with one big brush, while at the same time giving mutual funds a pass. They’re also guilty of sometimes inflating potential returns, from those mutual funds, for their comparisons.

In all fairness I have met, and sat through, more than my fair share of sales pitches for WL. The agents I’ve talked with have painted WL with such a broad brush you would think it is the end-all, be-all for anything in your life you want to do. “Save for college”, “Save for retirement”, “Save for a new car/home”, “Daughter’s wedding”. There just seem to be so many other products out there that aren’t given any credit. (i.e. 529 plans, ROTHs, etc..)

I guess I end up feeling like WL is an expensive way to force people to save, who don’t have the disipline to do it on their own. Not an evil product, or one that’s trying to rip people off, just filling a need in our society. It’s pretty obvious that there are many who would not choose to save anything if they didn’t have a “premium” to pay.

As always, thanks for your time and responses.

Am I understanding you correctly when you say that with both the “dividend paying WL’” and the “Universal Life with the increasing death benefit option”, I would effectively be be getting additional value upon death based on the increasing death benefit?

Yes, this is correct. UL with increasing DB is the face amount of death benefit plus cash value (this is actually how it is defined). Dividend paying whole life essentially gives you this also, depending on how you’ve set up your dividends and the policy. I mean, technically, in a whole life it’s all death benefit since it’s a bundled product so there is no separation of mortality costs and cash value/investment function. The cash value represents a reserve that replaces and becomes part of the death benefit (this is how the cost in whole life always goes down over time–the amount of death benefit being purchased becomes less over time). Think of it as a cash advance on the death benefit during your lifetime. The dividends are what help you out there. As an example, you may earn $200 in dividends in the first year, but that purchases $2,500 of paid up death benefit. The dividends then become part of the cash value and earn their own dividends which go to buy additional paid up insurance. So, the dividends grow exponentially. It’s not exactly the same as a UL, but it’s pretty close if you look at what’s happening in the policy.

For the people who say that if you buy term and put the difference in premium in a cookie jar, and get hit buy a bus tomorrow, your family will get the death benefit and the cookie jar. And if you buy WL today and get hit by that same bus, your family will just get the death benefit minus the cookie jar. Are they mathmatically wrong?

Well, if they are talking about a straight whole life with no dividend options, then yes this would technically be correct since the death benefit never increases. You would want to save a small amount of money on the side in a “cookie jar” if you wanted extra. Basically, you’d want to save money on the side in lieu of a dividend payment from the insurer. With what I just mentioned above in regards to dividend paying whole life and UL with increasing DB, the gurus are wholly wrong. Problem is, much of what I see the gurus doing is just painting all policies with the same brush. They don’t do it with stocks or mutual funds or anything else. But, with life insurance, they blank out and turn into idiots.

Great reply. I too am hoping for a “less than one percent” chance that I will die in the next 30 years!

Thank you for helping to enlighten me to the other options that are out there. Am I understanding you correctly when you say that with both the “dividend paying WL’” and the “Universal Life with the increasing death benefit option”, I would effectively be be getting additional value upon death based on the increasing death benefit? In other words, If I bought a $250,000 face policy, it would continue to increase through the years resulting in my family getting more than the $250,000 when if I died?

For the people who say that if you buy term and put the difference in premium in a cookie jar, and get hit buy a bus tomorrow, your family will get the death benefit and the cookie jar. And if you buy WL today and get hit by that same bus, your family will just get the death benefit minus the cookie jar. Are they mathmatically wrong? I do realize the small likelihood of this happening, but just curious.

Thanks again!

I don’t know how you did your calculations, so it’s hard to answer your question here.

As far as your question about whole life, it does depend on the whole life product. Like anything else, you can have a well designed product and one that’s not so good. So, let’s say with dividend paying whole life–you do actually get the accumulated value of savings plus the face amount of death benefit, since the dividends go to buy additional paid up insurance, your whole life policy increases in value every year. Actually, it can increase quite substantially in as far as a rate of return on death benefit is concerned. With universal life, the increasing death benefit option is literally buy term and invest the difference. If you go that route, you also get your savings plus the face amount of insurance.

Even though you get your savings plus death benefit with the right permanent insurance policy, I wouldn’t be overly concerned about dying within the first 30 years. Obviously, it can happen. But, the probability is very low. I had another discussion last week with an analyst from a major life insurance company. Part of our discussion was about cost structure, but he did mention to me that, interestingly, the industry pays out less than one percent of all term policy death benefits. It didn’t surprise me, but I didn’t realize the figure was less than one percent. I thought it was between one and five. Death rates are very low prior to something like age 60 or 65, which is (incidentally) when term rates start to rise dramatically. Insurers are not fools. They price their products to make money. I hope that helps.

Thank you for your response. Not being a financial professional, I do realize there are areas I don’t fully understand.

Am I off base when I run my calculations about dying withing the first 30 years? With WL I found that my family would only get the $250,000 death benefit. By doing Term and putting the difference in premium into my personal savings, I found that my family would get the $250,000 death benefit plus the savings.

Again, I appreciate you thoughts.