Basic Questions Regarding Whole Life

[Ami]

It's not just investment performance on the general account. While that plays a factor, and is the most commonly talked about since it's usually the most subject to change, it's only one of three pieces. Keep in mind the dividend is also made up of mortality and expenses. If the insurance company is more profitable then it planned to be when the policy was put in force, they are going to pass most of the increased profits on as a dividend. Just like a regular public company does to it's stock holders.


It isn't risk free, there's is the risk that the dividend won't be as great as you'd hoped in a given year. But it's a lot lower risk then having the value drop 30+ percent in the matter of a few months.

It's been studied on a few different occasions. There's no asset class that has a higher risk adjusted rate of return. Historically it has had the highest Treynor Ratio.

I concur with scagnt83 on this - Excellent observations.

Nothing (...perhaps other than a reasonable prediction that politicians' promises are likely to be "modified" after voting day) is "risk free". For instance, a company that is rated "super extra strong large, beautiful, sexy... etc" can (and sometimes do) fail - and sometimes even within a relatively short period after having been rated "tops". AFAIK, of the three Canadian insurance companies that failed in the 90s, two had excellent ratings shortly before their demise.

Whole Life is is designed for "permanent" needs, and most people need life insurance permanently. Term, as the word suggests is designed for "temporary" needs and/or to bridge an "affordability gap" (where the need is permanent but the ability to afford the premiums to cover the entire need with permanent insurance falls short of being sufficient to pay for the full amount of permanent insurance needed). UL is a "package deal" where the life insurance component can, from a design perspective, be any form of life insurance (in Canada, including WL, T100 and YRT), plus additional discretionary deposits/investments. Depending on the design of the UL, it can be either "permanent" or "not so permanent").

Note: The above is in no manner even nearing a full summary but merely a quick overview of several points. Each situation and set of circumstances is unique and deserves the services of a knowledgeable, equipped and duly licensed practitioner. A good consumer-interest focused insurance professional is worth far more than the commissions that (s)he earns... but that's beyond the scope of this thread.

I am licensed since well over 30 years ago but I don't sell. I invest nearly all of my professional time on research. Like anyone else I want to get the best VALUE for my money. Other than group insurance through my university alumni associations and the like, all my life insurance is permanent as in "Whole Life". Decades ago, when my needs were high relative to the amount of Whole Life premium that I could then afford, I started off by ordering a "blend" - "term" plus Whole Life through insurance agents. However, in the "blend", I selected the "term" policies not on the basis of price alone but with very careful consideration of what Whole Life policies the "term" contracts noted as being available for conversion. I'm glad that I took that route instead of the "price" mirage as it allowed me to place orders for excellent value Whole Life conversions through the years. In terms (pun intended) of term plan selection I strongly believe that the approach of shopping by value rather than by price is the best approach. Of course, vending machines can spit out term policies by price but it requires knowledgeable and conscientious insurance advisers to provide max value for the money.

 

[Death Cab For Tootie]

Very well put, Ami.

 

[Ami]

Let's do this to end all arguments. Create an ACTUAL illustration showing how much money a 35 yr old healthy male, NT, would have at age 65 on a 500,000 WL policy in 30 years.

Run another showing a term 30 policy for $500,000 with an investment account illustrating how much money you will have in your brokerage account (14% return average over 20 years, 4-6% over final 10) at age 65, which was funded with the difference in premiums between both policies. Go ahead and account for estimated taxes (on returns), and see which one looks better.

Whoa Whoa Whoa... hold that wagon before it goes over the cliff.

An analysis based on faulty data or a comparison in which the underlying data is artificially determined to predetermine the results ain't worth a pittance.

The quoted above suggests that life insurance will not be needed beyond age 65. In most cases, IMO, that's more baloney than Kraft could produce over the same 30-year period.

Moreover, the above "scenario" - sum of successive annual deposits each guaranteed to compound consistently for 20-n years at 14% after tax, and continuing to compound consistently at 4%-6% over the terminal 10 years, plus the sum of successive annual deposits each compounding at 4%-6% after tax for the terminal 10-n years - is virtually guaranteed not to occur in real life.

Show me just one example and prove me wrong. I stand to be corrected.

 

[justing]

I am sure funds exist that can come very close to proving these scenarios, but the main thing to consider is the length of time people stay in these funds.

If you look at an individual investor, I would say 1-3 years in any particular fund and with an advisor 7-10 yrs.

If you take the Megellan fund in its great days, and find the research on the 2 points listed above, you find that due to those facts no one achieves those returns. I have seen the study when I worked at Ed Jones.

This is the sole fact that people's portfolios have a lower return than the market would suggest they have.

This emotional drive to move in and out of investments causing a lower realized return both by missing the boat on the funds upswing and by incurring more transaction/sales fees, is the reason why diversifying into something more solid like WL or an annuity is a smart addition in anyones attempt to diversify.

However, I would say look at life insurance first as what it is, Life insurance, and insure you are fully funding all of your other avenues before focusing on life insurance as an investment.

It is first and foremost life insurance, second an estate planning tool, and third a type of investment.

If I were you I would not be looking to any insurance agent for this advice, I would go to a financial planner and get a plan developed and implemented.

Than and only than will you know where your money needs to go and how much needs to go their.

 

[BNTRS]

Why? Why can't it be one of the first things one puts his or her money into? It's one of the first things I put money into. We agree that the longer you have it the better it gets. The younger you are, the better the rates. Why not use it as a foundational piece of your financial plan?

This is the approach I generally take, and I make a lot more money each year off investment and fixed annuity business than I do Life business, probably in the neighborhood of 4 to 1.

 

[LGilmore]

"Than and only than will you know where your money needs to go and how much needs to go their. :"

You forgot to add never trust advice given by a person who can't use the correct words for the correct meaning in their sentences........

 

[Ami]

This emotional drive to move in and out of investments causing a lower realized return both by missing the boat on the funds upswing and by incurring more transaction/sales fees, is the reason why diversifying into something more solid like WL or an annuity is a smart addition in anyones attempt to diversify.

Good point. A disproportionate number of people seem to follow the TV and print media talking heads, with their respective cookie-cutter fads of the day, instead of investing in the services of professional and objective financial advisers.

However, I would say look at life insurance first as what it is, Life insurance, and insure you are fully funding all of your other avenues before focusing on life insurance as an investment.

It is first and foremost life insurance, second an estate planning tool, and third a type of investment.

Agreed.

If I were you I would not be looking to any insurance agent for this advice, I would go to a financial planner and get a plan developed and implemented.

Than and only than will you know where your money needs to go and how much needs to go their.

IMHO, that's an over generalization that may or may not be applicable for the circumstances. I disagree with the use of the phrase "any insurance agent for this advice", and particularly with the word "any" within that phrase. IMO, that's quite a sweeping statement. There are really good insurance agents out there who are sufficiently knowledgeable, caring and equipped to take the wholistic consumer-interest-focused approach.

Getting back to Whole Life, I'd keep several common sense matters in mind:
a. insurance is primarily intended as a risk transfer instrument;
b. if a risk is permanent and deserves to be transferred, it should be transferred permanently;
c. at present, everyone permanently faces the risk of death;
d. (other than in very few exceptions) death has a negative financial impact; the "loss of income" portion is only part of the risk. Over the long term, it is often a very serious error to think of "loss of income" as the "only" or "major" part of the risk. Death risk is (hopefully) a long-term consideration;
e. risk transfer fees (aka "insurance premiums") are directly proportional to the probability of occurrence and the amount at risk;
f. (with all other factors remaining constant) the probability of death increases with chronological age;
g. it is most often more efficient to deal with and take corrective measures relating to a "problem" permanently than to push a problem "under the rug" temporarily and have to address the same problem repeatedly.
h. in solving one "problem", it is unwise to knowingly create another, and potentially greater "problem";
i. in transferring a risk, it is unwise to knowingly create the risk of future non-transferability;
j. a "problem" is most often actually an opportunity seeking to be realized. A "temporary solution" leaves the "problem" in the "problem" state. A careful, well thought out, and long term approach can convert a "problem" from the "problem" state to the "opportunity" state.

"For profit" risk transfer pools (stock insurance companies) focus on increasing profits. One of the key means to do so is by decreasing the assumed risk transfer per dollar of risk transfer fees. One of the most effective ways to decrease the assumed risk is to assume the risk temporarily, and preferably to restrict the length of the risk assumption period to the length of time during which the risk is projected to be lower than average or average.

...I'll leave it at that for now.

 

[justing]

Ok, maybe you are right about the any insurance agent statement, but if you are looking to an insurance agent, you should be sure they have experience with actual insurance/estate planning, and are not simply an insurance salesman.

Does that sound better?

If i new my engrish teachr wus in hear, i wuld hav payd mor attenchin to gramer.

 

[Ami]

Ok, maybe you are right about the any insurance agent statement, but if you are looking to an insurance agent, you should be sure they have experience with actual insurance/estate planning, and are not simply an insurance salesman.

Does that sound better?

If i new my engrish teachr wus in hear, i wuld hav payd mor attenchin to gramer.

I apologize if I came across as criticizing your English: I didn't intend to do so. All I was getting at in that regard was that there are many insurance agents who are knowledgeable and experienced with insurance and estate planning - and who also care to make the effort to do an excellent job.

 

[scagnt83]

Most fee based financial advisors started as insurance agents, and still are...