Life Insurance as an Income Producing Asset with the Power of Leverage

 

We’ve talked a lot about using life insurance as an income producing asset. Many people stumble a bit when they first attempt to wrap their head around the notion of using “insurance” either as a place to save money or as an asset from which they can generate income. 

I raised an eyebrow or two when first presented with the idea. Today’s discussion is not an introduction to the concept of using life insurance as an income source, but rather a somewhat advanced look at why it can work so well.

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Case Study: Whole Life Insurance vs. Bond Strategy

 

We receive phone calls and emails every week from people looking to “de-risk” their portfolio and possibly add life insurance as a complement to their other investment and savings strategies.

A comment that tends to trend among these good folks notes that while we’ve done a pretty decent job explaining the more esoteric aspects of life insurance (according to the comments) it’s still somewhat difficult to understand exactly how this works and why it’s beneficial.

I can accept and agree with this comment and in an attempt to build out more comprehensive understanding I'd like to present a case study today that highlights some of the power behind life insurance when used as an asset in one’s portfolio. We’ll be publishing several more of these in the coming year. While we’ve been given permission to share these stories, names have been altered a bit to protect identity.

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Argument against Permanent Life Insurance: Lack of Fee Disclosure

In our final installment of the five most common arguments made against permanent life insurance we’ll take on fees or the lack of a discussion about fees, as high fees were already discussed.

The claim here is that life insurance contracts are very non-transparent regarding fee disclosure and you never really know what you are signing up for until long after you paid several years worth of premiums.

This argument, like several others, isn’t entirely unfounded. But it takes a large degree of liberal interpretation to the extreme.

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Argument Against Permanent Life Insurance: They Steal your Cash when you Die

This weeks edition of senseless arguments levied against whole life insurance and universal life insurance is one my very favorites.

Even though I’ve addressed this topic before, I couldn’t pass it up knowing I’d be writing a series on the most common “complaints” used to dissuade the buying public from these products.

I do have to admit right out of the gate, though, that this one has a shred of truth behind it.

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Argument against Permanent Life Insurance: Low Rate of Return

The rate of return argument against permanent life insurance focuses mostly on an irresponsible comparison of dissimilar asset classes.

Chances are good that most of you reading this understand that there is a relationship between the risk of an asset and it’s return; the two are positively correlated. This means the riskier an asset is (i.e. the more volatile it’s returns and the higher the chance you lose money if you buy it) the higher it’s long term rate of return is hoped to be.

People tend to be pretty comfortable with understanding that

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Argument against Permanent Life Insurance: High Commissions Paid to Agent

It seems one of the biggest reasons you should not buy whole life or universal life insurance is because the agent or broker who sold it to you will get paid to do so. At least this is a claim made in almost all of the articles ever written in an attempt to steer you away from these insurance products.

In what has to be the most ad hominem of all the arguments against permanent life insurance, the amount of money I make (or don’t make) takes center stage—I wonder how many of those folks wrote their article for free like I am this one right now.

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Do 80% of Whole Life Policyholders Cancel their Policies?

Spend any time looking around the internet for reasons not to buy whole life insurance and you’ll inevitably land on pages claiming that 80% or more of whole life purchasers cancel their contracts.

The inference here is that with such a high rate of cancellation those who bought before you learned something you’ve yet to uncover, so save yourself the time, money, and heartache and just skip on down to the next idea.

Sounds reasonable…if only it were true.

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2015 Whole Life Insurance Dividend Analysis

You can find the latest Whole Life Insurance Dividend Analysis here.

In 2013 we released the industry’s first public analysis on variation in dividends for major participating whole life insurance products. This analysis focuses on variation and trend of declared dividend interest rate at the seven most competitive life insurers who issue participating whole life and will publicly announce/disclose their dividend interest rate (more on this point later on).

We’ve long argued that this sort of analysis is the best gauge of potential cash value performance in a whole life policy because it allows us to review how the company has managed business and investment operations given the axiomatic assumption that these life insurers will move heaven and earth to deliver the highest dividend award to participating policyholders. This foundational assumption has substantiating legal precedents.

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2015 Whole Life Focused Company Cash Flow Trend Analysis

Operating cash flow is the cash generated by an insurance company prior to the inclusion of investment income generated by managed assets. Under insurance statutory accounting rules, this is profits generated after deducting operating expenses. Insurers that have issued participating policies can cover planned dividend payments with operating cash and/or investment income.

We look at operating cash as a secondary indicator of insurer operating health. I say secondary because it commonly affects policy performance far less significantly than investment performance on managed assets.

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