About James Clarkson

James Clarkson has been a member since December 8th 2012, and has created 4 posts from scratch.

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BREAKING NEWS: Guardian Life 2018 Dividend

Insurance NewsThe 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…

IPB 090: Is Cash Value Life Insurance Expensive?

 

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?

Consider this…

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.

IPB 089: The Misery of Retirement

 

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:

Source: Yahoo Finance

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.

BREAKING NEWS: MassMutual 2018 Dividend

Insurance NewsMassMutual announced its plans to pay participating policy holders a combined $1.6 billion in dividends.  This total payout will be  Read More…

BREAKING NEWS Northwestern Mutual 2018 Dividend Announced

Insurance NewsNorthwestern Mutual Life announced its plans to pay policyholders an combined $5.3 billion in 2018.  This dividend payment will be represent a
Read More…

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