Indexed Universal Life Insurance

[disneysteve]

it totally misrepresents what insurance is for in the first place.

I think this may be the key point to this conversation. I was thinking exactly the same thing but was refraining from saying it until I heard more about this example.

I believe that the purpose of life insurance is to provide for those who are financially dependent on me if I were to die prematurely. My wife would need money to pay the mortgage and other bills, put our daughter through college, etc. I do not carry insurance to provide a financial windfall for them upon my death. I fully expect that once our home is paid off and our daughter is grown, we will reach a point where our personal wealth is sufficient to sustain my wife were I to die and insurance will no longer be needed.

So if a 53 year old single woman with no dependents posted here asking about life insurance, the most I might possibly suggest would be a small term policy of perhaps 10K to cover funeral costs if paying for that would pose a hardship for her children. I would first make sure, however, that she was adequately funding her retirement accounts, maintaining an adequate emergency fund and had all of her other finances in order. Doing that might make the 10K burial policy unnecessary as her EF and retirement money could cover that. I realize that I don't know this particular woman's situation, which is why I asked for more info.

[Wayde]

disneysteve;319442]Thank you for this example, Wayde. Can we expand on this?

1. What is the premium for the WL policy?

for her it was approximately about $150 per month.

2. What would her premium be for a 20-year or 30-year (if available) level term policy with the same 75K death benefit?

20 yr =$60 per month, 30 yr = $90 per month

3. When you say she has no assets, what do you mean by that? Does she have any savings? How about retirement accounts like a 401k or Roth IRA? Does she own her home?

No assets means nothing that will result in Estate Taxes.

4. Am I correct in assuming that "15 years paid in full" means exactly that - that premiums only need to be paid for 15 years and then there are no further costs or charges for the remainder of the person's life and the full death benefit remains in effect?

She can either pay the $150 monthly until she is 100 years old...but I suggested her to pay about $240 per month so she will have the policy paid up in 15 years because she will be retired at that time and she doesn't want any more bills. Paid up doesn't mean there are no charges after 15 years. It means that she has put enough into the policy that will cover the costs of the insurance for the life of the policy.

Again **the numbers I'm showing all of you here are just examples and are no means a solicitation or offer to purchase a product or service.

[Wayde]

And I understand. But why I failed to see how a whole life policy may benefit more (as I stated earlier) is because you could do pay a much smaller premium with term, invest the difference, and still have a stack of money to live on/pass on.

Your assumption that the person will have a stack of money to retire on is superficial. Especially someone at 53 years old and is about to retire in about 10-15 years. Remember, to help my client...I try not to do too many assumptions. Example of this: the Market in the last 10 years has been up and down and is still yet to fully recover. It's been 10 years and counting. At her age, nothing is better than a guarantee. Again if she was 25 years old...yes, buy term and invest the difference is the best option. She would have 40 years plus to be in the market.

You're right about the "what if" scenerio if she were to die at 81 and no longer have coverage because the term lapsed. However in 15 to 20 years of investing the difference in premium, that money could have grown to even surpass the whole life benefit. I understand that I have not crystal ball. But neither do you. Neither does she. There is no certainty that term would have been better or worse in that given scenerio.

Exactly, that is why I gave her a whole life. It guarantees it so we don't need a crystal ball. It's called suitability. I'm not sure if you've heard of that. The government regulations will crack down on you very quickly if you sold the term and invest the difference idea to Seniors. Yes, it looks like Term and Invest the difference is like a one size fits all but that's not how the government looks at it. They want agents to consider all aspects of the clients life, age, risk tolerance, etc.

I agree is that while whole life could make sense and be appropriate for most people, but it is not always the best alternative. I am not against permanent life insurance if it is for a good reason (as I have also said before). In the situation of your client that you brought, it certainly could have been the best alternative. But only the math would tell us what would be best; albeit there are variables left to circumstance.

Due to her age, I don't play with the math because the math deals with the crystal ball. Again, at her age, she doesn't have time to mess up. Someone young has the time to recover after a loss but she does not.

Where I disagree is this... You stated that at least she will get a benefit when she dies.

I may be reading into this too much. But you're starting to sound like a lot of agents who say "well the problem with term is that you may not get anything back for your money; at least with whole, you will get something back." Thats where I disagree because it totally misrepresents what insurance is for in the first place. Insurance is to cover "maybe,if" situations, not "certainties." Again, I could be wrong with what you were getting at.

My friend, Death is a certainty. No one has ever escaped Death.

And btw no, I do not work in the industry. I used to be a fully licensed advisor but left the industry because the firm I worked for did nothing but push whole life. Kind of put a bad taste in my mouth

I understand. I was taught that way too. But as years go by and you learn the Industry, you realize that there is no one size fits all. You learn to focus on what's best for the client at that time of their financial and emotional life.

[disneysteve]

it was approximately about $150 per month.

20 yr =$60 per month

No assets means nothing that will result in Estate Taxes.

That doesn't really answer my question. I think the estate tax exemption right now is $5,000,000 so she could have pretty substantial assets but not have anything that will result in estate taxes.

Paid up doesn't mean there are no charges after 15 years. It means that she has put enough into the policy that will cover the costs of the insurance for the life of the policy.

What does that mean exactly? If it doesn't mean there are no charges after 15 years, what would the charges be at that point?

So she can pay $240/month for 15 years as you've suggested.
Or she can pay $60/month for 20 years.
Doing the latter would leave her $180/month to invest for those 20 years.

With a modest 5% return, at the end of year 20, she would have $75,486.58, virtually identical to the death benefit of either policy. At that point, she would no longer need insurance so prevailing term rates would be irrelevant and that 75K could continue to grow until whenever she does die.

No matter when she dies, her children make out better with the term policy because they get the 75K death benefit plus whatever she has saved to that point. If she dies soon, they get 75K. If she dies in year 5, they get an additional $12,500. In year 15, an extra $49,000. If she earns more than 5%, which isn't all that difficult to do, the numbers skew even more in favor of term.

What am I missing? In what situation would she come out ahead with the WL policy?

[disneysteve]

The government regulations will crack down on you very quickly if you sold the term and invest the difference idea to Seniors.

That may be but we're not talking about a senior. We're talking a 53-year-old. She won't be a senior for 12 more years. Assuming good health, she may live another 30-40 years.

Besides, we're not talking about retirement savings. We're talking about money to give as a posthumous gift to her kids when she dies. She doesn't need this money to live on. The worst case scenario is that her kids don't get the full $10,000 gift that she wanted to leave them.

[Wayde]

disneysteve;319476]I think this may be the key point to this conversation. I was thinking exactly the same thing but was refraining from saying it until I heard more about this example.

I believe that the purpose of life insurance is to provide for those who are financially dependent on me if I were to die prematurely. My wife would need money to pay the mortgage and other bills, put our daughter through college, etc. I do not carry insurance to provide a financial windfall for them upon my death. I fully expect that once our home is paid off and our daughter is grown, we will reach a point where our personal wealth is sufficient to sustain my wife were I to die and insurance will no longer be needed.

Yes, at your age, yes.

So if a 53 year old single woman with no dependents posted here asking about life insurance, the most I might possibly suggest would be a small term policy of perhaps 10K to cover funeral costs if paying for that would pose a hardship for her children. I would first make sure, however, that she was adequately funding her retirement accounts, maintaining an adequate emergency fund and had all of her other finances in order. Doing that might make the 10K burial policy unnecessary as her EF and retirement money could cover that. I realize that I don't know this particular woman's situation, which is why I asked for more info.

You have it all covered except for the Term coverage. Again, at her age, I am not going to speculate anything but give her a guaranteed coverage. As for her financials, I can not discuss it on this forum. I believe you wouldn't want me to share your specific financial situation on a forum without your permission too.

[BuckyBadger]

As for her financials, I can not discuss it on this forum. I believe you wouldn't want me to share your specific financial situation on a forum without your permission too.

Cop-out.

Then invent a fictional person and tell us THOSE stats that would make your product make sense.

(I deal with HIPPA, be we can still certainly talk about symptoms and treatments without breaking the rules. I'm thinking you can probably make up a pretend persona and tell us about the pretend financials.)

[Wayde]

=disneysteve;319527]That doesn't really answer my question. I think the estate tax exemption right now is $5,000,000 so she could have pretty substantial assets but not have anything that will result in estate taxes.

Yes, that is what I stated. She will not have enough to pay Estate Taxes.

What does that mean exactly? If it doesn't mean there are no charges after 15 years, what would the charges be at that point?

I think you are reading my sentence wrong. She will not have any more monthly premiums because she has put enough money into the policy that will pay for the yearly insurance costs and other fees for the life of the policy.

So she can pay $240/month for 15 years as you've suggested.
Or she can pay $60/month for 20 years.
Doing the latter would leave her $180/month to invest for those 20 years.

Yes, that is true...but again...we are speculating that the market will be a positive and she will have more money. What if the market crashed right before she was to retire? Then what? She doesn't have time to recover like young people do. Again, it's her age that is determining the suitability of the situation.

With a modest 5% return, at the end of year 20, she would have $75,486.58, virtually identical to the death benefit of either policy. At that point, she would no longer need insurance so prevailing term rates would be irrelevant and that 75K could continue to grow until whenever she does die.

Again, you are assuming constant 5% growth. Let me give you a number that people really don't pay attention to.

Assume you have $10,000 invested in the market. Again it's just an example and the figure has nothing to do with this topic of whole life for the 53 yr old.

If you lose 20% the first year your balance = $8,000
Now to get back up to $10,000 again the account would have to grow 25% the second year!

You see, you lose 20% but have to gain 25% in order to get back to even again. This means more time needed to be in the fluctuation of a market. Well, time is not on this 53 year old client's side.

No matter when she dies, her children make out better with the term policy because they get the 75K death benefit plus whatever she has saved to that point. If she dies soon, they get 75K. If she dies in year 5, they get an additional $12,500. In year 15, an extra $49,000. If she earns more than 5%, which isn't all that difficult to do, the numbers skew even more in favor of term.

But may I ask you a question? Do you know the exact date this client is going to die? You are betting on early death and a positive growth. I don't know. I wish her long and healthy life. So to give her a guarantee at her age is the only logical and suitable thing to do.

What am I missing? In what situation would she come out ahead with the WL policy?

Like I mentioned before...If you work the assumed numbers...she will be ahead with Term and Invest the difference...but she is 53 years old. At this age, Assumptions needs to be taken out of the question. Remember, Suitability is different from what you feel it's right, or what you think the market is going to perform.

[Wayde]

319528]That may be but we're not talking about a senior. We're talking a 53-year-old. She won't be a senior for 12 more years. Assuming good health, she may live another 30-40 years.

The definitely age to be considered a Senior citizen will vary from state to state.

Besides, we're not talking about retirement savings. We're talking about money to give as a posthumous gift to her kids when she dies. She doesn't need this money to live on. The worst case scenario is that her kids don't get the full $10,000 gift that she wanted to leave them.

No, we are not talking about retirement savings. The whole life policy's purpose is to make sure the funeral is taken care of so her kids don't have to come up with the money. In her culture...their funeral costs are much higher than the average of $10,000.

[Wayde]

Cop-out.

Then invent a fictional person and tell us THOSE stats that would make your product make sense.

(I deal with HIPPA, be we can still certainly talk about symptoms and treatments without breaking the rules. I'm thinking you can probably make up a pretend persona and tell us about the pretend financials.)

Bucky, thanks for joining in on the discussion. Unfortunately I'm not here to entertain you by talking about this particular client's financials. I think I have provided enough info already, so if you can't figure it out from my posts than it's your lost.

[BuckyBadger]

Bucky, thanks for joining in on the discussion. Unfortunately I'm not here to entertain you by talking about this particular client's financials. I think I have provided enough info already, so if you can't figure it out from my posts than it's your lost.

I think you're missing the point. No one is asking to be "entertained" by hearing about the financials of a stranger.

You were asked to give a specific example of a case where you would recommend your product. Instead of just coming up with a hypothetical situation in which your product would be appropriate, you claimed that you couldn't tell us of any situation because it would violate insurance salesman/client privilege. You missed the giant point that no one cares about that specific 53 year old client -- we were curious about any hypothetical client of any age to whom you would recommend your product for any reason.

But if you can't understand that, I suppose it's your "lost."

And the fact that you think I care about your client is, frankly, hilarious.

[disneysteve]

Okay. Let me take a different approach (not that I expect you to change your mind but let's do it anyway).

Instead of the 20-year policy, let's have our 53-year-old woman take the 30-year policy for $90/month. That leaves her $150/month to invest. If she earns just 2%/year for 30 years, she ends up with $74,407.67. Anybody who can't manage 2% over 30 years simply doesn't know what the hell they are doing.

So again, if she dies while the term policy is in effect, her kids get 75K plus what she has saved. If she outlives the term, she then has virtually the same 75K anyway plus it continues to grow until she does die.

No matter how you slice it, the term policy wins, again unless I'm missing something major here.

Forget a 20% market drop. She wouldn't have much if any money in the stock market so it wouldn't matter.

[dczech09]

Okay. Let me take a different approach (not that I expect you to change your mind but let's do it anyway).

Instead of the 20-year policy, let's have our 53-year-old woman take the 30-year policy for $90/month. That leaves her $150/month to invest. If she earns just 2%/year for 30 years, she ends up with $74,407.67. Anybody who can't manage 2% over 30 years simply doesn't know what the hell they are doing.

So again, if she dies while the term policy is in effect, her kids get 75K plus what she has saved. If she outlives the term, she then has virtually the same 75K anyway plus it continues to grow until she does die.

No matter how you slice it, the term policy wins, again unless I'm missing something major here.

Forget a 20% market drop. She wouldn't have much if any money in the stock market so it wouldn't matter.

This is exactly why whole life may be "appropriate" but not necessarily "best alternative." Even a 2% rate of return (which is quite frankly sad) would still out pace the whole life policy and give a slightly greater benefit (that still grows) after the term expires.

Also, if she needed to liquidate a little money here or there, she can do that with her savings. Heck you can get 2% in a simple savings account if you're savy. So liquidity is not an issue. And she wouldn't even have to take out a loan.

Also in regards to a 20% market crash- DS's hypothetical rate already takes that into consideration. Just for a quick FYI, my studies from the S&P500 inception through the end of 2011 showed an average annual return of 8.53% and that takes into consideration MANY market crashes. I know 30 years is a significantly shorter period of time, but you get the point.

In your hypo situation, the woman is not getting anything in return for the extra premium except a policy that is pretty much guaranteed to pay a death benefit. That is great and all, but it is not the best thing. The one thing I did like is that you only considered the whole life policy for its insurance benefit. You never tried explaining how the cash value could supposedly benefit the woman if she "used it the right way." In fact, you never referenced the cash value at all. Just the insurance coverage.

And as DS showed, the term does the same thing (just for a limited time) after which saved money takes off form there.

[disneysteve]

You never tried explaining how the cash value could supposedly benefit the woman if she "used it the right way." In fact, you never referenced the cash value at all. Just the insurance coverage.

And rightfully so that he didn't mention it. If she chose to borrow any of her cash value, then upon her death, her kids wouldn't get what she wanted them to get since the cash value loan would get repaid from the death benefit.

[disneysteve]

Also in regards to a 20% market crash- DS's hypothetical rate already takes that into consideration. Just for a quick FYI, my studies from the S&P500 inception through the end of 2011 showed an average annual return of 8.53% and that takes into consideration MANY market crashes. I know 30 years is a significantly shorter period of time, but you get the point.

Just to be clear, there is no reason why you shouldn't be able to earn 2%/year for 30 years without any stocks at all so market fluctuations would be irrelevant.