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.
If you'd invested at the very top of the last market cycle–October 9, 2007, you'd now have slightly more than doubled that investment (according to the Wall Street Journal) despite the vomit-inducing period of the next few years where you watched your money cut in half.
That's all fine but when I saw that mentioned as a sort of passing statement in the WSJ article, I immediately thought…
I wonder how an indexed universal life insurance policy (given the same parameters of a lump sum dump in) would have fared during the same time frame?
So…we punched up the numbers to find out.
If you're curious…listen to the full episode to hear the result.
It's not uncommon for people to refer to whole life insurance as a “forced savings plan” or at least it was common back when we started out in the industry. Sounds like a bad thing but is it really?
Sounds like a bad thing but is it really?
We've seen some data that indicates something north of 95% of Americans are weeks away from financial ruin. If they were to miss a paycheck or two, the fit hits the shan…know what I mean?
Now, “north of 95%” isn't any sort of hard data. But who cares? I think we all know it's way more than 50% and that's tragic.
We all need a plan, an accountability buddy or whatever you wanna call it that isn't influenced by human emotion. We all need a mechanical way of putting money away that isn't gonna cut you any slack because you're having a bad day.
We gotta save regularly and most of us (pointing at myself) should be pushing the limits of what we think is possible. 10% is a joke, we should be thinking more in the 50% range if we're really serious.
Do you have at least a year's of monthly expenses put away?
I'm not talking about your 401k.
The 4% (or whatever that number is) that are crushing it financially have a system, do you really believe your superior? Can you afford to argue with the results?
If you put away too much…what's the downside?
I'm sure you're all wondering, what's any of this have to do with life insurance?
Well, I suggest you listen to this episode to find out.
I know that all of our listeners are teeming with excitement as they see us release a new episode. We figured that if we gave it the ole college try, we could produce two episodes of the podcast for the month of September. One of us (Brantley) decided to move so we'll blame our lack of new episodes on that this time.
But in all seriousness, it's good to back.
In episode 83, we're discussing whole life and universal life in a bit of a different way than we have before. So many companies and brokerages that we speak with really seem to believe that the two products (WL and UL) are totally interchangeable.
Taken a step further, there seems to be some consensus that it's really just a matter of preference. And in some cases that's not far from true.
However, there are instances when one is clearly the winner over the other and there are yet other times where circumstances dictate which of the two will be a better fit.
If that sounds interesting to you, listen to the entire episode.
Good news for everyone, we've already planned our next episode, so you can plan on that for next week.
And as always, if you'd like help with your questions, use this page to reach out to us.
Last week, Equifax, the largest credit reporting company, reported a major breach of its core database. It is by far the largest hack of its kind to date and is estimated to have impacted more than half of the U.S. population–more than 143 million people's records were accessed.
By now, most of you have heard all about this from every other news source on the planet, however, what does it mean for life insurance applications? Will there be any sort of fallout over this for life insurance?
We weigh in with our thoughts in episode 82.
In episode 81, we're talking about the newest trend emerging in the world of life insurance underwriting and that is…
The end of paramedical exams and lab tests.
Now, the exams aren't going away completely. However, after talking with several people working for companies that have been rolling this out over the last several years, the numbers are telling us that about 50% of the people who apply are able to be fully underwritten without an exam.
This trend will surely accelerate and will serve a dual purpose:
- A much more streamlined underwriting process that leads to policies being issued more quickly.
- Add millions of premium dollars to insurance companies with a lower cost to acquire those dollars.
Of course we have more to say in the podcast, listen for our full commentary.
Whole life insurance is often maligned by the rest of the financial services world (those who sell registered investment products) as lacking transparency. It’s referred to as a “black box” for its lack of disclosure. Opponents say that it's not so much about how various pieces and parts are calculated, but more about the walls built around their attempt to reconcile results.
Or at least that's what they want you to believe.
In truth, it’s rather easy to compute expenses associated with whole life insurance. Life insurance illustration ledgers have been a compulsory step in the life insurance sales process since the early to mid 90’s in almost ever state and those ledgers explain a lot in terms of what the insurer is doing and plans to do with your money.
It's true that you cannot request a detailed breakdown of expenses under a whole life contract and compare it against other whole life insurance contracts.
You can easily look at ledger details and compare both guaranteed and non-guaranteed values for whole life policies to discern which ones come at a lower cost.
While some people may not want to perform analysis in this way, it’s no different than looking at a schedule of expenses to see who charges more for what. This view is simply bigger picture.
Expenses are relevant when making any decision, however, I would encourage you to focus on absolute value. How much money you have when you reach your destination is more important than the internal expenses you paid along the way. Whether or not something is expensive is always relative to the value it provides.
For five years, we have tracked the investment yield trend of whole life insurance companies and we continue to analyze this data every year because investment income is a primary driver of dividends paid to participating insurance policy holders.
Investment income is not the only contributor to any insurance company’s dividend payout. The other two factors considered each year by the board of directors is
- Claims experience
- Operational expense
Claims experience plays a much larger role in affecting the overall dividend than operational expense–there simply isn’t large fluctuations in day-to-day operating expenses for companies that have existed for over a century.
We use investment performance data reported in statutory accounting reports published by all insurers domiciled in the United States to compute the five year trend of investment yield on admitted assets. This computation tells us the average change in yield on invested assets over the most recent five year period.
For example, if the result of an insurer for this analysis is -.10% per year that means the insurer has experienced a loss in investment yield of .10% (ten basis points) per year for the last five years.
The results of this analysis are as follows:
Negatives Across the Board
This is the first year since we started this analysis that all insurers show a negative trend. In years past, only a few insurers achieved average growth in investment yield year-over-year with most insurers having experienced a decline on average. This result is not surprising given the current trend in interest rates across the broader U.S. economy.
Size Doesn’t Seem to Matter Much
The asset pool size of the insurer seems to have little effect on insurers 5 year trend for investment yield. The top five insurers on this list represent a broad range of asset sizes and all but one, New York Life, have experienced single digit decline year-over-year.
However, smaller asset pool sized companies to make up the entirety of the bottom 5 insurers on the list. Dividing the list in half, most of the larger insurers are found in the top 11.
This Trend is Likely to Remain
Interest rates remain low and don’t show major signs of improvement in the short term. As a result, we do not expect this trend to reverse in any major way for the next several years. Insurers will likely continue the trend of moving to somewhat riskier assets where available. This strategy will be more impactful for smaller insurers and then large ones due to sheer scale of overall assets and the impact smaller alternatives investments have on the total pool.
To continue on with the discussion of potentially rising interest rates…
We actually get into what it might mean for life insurance companies and for your life insurance policy–whether it happens to be participating whole life or universal life.
Major discussions in this episode:
- How quickly can you expect your dividend (WL) and/or interest rate (UL) to increase if Greenspan's prediction of a whipsaw comes true?
- Will the life insurers who were “forced” to raise expenses in their UL contracts over the last couple of years, lower these price increases as interest rates rise? (given that most of them gave the excuse of having to deal with a “prolonged period of low interest rates” to raise their prices on existing policies)