Whole Life... Why Not to Love It?

[DHK]

If death benefit needs are temporary... why is there an entire sub-forum for final expense insurance to sell seniors life insurance? It would obviously be far cheaper to obtain the coverage while one is young.

In addition to that, you are ignoring the financial needs of being able to access capital when needed. 401k and IRAs either restrict or tax/penalize withdrawals prior to age 59.5. If you separate from service after age 55, you can withdraw directly from your 401k without a penalty. If you take out 72t payments to continue for 5 years or 59.5 (whichever is longer), you can avoid the penalty.

Families need access to capital because they will continue to buy things over time. They are an economy of themselves. Locking away access from your money is short-sighted.

 

[Larry Tew]

...This is getting old.

Why don't you know these things?

I have a theory about that. I've seen her post a lot of "knowledge" (accuracy of said knowledge is in dispute) but absolutely no wisdom.

Knowledge knows that a tomato is a fruit, not a vegetable. Wisdom knows that you don't put a tomato in a fruit salad.

Her posts bring to mind the words of Robert Burns...
"A man convinced against his will is of the same opinion still."

 

[BNTRS]

woot woot!

they'd get a $343,000 "tax free" inheritance.

they'd be better off getting the higher return on a "taxable" death benefit.

gimmeabreak.

just do the math, people.

and open your eyes.

Okay, lets do some math.

We'll use your blue chip example, and we'll use your original P&G suggestion because I think we can agree that they are an epitome of blue chip success.

If we take your referenced returns from yahoo finance we have to make an adjustment. Since we're talking about systematic investments over time, the percentage change in the stock price over any given period is irrelevant as we are not planning to make the entire investment in the first period. You should have known that if you are as wiz bang about this as you like to suggest.

We also have to note that we're taking this over a 30 year period. Despite your suggestion that this is a 40 year return, the numbers you punched into yahoo's chart appear to be 1983 to 2013, which is 30 years, not 40.

If we take the annual return for P&G from every year July to July from 1983 to 2013 and we run a systematic investment through those annual returns we end up with a compound annual growth rate of return over the 30 years of just a hair under 9%. Not bad.

However, since many of use have discussed this through the risk perspective, and since you continue to insist that Blue Chip stocks are some of the safest investments around, we'll further evaluate these returns through one of the most ubiquitous risk measures employed in modern finance, the Sharpe ratio.

In order to do this, we'll need three things:

1. The average (arithmetic mean) return for P&G over the period, which is 12.21%)
2. The standard deviation of the return over the period (23%)
3. Since we're talking risk adjusted rate of return, the 30 year average 10 year treasury yield, which is 6.59%

If we put this all together we get a Sharpe ratio of 0.24. At least it's positive.

Now, I've attempted to skip over finer details that I thought were a given, but you appear to miss things rather easily so I'll back up and lay this out in layman's terms.

We all understand the simple risk vs. reward relationship when it comes to investing. Blue chip stocks represent a greater degree of risk than other investment options, take treasury bonds for example.

But there is a diminishing return to the increased risk exposure. And wise investing strategies, seek to maximize the risk/reward function. This is the foundational principal of MPT.

A Sharpe ratio of 0.24 (larger is better and less than zero means the risk free asset would perform better) tells us that while the investment certainly outperforms the risk free asset, it doesn't do it by very much. So that gap between the almost 9% and 6.59% for P&G and 10 treasury notes over 30 years respectively is of relative insignificance once we factor in the risk we undertake by purchasing P&G stock instead of 10 year treasury notes.

Now we'll assess participating whole life insurance.

We'll take the 30 year dividend yields for the big 4 mutuals. The average over the last 30 years has been 8.78% and the standard deviation is 1.93% (if you're good with the math, you'll immediately see where this is going to end up)

The Sharpe ratio for par whole life over the same time period is 1.93.

Now, we can suggest that since the Sharpe ratio has a natural zero (indicating that there is no difference between the asset in question and the risk free asset) it is a type of data known as ratio data. And because it's ratio data, we can suggest magnitude. This means we can divide the two Sharpe ratios (that of P&G and par whole life) into one another and note that par whole life comes out to 4.63 times safer than P&G stock over the last 30 years.

It may not have yielded as high, but when it comes to the risk adjusted return, par whole life has destroyed one of the best examples of a superlative blue chip stock investment for the last 30 years.

There's a lot of additional personal finance risk discussion, but I'm done for now. We can get into that later.

 

[jerry176]

If death benefit needs are temporary... why is there an entire sub-forum for final expense insurance to sell seniors life insurance? It would obviously be far cheaper to obtain the coverage while one is young.

In addition to that, you are ignoring the financial needs of being able to access capital when needed. 401k and IRAs either restrict or tax/penalize withdrawals prior to age 59.5. If you separate from service after age 55, you can withdraw directly from your 401k without a penalty. If you take out 72t payments to continue for 5 years or 59.5 (whichever is longer), you can avoid the penalty.

Families need access to capital because they will continue to buy things over time. They are an economy of themselves. Locking away access from your money is short-sighted.

Those people are poor planners, and put off until they realize they need coverage, and others in that category believe in Life Insurance and purchase multiple small policys.
Recently one lady had 4 policies, and bought another one.
Go figure...

 

[mfsavino_DIS]

What happens when they get laid off or situation changes?

I've known 4 25 year olds who bought a million dollar WL policy around 6k a year and after 3 years they all couldn't afford it anymore.

They got stuck either trying to cut back to fund the policy or surrender the policy.

I agree its a great product but the 25 year olds I think is hard to keep stable income. They get married have kids and buy a house. Automatically they won't be able to afford it.

But there are some who make It

That is the agents fault! The job is to find the proper balance that will suit the lifestyle of a current prospect while not trying to predict the future. For younger clients it is always better to blend a product of both term and whole life to allow for the growth of cash value while keeping a larger death benefit and having the opportunity to convert that term coverage in the future as income increases. Whoever sold those policies screwed those young people and shouldn't be selling to begin with!

 

[VolAgent]

That is the agents fault! The job is to find the proper balance that will suit the lifestyle of a current prospect while not trying to predict the future. For younger clients it is always better to blend a product of both term and whole life to allow for the growth of cash value while keeping a larger death benefit and having the opportunity to convert that term coverage in the future as income increases. Whoever sold those policies screwed those young people and shouldn't be selling to begin with!

Really now? It is the agent's fault the person hit hard financial times and wasn't able to meet the obligations they agreed to?

Careful where you go with this. Now every NSF and lapse is YOUR fault.

At the end of the day, an agent can only sell what the person agrees to buy. Assuming we are dealing with a person of sound mind.

 

[Larry Tew]

woot woot!

"Woot woot"? "Woot woot"? I just figured it out...

Mr_Ed is Mah!!! She got this!!!

 

[Mr_Ed]

Now we'll assess participating whole life insurance.

We'll take the 30 year dividend yields for the big 4 mutuals. The average over the last 30 years has been 8.78%

I call bullsh*t.

PROVE IT!

- - - - - - - - - - - - - - - - - -

Okay, lets do some math.

We'll use your blue chip example, and we'll use your original P&G suggestion because I think we can agree that they are an epitome of blue chip success.

If we take your referenced returns from yahoo finance we have to make an adjustment. Since we're talking about systematic investments over time, the percentage change in the stock price over any given period is irrelevant as we are not planning to make the entire investment in the first period. You should have known that if you are as wiz bang about this as you like to suggest.

We also have to note that we're taking this over a 30 year period. Despite your suggestion that this is a 40 year return, the numbers you punched into yahoo's chart appear to be 1983 to 2013, which is 30 years, not 40.

If we take the annual return for P&G from every year July to July from 1983 to 2013 and we run a systematic investment through those annual returns we end up with a compound annual growth rate of return over the 30 years of just a hair under 9%. Not bad.

However, since many of use have discussed this through the risk perspective, and since you continue to insist that Blue Chip stocks are some of the safest investments around, we'll further evaluate these returns through one of the most ubiquitous risk measures employed in modern finance, the Sharpe ratio.

In order to do this, we'll need three things:

1. The average (arithmetic mean) return for P&G over the period, which is 12.21%)
2. The standard deviation of the return over the period (23%)
3. Since we're talking risk adjusted rate of return, the 30 year average 10 year treasury yield, which is 6.59%

If we put this all together we get a Sharpe ratio of 0.24. At least it's positive.

Now, I've attempted to skip over finer details that I thought were a given, but you appear to miss things rather easily so I'll back up and lay this out in layman's terms.

We all understand the simple risk vs. reward relationship when it comes to investing. Blue chip stocks represent a greater degree of risk than other investment options, take treasury bonds for example.

But there is a diminishing return to the increased risk exposure. And wise investing strategies, seek to maximize the risk/reward function. This is the foundational principal of MPT.

A Sharpe ratio of 0.24 (larger is better and less than zero means the risk free asset would perform better) tells us that while the investment certainly outperforms the risk free asset, it doesn't do it by very much. So that gap between the almost 9% and 6.59% for P&G and 10 treasury notes over 30 years respectively is of relative insignificance once we factor in the risk we undertake by purchasing P&G stock instead of 10 year treasury notes.

Now we'll assess participating whole life insurance.

We'll take the 30 year dividend yields for the big 4 mutuals. The average over the last 30 years has been 8.78% and the standard deviation is 1.93% (if you're good with the math, you'll immediately see where this is going to end up)

The Sharpe ratio for par whole life over the same time period is 1.93.

Now, we can suggest that since the Sharpe ratio has a natural zero (indicating that there is no difference between the asset in question and the risk free asset) it is a type of data known as ratio data. And because it's ratio data, we can suggest magnitude. This means we can divide the two Sharpe ratios (that of P&G and par whole life) into one another and note that par whole life comes out to 4.63 times safer than P&G stock over the last 30 years.

It may not have yielded as high, but when it comes to the risk adjusted return, par whole life has destroyed one of the best examples of a superlative blue chip stock investment for the last 30 years.

There's a lot of additional personal finance risk discussion, but I'm done for now. We can get into that later.

I'm truly amazed at the amount of bullsh*t in this post.

A 7th grader could refute these conclusions.

I could destroy your argument in two short sentences, but I'll wait for you to show me the proof of this amazing average annualized 8.78% return over 30 years!

I'm ROTFLMAO.... this is just too funny.

 

[DHK]

I call bullsh*t.

PROVE IT!

- - - - - - - - - - - - - - - - - -




I'm truly amazed at the amount of bullsh*t in this post.

A 7th grader could refute these conclusions.

I could destroy your argument in two short sentences, but I'll wait for you to show me the proof of this amazing average annualized 8.78% return over 30 years!

I'm ROTFLMAO.... this is just too funny.

lol.

You don't know the difference between a declared dividend and a credited dividend to a life policy!

And here you were trying to make us think you were 'so smart'!

The 'Big 4' mutual insurance companies declared these dividends as a divisible surplus. You do know what a divisible surplus is... right?

Just because the 'Big 4' have a large dividend history does NOT mean that each policy will earn the same rate.

To be clear, BNTRS did NOT say that each policy will earn the declared dividend rate. He only said that they 'big 4' have a nice high average declared dividend rates.

Of course, I already talked about the difference between average and actual in an earlier post that you ignored.

 

[Mr_Ed]

lol.

You don't know the difference between a declared dividend and a credited dividend to a life policy!

And here you were trying to make us think you were 'so smart'!

The 'Big 4' mutual insurance companies declared these dividends as a divisible surplus. You do know what a divisible surplus is... right?

Just because the 'Big 4' have a large dividend history does NOT mean that each policy will earn the same rate.

To be clear, BNTRS did NOT say that each policy will earn the declared dividend rate. He only said that they 'big 4' have a nice high average declared dividend rates.

Of course, I already talked about the difference between average and actual in an earlier post that you ignored.

So you're saying that BNTRS was not comparing "apples to apples".

You're saying that an 8.78% average declared dividend rate does NOT mean that my policy cash value has grown by 8.78% (but by some lower amount?).

You're saying that an 8.78% average declared dividend rate is not the same as an 8.78% capital appreciation.

Which one grows my bottom line more: 8.78% average declared dividend rate or an 8.78% capital appreciation (and we'll forget about my 2% to 5% stock dividend payments for now)?