Tips for Buying Permanent Insurance?

[atxeng]

Why would your child have a $2M life insurance policy? Is this the beginning of an episode of Dateline?

Is your baby a celebrity ...why is he/she wroth more than your wife.. what happens to you if your wife passes away.. vs if your baby passes away. if my daughter passed away.. it woudl of course be devastating but my expenses would most likely go down.

The whole point is to generate an investment to take loans against, right? We are not talking about insurance for insurance sake. We are talking about interesting methods of investing and getting around the rules. So I am presented w/ a 10-pay $2M policy on the baby to use as a place to pump cash in to. Theoretically, this will return enough dividends and growth so that the policy will be able to support significant loans/withdrawals to pay for college.

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I'm not going to try and convince you of anything, I just wish you good luck and hope things work out for you. I think everybody here has presented reasonable cases for the purchase of permanent, but entirely the OP choice. Not my client, not my care.

Can you help me see where these reasonable cases are? I see I was recommended to read a poem and recommended to compare like-to-like and recommended to structure the policy differently.

Comparing like-to-like, it appears that BTID is equal or better so I'm trying to figure out why one would want to buy an big WLI policy when it appears that I can get better returns, equal or more insurance coverage, cheaper loans, and better liquidity using a BTID strategy.

For an example of the current policy I've provided details for: $250k term conversion into a WLI policy --> $3300/yr premium.
- negative IRR for 25 years guaranteed, 12 years at best case scenario.
- 6% fixed APR loan rates
- equivalent to ~1% RoR guaranteed or ~ 5.4% best-case scenario.
This doesn't seem like an "awesome" investment choice for a variety of reasons compared to BTID
- 35-year term coverage for same amount for ~$300
- Can go to the bank and get loans for <2%
- no high load fees/commissions so my investment's "surrender value" is more or less the same as what I put in from day 1
- 3.2% guaranteed RoR (T-bills) or 5-7% RoR in corporate bonds
- can liquidate investments easily

The only interesting thing I've seen is the brief discussion about structuring a permanent policy differently than the WLI MassMutual I am looking at currently, however, this discussion has not really got much details to it...

I'd love to explore and expand DHK's advice about structuring policies to maximize cash value.

 

[walthamny]

Your spreadsheet has full of assumptions, some pretty unrealistic. One is that taxes could go up to a normal range. Historically we are at the low end of capital gain tax rates and income tax rates. Try testing your assumptions with a 70% marginal income tax rate and 45% capital gains tax rate. All possible and historically could happen again.

If the interest rates follow the pattern of the last 30 years, the fed fund rate should be around minus 10% in the next 30 years. So we can all agree that wont probably happen but then you really can't use the last 30 years as anything normal.

Cash value Life insurance is creditor protected in most states. You would need to subtract the annual cost of creditor protection from your BTID analysis.

When you save for an event like college, your BTID strategy will push you into AMT tax because you will be bumping up your income by cashing capital gains. Putting yourself in AMT means you also forego all kinds of other potential tax deductions normally available to you. Zero issues like this with Cash value life insurance

You also miscalculate BTID strategy because if you pick 20 to 30 stocks, you are bound to have one loser and you can deduct the losses through ta harvesting.

Also, lets assume 1 year before your child starts college, North Korea launches 10 missiles at USA or some astreoid hits USA. Your BTID strategy will take a 40% loss, your cash value life insurance will probably earn 1% no matter what. So to compare apple to apple, please apply negative 40 % to the last years return.

 

[pfg1]

What you decide is obviously up to you. Keep in mind, you are in a very unique financial situation right now for someone your age... I would have an open mind to lots of things.

PLI if designed properly for max cash, you can usually break even around 7yrs (12-13 guaranteed) and have an IRR of around 4.5% at yr 20. It just gets better and better every year.

BTID, certainly can work. But keep in mind... the insurance is only good if its in force when you die. Studies show that 99% of all term policies do not pay out. Studies also show that most folks in the BTID camp don't follow through. Most spend the rest, vs saving/investing. Intentions are great, but for many it doesn't work out as they planned. Not saying that is you, just laying it out there.

Bottom line, yes...you can make a case for both. And your portfolio shouldn't only have one or the other... but (imo) BOTH. The PLI is no risk, and given that - its honestly hard to beat when you look at all the pros/cons of everything out there.


Mass is a good company with good products. All products (insurance or financial) have loads (fees/cost). And load amount, isn't just commission...that is just a portion. Advisers need to get paid. The way I usually design policies often pays me alot less than what many advisors get paid. On the loan rate vs return rate... well yes, sometimes it might make sense to use outside financing. However, for example....if you are earning 4.5% and paying 4.5% -the net effect is 0. There are also other factors to consider, when looking at when and how to use pli cash value.

Given what you've shared...I probably wouldn't go $2m on the kid... and I can't imagine you'd get that issued with the wife only at $500k anyhow. Cut that in half on the kid, and go $1m or $1.5m on the wife... is what you might look at.

Hope this helps.

 

[scagnt83]

Good god. Ive come to hate these WL vs. BTID threads at times. Lets go easy on the OP and remember he is not an expert in Cash Accumulation Permanent Insurance or Investments.

OP, I feel your pain. At the premium/asset levels you are looking at, this is not a small decision. You are doing the right thing by analyzing what is a very major financial decision.

You sound like an engineer of some type. Or at least analyze the situation like one. (I have lots of engineers as clients)

Keep in mind that the Blease Report does not show the maximum possible accumulation for the policies. This is because they wanted to do an "equal" comparison... but the products are not equal. Its like restricting a sports car to 100mph and saying its equal to a sedan. How much DB per dollar is different for each company. So if you put $1000 into company A, it will give you a different DB/CV than company B will. But the Bleak reports are based on you getting $100k in DB with each company.


#1 Issue Here
The policy you are looking at is not designed for maximum Cash Value Accumulation. I sell Mass (and many others), and that is not properly designed, unless you are very unhealthy and it was ran at a poor health rating.

If you are serious about this. You need to find an agent that can provide you with a policy design that will provide maximum cash accumulation.


Comparison of Returns
It is perfectly appropriate to compare a WL (or IUL) to Bond Returns. However, the problem is that you are hung up on the Guaranteed returns of WL. Mass Mutual WL has not returned the Guaranteed Return ever over a 200+ year period. So is it really fair to compare the guarantee of a Treasury to the guarantee of a WL? Especially considering that the insurance company invests those WL Premiums largely into US Treasuries? And based the Dividned Rates on the returns from those investments?

My point is that dividend paying WL has always returned more than the guarantee, because insurers invest the majority of their assets in US Treasuries and US AAAs.

A much more fair comparison would be looking at the "midpoint" illustration, in between the Guaranteed and the Current.


Risk-Adjusted Rate of Return
When comparing this to Corporate Bonds or equities, you must consider the risk-adjusted rate of return. WL from one of the big mutuals has a lower amount of risk compared to Corporates and Equities.


What most people leave out of the comparison
Premiums and Death Benefit. I did not evaluate your spreadsheet in detail, so perhaps you did this already. But you must take into account the premiums for Term, and deduct those from the Bond Return. Remember that they increase over time as well.

- Well off baby boomers are buying GUL (guaranteed universal life) in record numbers. They are in their 60s and had always been told they did not need life insurance after age 60. But these people who have multiple houses, $200k+ incomes, nice cars, lots of financial responsibilities, etc. These people are finding they still need life insurance. These are people that did BTID at your age. (im in my 30s myself and I own term/wl/iul and equities and real estate and metals)

If you can guarantee that you are and always will be vastly different than the millions of people that were in your exact same position 35-40 years ago.
Then I can guarantee that you will never need a $15k per year GUL policy (no CV, just DB) when 65+.
If you have some type of permanent coverage now, I can say that you most likely will not need a super expensive GUL in your 60s and 70s.

Honestly, I think insurance companies were the ones behind the big switch from WL to BTID. They see a MUCH higher profit margin from Term and GUL. And now they are selling GULs with HUGE premiums to baby boomers whos term has expired. Much more profitable business model than offering a policy that gives you cash while living.


So statistically speaking, you should include GUL Premiums in your retirement if you do BTID. (that would be $8k-$15k in todays dollars... 2.5x that 40 years from now)


Here is the thing man... its not an "either or" type of situation. Diversification is a wonderful thing. Buy some WL... or some IUL... or both (internal mechanics can allow for more Cash Accumulation in a Universal Life policy. not talking about the index portion either). Buy some Term too. Invest in some Bonds, Equities, Real Estate, Metals. Mix it up. Dont put all your eggs in one basket. Diversification is not just about a single equities portfolio... despite what your stock broker might say... lol. You need "total asset diversification", not just within Securities.


The Treasury Comparison again
Another issue with this. With a US 30-YR, you have locked yourself into a historically low rate environment for the next 30 years. That is not a good thing. You are locked in and are unable to capitalize on better rates in the future.

WL will fluctuate with the current rate environment. Back in the 70s through early 90s, WL Dividends were in the 10% range at times. Then as the Fed lowered rates over the mid-late 90s, those Dividends followed suit.

WL is able to capitalize and profit from future rate increases.

Sure they are just doing a combo of laddering and trading Bonds just like you "could" do... but they do it on a MASSIVE scale, get discounts, and have professional traders managing the portfolio. You cant do it as efficiently and profit as much from it as the insurance company can with their scale.

Hope thats some food for thought and helps to clear things up a bit.

 

[dgoldenz]

The whole point is to generate an investment to take loans against, right? We are not talking about insurance for insurance sake. We are talking about interesting methods of investing and getting around the rules. So I am presented w/ a 10-pay $2M policy on the baby to use as a place to pump cash in to. Theoretically, this will return enough dividends and growth so that the policy will be able to support significant loans/withdrawals to pay for college.

If you don't have a need for insurance, then don't buy insurance. What will your justification for a $2M policy on a child be? Are you even going to remember how these policies/dividends/loans work in 20 years when you start taking the loans?

 

[atxeng]

#1 Issue Here
The policy you are looking at is not designed for maximum Cash Value Accumulation. I sell Mass (and many others), and that is not properly designed, unless you are very unhealthy and it was ran at a poor health rating.

If you are serious about this. You need to find an agent that can provide you with a policy design that will provide maximum cash accumulation.

This seems like something I really need to focus on here. Is it something I should expect my agent to prepare for me or do I need to ask? This broker/adviser has often said that the goal is to spend down the death benefit during the retirement phase.
How do I get (or what do I ask for) a Permanent Policy that maximizes cash value?

Comparison of Returns
It is perfectly appropriate to compare a WL (or IUL) to Bond Returns. However, the problem is that you are hung up on the Guaranteed returns of WL. …So is it really fair to compare the guarantee of a Treasury to the guarantee of a WL? …
A much more fair comparison would be looking at the "midpoint" illustration, in between the Guaranteed and the Current.

I totally agree. That’s why I compared (and stated many times) that I was looking at the best-case CURRENT VALUE tables. This is showing an IRR of ~ 4.6% or equivalent to a 5.4% RoR BTID. If I look at the Mid-Point Tables, then the plans are total garbage and any loan quickly consumes the cash value and surrenders the policy. Anything except best-case Current Value seems like a terrible deal. I even have these tables (guaranteed, midpoint, and current) plotted on the previously attached files.

Especially considering that the insurance company invests those WL Premiums largely into US Treasuries? And based the Dividned Rates on the returns from those investments?

My point is that dividend paying WL has always returned more than the guarantee, because insurers invest the majority of their assets in US Treasuries and US AAAs.

So again, this is something that no one has really addressed yet that I keep asking. It seems that the majority of the insurance company’s investments and dividends come from them directly investing in the same bonds as everyone else, and then returning a lower portion to its shareholders….the data shows this trend as a trailing 1-2% behind the current bond rates.
So the question I’ve asked many times here is: Why is this WLI a good investment when they are returning a lower RoR than bonds and they invest in the same bonds I would be investing in using BTID? It doesn’t seem like a hard question.

Risk-Adjusted Rate of Return
When comparing this to Corporate Bonds or equities, you must consider the risk-adjusted rate of return. WL from one of the big mutuals has a lower amount of risk compared to Corporates and Equities.

Agreed, so is this reduced risk worth all the other WLI factors like risking surrender if the loan consumes the cash value or the risk of low dividends or the risk of negative IRR for 12+ years just to break even? This is a tough call.

What most people leave out of the comparison
Premiums and Death Benefit. I did not evaluate your spreadsheet in detail, so perhaps you did this already. But you must take into account the premiums for Term, and deduct those from the Bond Return. Remember that they increase over time as well.

Agreed. I projected using BTID…taking the same premium amount of a WLI and buying a 35-year term policy and then investing the difference. I projected this at a range of RoR’s from 3.0% to 7.5%.

- Well off baby boomers are buying GUL (guaranteed universal life) in record numbers. …These people are finding they still need life insurance. These are people that did BTID at your age.
So statistically speaking, you should include GUL Premiums in your retirement if you do BTID. (that would be $8k-$15k in todays dollars... 2.5x that 40 years from now)
…
Buy some WL... or some IUL... or both (internal mechanics can allow for more Cash Accumulation in a Universal Life policy. not talking about the index portion either).

Good points…I will need to include potentially a need for longer term after retirement.
So I think this is where I need help. All I’ve been presented with is Whole Life policies. I am not familiar with GUL and IUL. Is this similar to your advice for a policy that maximizes cash value? Teach me?

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If you don't have a need for insurance, then don't buy insurance. What will your justification for a $2M policy on a child be? Are you even going to remember how these policies/dividends/loans work in 20 years when you start taking the loans?

ummm, this right here seems to be an interesting response. So then this statement aligns with BTID....buy insurance for insurance ONLY. Don't try to confound it with investments and cash values and all that jazzz....get your insurance from one place and do your investments in another place....so what's the point of any of these WLI discussions then? Are you saying its all a waste of time and a farce?

 

[xrac]

Re: Northwestern Vs Mass for Whole Life Policies?

So my financial adviser is also a broker (for MassMutual?) and is starting to push whole life on me pretty hard. Not sure if this is the best forum to discuss this, but how do yall usually compare and project this? I'm trying to run projections and it seems at best to be equal to a 5.5% RoR on an after-tax account.

Thoughts? I have a lot I can talk about.

Hey, here's some more details.

• Age 30, male
• Married, wife is 30 y/o
• new baby born, 3 months old
• $150k/yr income (wife stays at home)
• Live in TX, own a home. $410k mortgage (about 75% LtV)
• maxing out all tax-advantaged retirement accounts (401k, IRA, HSA), I'd say maybe $250k between wife & I in tax-advantaged accounts
• due to recent windfall inheritance, we have about $600k in after-tax accounts
• currently have $250k TERM policy with MassMutual that can be converted.
• Group insurance & ADD through employer, 2x salary free (option upto 8x but its expensive)

So I'm in a pretty good financial situation and am looking for ways to create a well balanced portfolio. I understand really well the concepts of Whole Life (personal banking, dividend, loans, etc). With the new baby and being young, I definitely need to up my insurance levels. I am looking at at least $2M for myself & $500k on the wife.

So I'm looking at 2 main conversations here:

1. BTID vs permanent insurance for wife & I. Converting my existing $250k term and buying new policy w/ higher DB.
2. buying large permanent policy on new baby to use as investment tool for college education.

For Item #1, I dunno, I just don't know if I'm convinced that it is an equal or better investment vs BTID. I see that the Current Value projections, it is showing 12 years just to break even and reach 0% IRR and a long term 4.6% IRR for 30+ years.

I will try to attach some projections I made.

For #2, they are proposing something big, like a 10-pay $2M policy on baby (~$20k/yr premium) to then use as a college tuition investment & long term gift to child.

Which item can we discuss first?

also:
So my insurance broker is pushing Mass Mutual, claiming they have the best returns and dividends. However, it looks like Northwestern is better. Is this a one-off statistic or am I splitting hairs?

20 year returns: bleakes report:

--Northwestern Mutual, 4.44%
--New York Life, 3.37%
--Thrivent, 3.20%
--MassMutual, 3.01%
--The Guardian, 2.62%

Remember past performance does not indicate future results. With that said I do not think you can go wrong with a WL from any of those companies other than I do not know about Thrivent. I have a large policy on myself and my wife through Guardian and I sleep very well at night and I use to be a BTIDite. and started following the market in 1989.

 

[atxeng]

PLI if designed properly for max cash, you can usually break even around 7yrs (12-13 guaranteed) and have an IRR of around 4.5% at yr 20. It just gets better and better every year.
…
The way I usually design policies often pays me alot less than what many advisors get paid.

So how do I go about doing this? All I’m looking at is the Whole Life policy my broker sent me. Are there terms I should be asking for? Should I be asking for something different than a Whole Life?
Are you talking about something like a 10-pay policy to cram in a lot of cash in 10 years?

BTID, certainly can work. But keep in mind... the insurance is only good if its in force when you die. Studies show that 99% of all term policies do not pay out. Studies also show that most folks in the BTID camp don't follow through. Most spend the rest, vs saving/investing. Intentions are great, but for many it doesn't work out as they planned. Not saying that is you, just laying it out there.

Totally agree here, but this is kind of a wash because studies also show that a large portion of permanent insurance policy holders lapse their policy for (insert reason here). Additionally, if a person spends down their entire policy down to nearly $0, then the insurance won’t pay out either. I don’t really feel this qualitative point is a good discussion point when trying to actually discuss numbers and financial projections.

 

[DHK]

This seems like something I really need to focus on here. Is it something I should expect my agent to prepare for me or do I need to ask? This broker/adviser has often said that the goal is to spend down the death benefit during the retirement phase.
How do I get (or what do I ask for) a Permanent Policy that maximizes cash value?

Okay, I know exactly what's going on. I have a different philosophy, but this is all part of the LEAP - Lifetime Economic Acceleration Process financial strategy.

I know I can go into all kinds of detail with you, so here we go:

In retirement, we can either:

Pension (if you have one):
- Single life (maximum income)
- Joint Life (lower income for two people)

401(k) and other Qualified Plans:
- Spend principal and interest (maximum income)
- Spend the interest only (lower income)

Mortgage:
- Live there and generate income (maximum income)
- Just Live there


The idea is that with permanent life insurance and leveraging the death benefit... you can leverage that guarantee to accelerate your own retirement standard of living.

The problem... is that you have to ensure that you can GET there first.

Pension - will you have one?

401(k) - will it survive market volatility?

Mortgage - will it be paid off by at least 50% before retirement to qualify for a reverse mortgage?


Even with this model, the idea would be that you would essentially ignore the cash value accumulation and consider it an additional 'benefit' and just pay the premiums to secure the death benefit. This would be another reason why you would just ignore comparing the rates of return in the policy to anything else, because it doesn't matter when it's securing the death benefit.


There are still a lot of 'if's' in this kind of planning and not everything will be working to its maximum efficiency - in my opinion.

The problem with this LEAP-based kind of planning is that the "economic model" stays static, but economics does not. Not everything stays the same and the PS&G model itself - I feel - is outdated.


However, if you maximize the contributions to a permanent life insurance policy, it can provide tax-free retirement cash flow via policy loans and be a non-correlated asset against any other securities you may have. I have other ideas regarding mortgage structures - basically, it makes little financial sense to have a paid-off home if you can have that money actually working for you elsewhere.

 

[DHK]

The strategies in this attached article are essentially what they're talking about.