Buy Term And Invest The Difference

[Atlas]

" Buy Term and invest the difference "

If this has been such a wonderful idea why is no one doing so. It all comes down to one word, DISCLPINE.

Why is our savings rate negative? Only one word, DISCLPINE. Why is our nation at an all time low when it comes to net worth? DISCLPINE.

So why should you buy whole life? Only one word DISCLPINE. Whole life forces you to save. As we can tell by our nations average savings rate many need to be forced to save. Whole life will help an undisciplined person to save.

All many ever talk about is ideas that never work in the real world.

" Buy Term and invest the difference "

In the real world is is " buy term and waste the difference. "
So do you have any undisciplined clients? If so tell them about a plan that will make them save.

 

[James]

It kind of depends, some will always take what the media and financial gurus want to throw out there. Yet the studies that are so negative on Americans and there general savings habits may not be all correct as some would like us to think.

http://www.urban.org/publications/1000252.html

There are other studies out there that contradict what some in the media and others are excepting as gospel. The fact is a big portion of the population are more prepared for retirement than some would think. Fact is the Financial World has a strong interest to make many think that there ideas are gospel, fact is, it isn't nor are there studies. Stay tune, if you begin to keep an eye on new studies out there that is not touted by Wall Street and the Media you might be more positive and not fall into the trap of "I'm doing okay, but I worry about my neighbor", fact is your neighbor is likely to be doing okay also!

 

[Dave020]

Wow, interesting thread. My thoughts...

Forced savings is an idea used by large life insurance companies to push whole life products. They do not perform as well as nearly any other saving alternative and are highly illiquid. Mortality costs are high, interest rates on access to cash value are high (imagine having to pay someone interest to borrow you own money), and let's not forget the possible future "surrender squeeze" that many many insured face at times when they can least afford to re-fund a depleted policy. So, forget cash value, it's a joke as far as a savings plan - a CD at my bank earns more and is far more liquid as would be a money market and that is not even getting into moderately conservative mutuals. The only value a whole life contract really has is the permanent paid-up value. And generally that only occurs with participating policies paying dividends. Besides, NAIC is pretty clear that you can't sell permanent products as savings vehicles or investments or anything else except permanent life insurance. And the only part that is really "permanent" are the paid up additions which would take many years to equal the original face value. Also, client will be upside down or sideways for at least the first few years before there is any cash value in the policy. How does you possibly explain to a client that this is a forced savings plan that will be worth nothing except death benefit for the first X number of years when they can at least see positive value on any other vehicle with each contribution? I used to laugh when I ran illustrations at NML and the CV in the first year was $0. Client would pay in $2500 in premium and get...$0. Sure at age 65 it looked a lot better but I can get better than $0 on my $2500 just about anywhere else. Maybe take $600 of that, buy some term (with a much larger death benefit) and take the other $1900 and stick it in an interest bearing account, bet I'll have more that $0 after the year.

As to need, well, certainly need will change over time but I find it very suspect to assume a person's need for $1M life coverage will be constant throughout their whole life (pun intended).

I see life insurance need as a bell curve, with low needs at both the youngest adult and oldest adult ages and largest needs in the years when a family needs to provide for children and a mortgage. No way a 22 year old just out of college needs a huge benefit policy nor does a 80 year old widow (er) (except for estate planning purposes which may or may not need to be addresses separately).

Here in CA we need high death benefits mainly to protect mortgage plus income (homes in my area start at over $500k) so it is not uncommon to write 1.5 or 2 Million dollar face on policies. These same people are usually funding 401(k) to max, stock options, a Roth or other form of IRA and perhaps an annuity or two plus bank accounts and CDs. Since they are already invested and saving, their need it pure protection for a predictible period of time, and term provides exactly that. Straight mortality curve coverage at the lowest possible mortality-based cost.

Now, I do like the idea of a blended approach to long-term need, part whole life part term. The whole life part is for the future need on a permanent basis while the term is used to cover the temporary large needs of mortgage, kids, income replacement and such. I always was fond of $25k or so of whole life with the remainder in term. The whole life could be paid up at 65 and then used for final expense.

 

[Guest]

As to need, well, certainly need will change over time but I find it very suspect to assume a person's need for $1M life coverage will be constant throughout their whole life (pun intended).

I see life insurance need as a bell curve, with low needs at both the youngest adult and oldest adult ages and largest needs in the years when a family needs to provide for children and a mortgage. No way a 22 year old just out of college needs a huge benefit policy nor does a 80 year old widow (er) (except for estate planning purposes which may or may not need to be addresses separately).

Very valid observations you have made in the above statements.

1. A 22 year old kid out of college most likely will not be able to afford a $1M DB permanent policy. So, his income most likely will put him closer to the tail of the bell curve than the center.

2. IFF a 22 year old kid could in fact afford a $1M DB in permanent insurance and acquired such a policy, 60 years later, at age 82, inflation will take care of putting him on the tail end of the bell curve. That million dollar policy will have its purchasing power eroded by inflation.

Here in CA we need high death benefits mainly to protect mortgage plus income (homes in my area start at over $500k) so it is not uncommon to write 1.5 or 2 Million dollar face on policies. These same people are usually funding 401(k) to max, stock options, a Roth or other form of IRA and perhaps an annuity or two plus bank accounts and CDs. Since they are already invested and saving, their need it pure protection for a predictible period of time, and term provides exactly that. Straight mortality curve coverage at the lowest possible mortality-based cost.

This scenario is an entireley different proposition. Someone has performed a financial review and determined that a particular product fills a void.

It is in contrast to someone aspousing buying term and investing the difference as an unquestionable universal invocation that everyone should pursue.

Check this out. Note it is out of date in that our tax rates are lower. I think still it makes for some interesting reading. http://www.nysscpa.org/cpajournal/old/08135916.htm

I think I have come to believe that most people probably cannot afford the permanent policy which provides them the DB they need. Consequently, they must buy term. I would bet the majority of people that have made their last payment into a 30 policy, wishes they had bought permanent insurance when they were young and COI affordable. No doubt they could not have afforded as much a DB as term, but I bet they wish they had bought something.

 

[James]

So basically now comes the other myth, first it was that the vast majority of people are no where near a savings rate that can afford them some sort of retirement. Alternative studies that are not espouse by the Financial World and the media suggest a different picture that others simply don't want to count. Basically, Wall Street wants more investments!

Now we move on over to the "Inflation" monster! Yet look at inflation, now take out of the equation Health Care that is moving at around 7-9% yearly and now is at least 7th of the economy. What inflation I dare ask? In fact, if one views the Federal Reserve and other comments the real fear is Deflation not Inflation! Now I wonder how the Stock Market will react if the Fed's ever have to announce Deflationary fears publicly? Fact is no one knows where this economy is heading, esp with considerations of foriegn problems.

Now we are right back to the same old BS, solid PWL is paying around 6% over the long haul. Find me a list of MF's that is beating that by any amount over twenty years? There isn't many out there, and remember last years gains are not guarantee to continue.

Ps technically you're not borrowing your own money when taken loans out on the CV of WL. That would be consider a withdrawal.

 

[Atlas]

It kind of depends, some will always take what the media and financial gurus want to throw out there.

Well lets look at what the Federal Reserve has to say.

http://www.frbsf.org/publications/economics/letter/2005/el2005-30.html

The title says it all.

" Spendthrift Nation "

So I have no idea what myth you are talking about.

 

[Dave020]

I think I have come to believe that most people probably cannot afford the permanent policy which provides them the DB they need. Consequently, they must buy term. I would bet the majority of people that have made their last payment into a 30 policy, wishes they had bought permanent insurance when they were young and COI affordable. No doubt they could not have afforded as much a DB as term, but I bet they wish they had bought something.

Valid point here and I agree. I think that at the far end of the bell curve there is a need, and it takes adjustment through the client's financial life to arrive at what it will be.

I find that term policies generally offer a convertability option which then allows the agent to help the client attain the final amount of permanent over the years by doing conversions over time. Yes it can cost more in premium because conversions will occur at higher ages, but it still offers a solution that is manageable for the client.

Dave

 

[James]

It kind of depends, some will always take what the media and financial gurus want to throw out there.

Well lets look at what the Federal Reserve has to say.

http://www.frbsf.org/publications/economics/letter/2005/el2005-30.html

The title says it all.

" Spendthrift Nation "

So I have no idea what myth you are talking about.

Go read your link, the story is nothing more than a small period of time that is more influence by the strong returns of the market and increasing property values of the last 20 years. I'll agree that many people are being influence by returns that can not possibly go on forever.

Yet though, more and more studies are coming out disputing the idea that people are not ready for retirement by counting total worth not just Qualified savings. In other words the planning and plans of the FP'er has been denounce by many, including the Organization of CFP just last year! As in the majority of Americans are ill served by the CFP and their plans are simply not realistic for the vast majority of people.

People in general do not invest for retirement, they save! As the old man said, "We do it the old fashion way, we earn it". Basically that is how most people mass their fortunes, such as the greatest generation, via Blue Book Saving Accounts, CD's, Annuities, CV Ins. Policies, Bonds and a mix of MF's. Yet this group has been as far as history the most affluent Retirement Population the World has ever seen.

 

[Atlas]

James


" the story is nothing more than a small period of time "

Do you think 40 years is a small period of time? I do not we may not have the same idea about what long term is.

If you will see graph " Explaining the declining saving rate " you can see 40 years.

1960 till 2000

You may also want to see, " Ratio of household debt to personal disposable income" graph. Some of this debt is for homes but some is wasteful debt as well. Credit card debt and home equity loans. Many times those loans are very bad debt.

As far as debt goes, " Much of the recent run-up in household debt has been mortgage-related; low interest rates have spurred a refinancing boom that has allowed consumers to extract equity from their homes to pay for a variety of goods and services. According to data compiled by Greenspan and Kennedy (2005), borrowing against home equity generated an average of $425 billion per year in spendable cash from 2001 through 2004—more than twice the average of $177 billion per year over the preceding four-year period. "

As I often call this using your home as an ATM machine. So do increasing property values of the last 20 years matter if you are doing home equity loans?

 

[Dave020]

Following on to Atlas, here in Santa Clara County (CA) the rate of foreclosures on homes in 2006 was almost 5X the 2005 rate.

I agree that people are buying into a lot more bad debt and that can even include the "creative" mortgage financing business in places like CA.

Dave