Since we completely ignored the fact that there was a Holiday earlier this week, we'll take a minute to wish everyone a belated Happy Halloween (it's even more embarrassing that the last article to drop came out on 10/31). Unless you the one around the office who spends an hour or more before work dolling yourself up for the Halloween customs you planned out almost a year in advance, you're biggest memory from earlier this week was likely taking your kids for an after-dark walk around the neighborhood to beg your neighbors for candy that would keep the kids up all night. And since we're already on the topic of children, we figured today would be a great day to talk about the kids and buying life insurance for them. Nothing scary or controversial there. 😉
So this topic has been debated (somewhat passionately) for years. Some argue forcefully in favor others argue forcefully against it. The traditional naysayers suggest that it's sick to purchase life insurance on your children as the thought of “profiting off their death” is sickening. Still others like to point out that since you don't typically rely on your children as a source of income, it would appear meaningless to purchase life insurance on them. Are they right? Is a life insurance policy on your children just a good ruse devised by an insurance agent who came up with a way to boost his case count and make a quick extra buck here and there? I actually used to sort of think so (gasp!). But then something happened that made me change my mind.
Every once in a little while this question comes up and recently I had someone ask me about this and decided it was a good topic to address. We know that when a policy loan is taken, there is interest charged on that loan that is collected by the insurance company. Now, since whole life insurance is issued by and large by Mutual Insurance Companies the fact that a policy holder is paying interest to a company he or she owns a part of, and participates in the divisible surplus (read profits) of the company, it's not really a kiss-it-goodbye scenario. Still, though, some people take literal phraseology very seriously (I've been in two…disagreements we'll call them…over it literal definitions this week alone). So, for those who look at interest charged on a policy loan and say, “I can get better financing than that with my good credit” is this necessarily the moment when we infinite banking hawks sit back down and say it works for everyone except you Mr. and Mrs. 850 FICO?
Here's something you wouldn't expect to find written around here: Whole life insurance (at it's core) kind of sucks. Sure everything is guaranteed, and to some people and in some applications those guarantees are vitally important. But the thing that drives whole life insurance to the level that makes it an attractive cash accumulation tool for us is what insurance company refer to as the ability to participate in the sharing of divisible surplus, aka dividends.
To be somewhat bold, non-participating whole life insurance is horrendously boring, and probably not worth your time (unless your in your 60's or older and just looking for $5-10k for final expense costs when you die, and if you think that's all it's going to cost, you might want to think again).
The key element that takes Whole Life insurance to the next level is the payment of dividends (participating whole life insurance). Dividends not only supply your policy with loads of extra cash above and beyond the guaranteed cash the insurance company promises you'll have if you pay your premiums, but they also give you the ability to continue to earn money on your money even when you've taken the money out to spend it.
Earlier in the week we declared PUA's the magic behind Cash Value life insurance. If PUA's are the magic, dividends are the mana that grant them their magic.
It makes perfect sense to dedicate some time to the discussion of paid-up additions and their role in cash value life insurance. You’ll find them under a few different names (additional insurance rider, enricher rider, enhanced paid-up additions, etc.), but it all means the same thing.
This feature of a whole life insurance policy is critical for creating a cash-rich policy, and we’ll take some time to explore what paid-up additions are, how they function inside a policy, and, most importantly, why you want them.
Ever flip on over the CNBC and watch their stock picking experts talk about chartology? It's the process of looking at a graphical depiction of a stock or market performance and making “educated” guesses about where the market (or a particular equity) is going based on the statistical data that represents the chart's graphical display. It's not perfect, but it's something a lot of Wall Street types get really excited over, and it's probably something you've run into if you've spent more than 10 minutes with a stock broker who wanted to pitch you on his or her latest and greatest stock idea. Well, here's a chart that most 3rd graders could make a prediction off, and it's not good news for the buy and hold folks. It's the historical data for the Dow Jone Industry Average, the index of the largest publicly traded companies in America (read: where the “low risk” blue chips call home).
Here's something we should address right off the bat that I think a lot of people in the BOY et. al. crowd tend to forget to mention: YOU CAN SPEND YOUR MONEY! So, if today I'm serving you dinner in the form of financial security, we're going to start first with dessert. And if it weren't for copyright law (and a little bit of laziness), I might think about stealing a picture off the internet of a young child with ice cream all over his/her face. But I'll just let you envision that instead.
So the biggest question I get all the time is why? Why do I need to change the savings/retirement plan that I have currently (and for many the answer is, because doing something…anything is an improvement over what you are doing, now)? Why should I look at life insurance as a savings vehicle? How does that even work? Besides, as many point out, I know plenty of people who aren't doing it…
Prior to booming interest rates from the later 70's and early 80's your life insurance options were pretty much term insurance and whole life insurance (and these nifty things calls endowment contracts that have sense gone the way of the dodo). But, as interest rates started to skyrocket and insurance companies appeared to lag way behind, many began tough criticisms of the industry for offering such tiny returns compared to CD's and other interest based savings vehicles. The industry maintained that it's payment of dividends accounted for the fact that policy loans did not change the dividend paid (essentially taking money out without taking money out) and required a smaller dividend payment. Still, the spread was pretty great and a lot of people began taking large policy loans and placing the money into other savings vehicles with much better returns in the short run.
Some companies tried to combat the interest rate environment by changing the way in which they paid dividends. The Guardian Life Insurance Company of America was instrumental in changing the payment of dividends by pioneering what is now known as Direct-Recognition to compensate for the interest spread. They paid a higher dividend rate by addressing what all of the insurance companies were fearing, money leaving the contracts. So, Guardian began a practice of paying higher dividends if the money stayed in the contract, and reduced the dividend on loaned values of the policy.
Others in the industry decided to go in a different direction. Instead of changing up dividend treatment, they decided to create a new product. A product that took the guarantees that Whole Life brought off the table, but allowed for an opportunity to make more money on cash value in the policy if interest rates continued their rally. This new product was called Universal Life Insurance Read More…
So the original intent of this was to have a informational resource that was updated regularly to promote the use of permanent insurance as a conservative allocation to one's portfolio. To promote the infinite banking concept through a slightly less glitz and glamor fashion than the Nash and Yellen group. With a much harder look at the mechanical nuts and bolts rather than the talking point sales-pitchy stuff that appeals more to insurance salespeople than it does the end user.
Today we are going to begin that process. The basic informational stuff about life insurance is being removed–there's more than enough of that stuff floating out around the internet and we'll address important points as necessary. We won't completely abandon the importance of basic life insurance planning, and we'll leave plenty of room to write on this issue as well.
Known by a few different names, and probably the most tweaked product in the industry, Whole Life (aka straight life in older circles) has a several centuries history of offering guaranteed death benefit for the entire lifetime of the insured. In the world of guarantees, nothing beats it, and it has been an anchor for conservative savings plans for just about as long as it's been in existence. It's also one of the most hotly debated products in the insurance industry as opinions run wild about its overall usefulness compared to other products that exist today. Read More…