The trend for dividend interest rates for participating whole life insurance and the cap rates for indexed universal life insurance have been a long trend downward. No denying that.
But does that change our perspective on cash value life insurance?
It's that time of year again…time for companies that offer participating whole life insurance policies to make their dividend announcements for the coming year. (And yes, we realize these are technically the 2018 dividend announcements but since they're made in 2017 we refer to it as the 2017 season.)
This year the “trend is not your friend…again” as there only two companies (that we follow) who have decided to hold their dividend interest rate (DIR) steady. All others decreased their DIR.
Most companies continue to cite a challenging environment for generating investment income as interest rates remain depressed. Obviously, no one expected long term interest rates to bump along the bottom for anywhere near this long.
The Guardian Life Insurance Company of America announced its plans to pay participating policy holders a total of $911 million in dividends in 2018. This will mark the Read More…
Over the past few weeks we've had a half-dozen or so conversations with folks who would like to understand the expense of owning cash value life insurance. Yes, for the sake of our discussion we are lumping together whole life and universal life insurance.
How can we do that? Aren't they distinctly different products? Well, yes and no.
Structurally they are different, however, if someone is evaluating a policy based on its ability to produce a positive internal rate of return on cash, it's possible to boil down the expense of owning the policy.
We are keenly aware of the need that people have to compare the expenses of all their savings and/or investments. And let's be clear, there is a cost to own anything…
Stocks, mutual funds, ETFs, real estate, exotic cars, precious metals, savings accounts etc.
The problem arises for most of us in that we may be comparing expenses incorrectly. With some financial products it's easy to look at the “expense ratio” and calculate the relative cost of ownership.
However, with others (life insurance included) the comparison cannot be simplified to an expense ratio. Well, you can do it, but you'd be missing the potential.
For example, how do you evaluate the first year expenses of owning a whole life insurance policy compared to the future value of its tax free (potentially) income stream? The ability of life insurance to do that one thing, makes it pretty unique among the alternatives mentioned earlier.
If your goal is to maximize cash flow in retirement (as it is with many folks we work with), then focusing on the “expense ratio” doesn't mean a whole lot. It won't really tell you much of anything as it relates to the future ability to generate cash years down the road.
See, comparing expense ratios is relevant when comparing like products–one S&P 500 index fund versus another. However, with life insurance, expenses can be embedded within the structure of the policy.
What do I mean by that?
You have decided that you'd like to dedicate $50,000/year in premium to a whole life policy. Your goal is maximize cash value growth to increase liquidity as quickly as possible and to provide a future cash flow in retirement. And you're comparing company A versus company B–both offer participating whole life insurance policies.
Well, logic tells most of us that they must be the same because par whole life is mechanically identical. And if we're looking at textbook definitions, you'd be right. However, company A allows a much higher ratio of paid up additions for your 50k than does company B.
As it relates to your goal of increasing future value and cashflow, company A is “cheaper” and will very likely produce a better outcome.
I am oversimplifying for sake of the example but there are multiple components that have to be evaluated within a whole life policy to determine expense. Our point…it's much more useful for you to focus on the result than the expense ratio.
The 2017 Boomer Expectations for Retirement survey from the Insured Retirement Institute reveals that things are not really improving for Boomers as they move into and toward retirement. There are more than a few disturbing statistics to share.
I recommend you follow along with the report as you listen to this week's episode, it will make it much easier to digest the information we're sharing.
You can find the survey results by clicking here.
In the seven years since the survey was started with boomers aged 54-70, the trend is not improving. It seems that as a whole, boomers are not growing more confident in their ability to provide a comfortable retirement for themselves.
Something worth thinking about…
Their confidence is declining in the face of a massive run-up in the stock market since March 2009. Take a look at this chart of SPY (ticker symbol for a popular S&P 500 ETF) returns since the last market bottom:
So, why all the misery? Why are such a large percentage of boomers indicating that Social Security will provide their only reliable source of guaranteed income?
There are a few disconnects here in terms of what people say they want and what they actually do. I'll let you read the report to pick out all of them, but it is worth pointing out one in particular that leaves me scratching my head.
On page 17, the study reveals a major problem with how people plan to actually fund the income gap in retirement, the following statement shines the light on a serious problem:
When it comes to accessing their savings, two-thirds of Boomers say they plan to withdraw funds as needed for basic expenses, or for emergency or discretionary spending needs. Conversely, only 8 percent plan to transfer a portion of their defined contribution savings to an annuity. This leads to one of the most interesting findings in this year’s study: while only 8 percent will consider using their retirement savings to fund an annuity, 85 percent of Boomers say that it is very or somewhat important to have a source of guaranteed lifetime income besides Social Security.
Clearly, annuities are not the solution to every problem. I believe that if you described all the things an annuity with an income guarantee can do for people they'd think it was miraculous. The problem comes when you say the word “annuity”.
And heaven forbid anyone go to Google and search for information about annuities–they'd be left with the impression that anyone offering or speaking positively about the benefits of an annuity is obviously a conman. Sad that the narrative of guaranteed income is being controlled by misguided financial pornographers.
I'm not aware of any other way that an individual can create a guaranteed lifetime income besides using some sort of annuity.
Look, this isn't the only problem most of the study participants revealed, not by a longshot but it does reveal to me that we've gotta do a better job of getting the truth out there. We need to help people focus on what they need, how to get there and decrease the dependence on social security. It's never a good idea to place your hopes of retirement security in the hands of politicians.
MassMutual announced its plans to pay participating policy holders a combined $1.6 billion in dividends. This total payout will be Read More…
Northwestern Mutual Life announced its plans to pay policyholders an combined $5.3 billion in 2018. This dividend payment will be represent a
It seems there's no end to the bad news in our industry as it relates to increased COI/expense charges for universal life insurance policies that were sold by SOME companies. Lawsuits are popping up and embarrassing company practices are being revealed.
First, let's get a few things on the table…
Yes, within every universal life contract, the company has the right to increase charges within certain limits. There are contractually guaranteed caps set forth in the policy.
Are the problems that are being created for these policyholders a result of the increased charges or are the problems caused by chronically underfunded policies?
And before I get tons of hate mail–I'm not absolving bad behavior from insurance companies.
In a recent court filing against Transamerica (relating to increased charges in UL contracts), there are allegations of subverting agents to talk directly with policyholders (not something insurance companies ever want to do normally), withholding in-force illustrations (and/or representing a truly terrible outlook for the policies in an effort to coerce policyholders to surrender their contracts), and setting up separate phone lines to “deal” with these policyholders.
All bad, no excuses (if it's true).
However, as we've discussed over and over…universal life insurance (especially older policies that were sold with current interest rates that were much higher than anything the policies are actually earning today) is a product that needs to be managed. It's not a set it and forget it sort of product.
In the many examples of collapsing universal life insurance policies we've seen, all could have been saved by slight increases in premiums paid over the years. Of course the problem is that many people have no competent resource to manage their policy and they don't know there's a problem until there's a big problem that's compounded over an extended period of time.
The industry needs to figure out a way to do better. Life insurance companies need to do better. When they (life insurance companies) removed themselves from the distribution, they seem to have thought they removed themselves from the management/service side of the equation.
That attitude is proving to be shortsighted and foolish.
Often times, understanding the power of cash value life insurance requires a paradigm shift.
It's not all that complicated really, just not entirely comparable to anything else.
A vast majority of folks that we talk with have some sort of vernacular when it comes to investing, saving or building their financial plan. They understand terms like “expense ratios” and the importance of identifying them.
But life insurance throws a curveball at most people because the terminology is different and to make it worse…the same function will have different names from one company to the next.
All but making comparison in any sort of apples-to-apples way, impossible.
How do we get around that…???
Following up our episode from last week where we discussed how an indexed universal life (IUL) policy would have fared over the last 10 years, we thought it would be interesting to dig into THE most powerful aspect of IUL in our opinion–years when the market index has a negative return.
This is something we've talked about briefly in the past and we received some criticism. See, in every IUL contract there is some sort of floor for the years where the market index has a negative return. The floor can range from 0-2%–most contracts being offered today are at 0%.
So, in a year like 2008 where the market has a negative return, the worst you'd do is stay flat as it relates to the cash value of your IUL contract.
However, some have come along to point out that while this is true, you could still have a decline in your cash value due to policy expenses and cost of insurance. And technically that is true.
Yes, there is a cost for any type of insurance and I mean that in every possible context.
Our point in today's episode is that if you focus too much on that cost–you're missing the boat. You're focused on the wrong thing.