Cash Value Life Insurance as an Asset Class

Pam and friends over at Bank on Yourself® released a blog post detailing the reasons to be wary of Indexed Universal Life Insurance complete with a video to further emphasize their point.

It comes as little surprise that a marketing program that seeks to help insurance agents sell more whole life insurance would work to demean indexed universal life insurance, but what is surprising is the sheer lack of honesty.

There are a number of over-the-top claims with zero supporting evidence, so we’ll discuss all seven reasons to be wary of indexed universal life insurance.

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Using indexed universal life insurance for retirement income comes with a certain degree of skill and responsibility that shouldn't be overlooked. The liberty an agent or broker can exercise over assumed interest rates means that we need to seriously test our design and proposed ideas to ensure proper expectations as it relates to policy performance.

Unfortunately, this responsibility sometimes goes unchecked and a few bad eggs have presented and sold policies with lofty expectations that may one day become serious disappointments as it relates to the income producing capabilities of these products.

Remember–many people are looking to use indexed universal life insurance to create tax-free income at some point in the future by making use of policy loans.

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Last week we published a critical piece regarding a recent review of indexed universal life insurance that showed up on Jim Dahle’s website The White Coat Investor. Jim took our criticism seriously and on Friday of last week published a lengthy reply.

Based on the time Jim has taken to address this, I felt it was necessary to offer up some additional thoughts, and even a small critique on his attempt to rebut my biggest criticism of his original work.

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Most of our readers and clients are familiar with the White Coat Investor—a web site started a few years ago by Jim Dahle, a physician who practices Emergency Medicine. I’ve talked about Jim’s work before, once quite a while ago when he attempted to malign whole life insurance and again about a year ago when readers wanted me to take on his suggestion that whole life insurance is not like a Roth IRA.

The second time I disappointed some people when I did the exact opposite of what they wanted by pointing out that he wasn’t wrong on that subject.

For the most part, we like to leave him alone in his pursuits. This is due in part to the fact that, believe it or not, we’re not all that different in our main goal—to identify and bring attention to the really dumb things financial professionals of all types do to people (for the White Coat Investor it’s specifically doctors) that leave them in a less than optimal position.

We differ, obviously, on our feelings about life insurance and that’s mostly fine. But Jim’s been on a bit of an indexed universal life insurance rant lately thus we’ve decided to weigh in on his recent work reviewing an indexed universal life insurance illustration that someone sent him.

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Bad whole life insurance, the stuff that isn’t designed the way we suggest it should be, sometimes catches fire for its so-called poor returns. Those with something to sell you that isn’t life insurance (i.e. that competes for those dollars) like to focus on fees and talk about how terrible the product is. And in recent years, historical whole life insurance cash value performance reports from places like the now defunct Blease Research were used to try and claim that returns were mediocre and illustrations always overstated the performance of the policies.

But prior to the peak in interest rates seen in the late 80’s/early 90’s whole life projections often understated the performance of the product.  And when we go back beyond this point and look at a policy put in force several years prior, we see dramatically different returns. This is potentially really good news for the life insurance industry and its ability to deliver competitive returns on its products relative to the entire selection of financial products.

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The investment sales world is often interested in convincing us that their products are superior, but when proof of superiority is lacking one opts for a common secondary method…bad mouthing the competition. And while there are a number of ways that this sort of thing might take place throughout the financial services industry, one such practice that deserves time here for it utter nonsense is the claim that you and I can easily beat the investment performance of a life insurer and further it’s stupid to think that there is something special they could offer since they are bound to the same market you and I have access to.

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Blended whole life insurance has long been a mainstay subject at the Insurance Pro Blog. Dare I go so far as to say it’s the subject that acted as the catalyst for the site’s existence (that might be a tad sensationalist, but also not incredibly far off from the truth).

We’ve explained numerous times how it works, and why it works. We even have historical evidence for its proof of concept. But, in the interest of cash optimization there exists another question that is a tad out of left field, but extremely important. Practically speaking, does it work?

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Following up on last week’s article regarding whole life insurance and improved market conditions, we’re bringing the same question up about indexed universal life insurance this week.

Since we already covered some of the more intangible issues with this consideration last week, we’ll skip most of that this week (except for one nuance regarding indexed universal life insurance) and instead focus more on the returns we’d anticipate seeing if conditions improve and remain improved.

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It’s been a pretty good run for whole life insurance over the course of the last five years. 2008 scared the pants off many Americans and has reminded us all that maybe being an “investor” isn’t all it’s cracked up to be.

As the blood pressure among our investment salesmen and women slowly rises following that last statement, allow me to take a moment and discuss a question we've received a lot lately:

If the market continues to rally, and history does end up repeating itself, will whole life insurance fade into the background just as it did throughout the 90’s?

The answer may surprise you…

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