Normally we are fine with leaving minor mistakes people make regarding various financial products alone—long time readers of this blog know we’ve sure made our fair share of editing booboos among the nearly 500 articles we’ve written in the past three years.
Recently, we were called in to review advice (a second opinion) given by a financial planner that was so wrong I have to highlight it here. And I also realized something in correcting the misinformation that made me think this is a mistake some others might be making. So I did a little digging around the ye olde interwebs (looking at forum posts & financial blogs) and discovered it is indeed a common mistake.
This Policy Sucks…or does it?
We received a contact through our contact form from a guy–we’ll call him Bob to protect his identity. A little over a decade ago, Bob purchased a whole life policy from one of the well known mutual life insurers and had been wondering if he should keep the policy and continue paying the premiums.
He sought out the advice of a fee-only financial planner (because they are objective and such) and the planner he selected, we’ll call him Joe was happy to provide his opinion on the matter, for a nominal fee…of course.
Within a few days of receiving the original policy proposal and current in-force ledger of the whole life policy, Joe (the fee-only financial planner) wrote Bob an email and informed him that he had been taken by a sleazy life insurance agent and he needed to cancel the policy immediately.
Among the list of opinions alleging various information Joe could not possibly know, he included what he considered ”the most damning reason of them all to drop this policy” the policy had performed at its guaranteed rate…boo, groan, jeer, etc.
Now, I can confirm something for all of you.
Looking at the in-force ledger, clearly the current cash value in the policy is the guaranteed cash value. But there is something else that even Bob noticed that made him second-guess the accuracy of the advice that he received.
Looking back at the original illustration, the guaranteed cash value was a good bit less than what the current ledger quoted. Additionally, the future guaranteed cash values were also higher than what the original ledger showed.
Mistake or simply the depiction of a cool life insurance perk?
It can’t go Backwards
Joe’s depiction of the policy’s “inability to do any better than the guarantee,” which as we all know is “terribly bad compared to even the stock market’s worse years” (really?), sure leaves us with the impression that Bob made a huge mistake and gave up untold fortunes.
But why was the guaranteed column on the new in-force ledger different from the original ledger?
Because, you see, once a whole life policy has a given amount of cash value in it, that is the new guaranteed cash value. Let that sink in for a second, it will make perfect sense.
Boy-howdy is it sure fun to know how life insurance works. Bob’s policy has most certainly outperformed the guarantee that was originally stipulated in his policy—by quite a bit.
But Joe’s mistake comes from ignorance or carelessness that overlooked the fact that once a whole life policy outperforms an originally guaranteed cash or death benefit amount, that new result becomes the guarantee.
And it gets even better, because the guaranteed rate of growth applies to this new amount—this explains why the future guaranteed values are higher on the current ledger than the original.
So how much better did Bob do you ask? He was kind enough to give me the go-ahead to share.
The Actual Values
Bob’s original illustration showed guaranteed values for the year in question of $77,443. His actual performance was $105,644 or 36% more.
Now, it’s also true that this amount was 14% less than the original projection of $122,184, but that’s because the dividend for this particular company had declined since Bob bought the policy.
Now I certainly realize that this evidence is anecdotal, but it falls in line with several other policies I’ve seen.
And for those out there who claim whole life policies will perform closer to their guarantee than the projected values, I’m not really sure what policies they are looking at. I’ll submit that I’ve looked at quite a few policies that have been on the books for a while and that’s not been consistent with my findings.
Bob's situation proved to be no exception.
Moving forward the guaranteed cash in Bob’s policy will always remain significantly higher than the original guaranteed column, and this again is a function of dividends paid to date.
This means if for some unknown reason Bob’s company suddenly stopped paying dividends and never did again, his policy maintains a very nice increase over and above the guarantees he looked at when he bought the policy. If the insurer continues to pay dividends (which is extremely likely) Bob will continue to realize results that far exceed his guarantee.
Knowledge is Power
Cynicism and a thirst for knowledge can be good things. If Bob had taken Joe's advice at face value, he might have walked away from the encounter thinking that he made a bad decision nearly a decade ago.
Instead, Bob pushed further and learned much more than he anticipated. As of our last conversation, he’s pretty happy with his policy and plans on keeping it.
Getting an objective second opinion is often a good idea, however, you should always make sure that the person offering up the second opinion is actually qualified to offer it.
As Voltaire once said, “Opinion has caused more trouble on this little earth than plagues or earthquakes.”
If you have a policy that's been in force for a while and you'd like to know how it stacks up, feel free to reach out to us, we're always happy to help and we're qualified to offer an opinion.