"Buy term and invest the rest" is a well-worn slogan.
Let me ask this. Why does whole life have such a low return? Why can't the company invest the funds in a high-yield long-term bond or index fund or something that will pay better than 3% (even after taking a half or 1 point spread?)
Perhaps someone here knows the following. Say when I was 40 20 years ago and I bought a 20 year term life policy and I invested the rest in a plain old Fidelity or Vanguard index fund, what would it have paid out today?
Is 3% really the BEST that an insurance company can guarantee or is there more to it than that (like greed or bad mangement.)
"Buy term and invest the rest" is a well-worn slogan.
Let me ask this. Why does whole life have such a low return? Why can't the company invest the funds in a high-yield long-term bond or index fund or something that will pay better than 3% (even after taking a half or 1 point spread?)
Perhaps someone here knows the following. Say when I was 40 20 years ago and I bought a 20 year term life policy and I invested the rest in a plain old Fidelity or Vanguard index fund, what would it have paid out today?
Is 3% really the BEST that an insurance company can guarantee or is there more to it than that (like greed or bad mangement.)
Thanks,
Al
I believe the insurance company general account that backs the WL policies has to be invested in instruments that have safety on par with treasuries and other investment-grade bonds. Those rates are pretty low these days. If you take any further expenses from them, you are left with something dismal. Right now, it's close to the best that can be done as far as guaranteed returns go inside of insurance. Some life insurance salesmen successfully have danced around this by saying it's a "savings" rather than an "investment."
"Buy term and invest the rest" is a well-worn slogan.
Let me ask this. Why does whole life have such a low return? Why can't the company invest the funds in a high-yield long-term bond or index fund or something that will pay better than 3% (even after taking a half or 1 point spread?)
Perhaps someone here knows the following. Say when I was 40 20 years ago and I bought a 20 year term life policy and I invested the rest in a plain old Fidelity or Vanguard index fund, what would it have paid out today?
Is 3% really the BEST that an insurance company can guarantee or is there more to it than that (like greed or bad mangement.)
Thanks,
Al
There are alternatives, if you are securities licensed. Guarantee goes away.
It's a guaranteed death benefit with safe accumulation.
I've sold 27 life policies this year. Very few compared to many of you I'am sure.
Not my line of biz so take what I write with a grain of salt.
I always ask as it is my duty to make sure my clients are covered in all areas.
Of those 27 - 6 have been WL.
Those 6 sales have been because of a number of factors.
1- was a golden handcuff/key employee, overfunded set up.
2- buy sell.
The other 3 were individuals who simply wanted to make sure that when they die that their funeral was paid for.
Those 3 all had the same basic stories- "My (insert name here) died who had term for xx years. The problem was that they died X amount of years after the policy expired"
The whole selling term based on investment returns is an old A.L Williams (now Primerica) thing.
Those who sell WL as an investment or a savings vehicle are simply not up to speed on the many reasons why clients buy WL.
Last edited by MIBizInsurance : 10-29-2007 at 12:33 PM.
I think if you have a proper understanding of risk and return, you wouldn't ask that question now would you?
If you had a proper understanding of risk, you'd see permanent coverage does have a place in a portfoilo and doesn't need to apologize for being there.
"Buy term and invest the rest" is a well-worn slogan.
Let me ask this. Why does whole life have such a low return? Why can't the company invest the funds in a high-yield long-term bond or index fund or something that will pay better than 3% (even after taking a half or 1 point spread?)
Perhaps someone here knows the following. Say when I was 40 20 years ago and I bought a 20 year term life policy and I invested the rest in a plain old Fidelity or Vanguard index fund, what would it have paid out today?
Is 3% really the BEST that an insurance company can guarantee or is there more to it than that (like greed or bad mangement.)
Thanks,
Al
I have funds in Fidelity and I KNOW they don't guarantee 3%. They don't even guarantee that you won't lose money.
You're not comparing apples to apples if you are comparing guaranteed vs. non-guaranteed.
You're not comparing apples to apples if you are comparing guaranteed vs. non-guaranteed.
What are 10-year Treasure bonds paying? What are 5 year FDIC insured CDs paying these days.
Correct me if I'm wrong but in WL insurance companies don't REALLY guarantee a return or a dividend (for a mutual). They can change the payout year to year or perhaps after a certain number of years... and I don't believe there is an absolute floor.
Not trying to start a "buy term" debate. No one will win that one. Just curious as to how these WL products work internally.
What are 10-year Treasure bonds paying? What are 5 year FDIC insured CDs paying these days.
Correct me if I'm wrong but in WL insurance companies don't REALLY guarantee a return or a dividend (for a mutual). They can change the payout year to year or perhaps after a certain number of years... and I don't believe there is an absolute floor.
Not trying to start a "buy term" debate. No one will win that one. Just curious as to how these WL products work internally.
Al
Treasuries right now maturing in 2017 as of today in the secondary market will give you about 4.55% yield to maturity for stripped coupon bonds and 4.4% ytm for regular two payments per year.
What are 10-year Treasure bonds paying? What are 5 year FDIC insured CDs paying these days.
Correct me if I'm wrong but in WL insurance companies don't REALLY guarantee a return or a dividend (for a mutual). They can change the payout year to year or perhaps after a certain number of years... and I don't believe there is an absolute floor.
Not trying to start a "buy term" debate. No one will win that one. Just curious as to how these WL products work internally.
Al
And 5-year CD's are 4.8% for those that are call-protected and 5.15% for those that are not.
"Correct me if I'm wrong but in WL insurance companies don't REALLY guarantee a return or a dividend "
Do you pay taxes on a life dividend?
From the looks of it you won't have to worry it too much longer. Many mutuals have demutualized in the last few years. That pesky tax free dividend may not be around much longer.... so the industry may be changing and the arguement may become mute. If you honestly want to know I can explain, but somehow I have my doubts about your interest to learn....
Let us have some honesty, the term demutualizing isn't exactly correct, most are becoming "Quasi" mutuals! I'm confident that the Insurance Dividend will be with us for quite some time to come. NW is the best paying company with around 8% and MM, Guardian, MT and others are coming in right behind them. Now let us compare that to the average Investors Returns in the Mutual Fund arena that the Dalbar and others studies showing 3.4% return on average, and you have to pay taxes on that unless it is a part of a Qualified Plan.
Plus let us not even talk about actually using ones money in retirement as in harvesting! For some reason you all never want to talk about that?
Ps, Mass Mutual last year had their largest Dividends in their history. While the dividend is not guaranteed, but with a history by these companies of 125 plus years paying dividends without missing a year, it's all but a guarantee or least the best out there. Please try to remember that the Mutual Fund or Money Market Returns isn't the Investors Return, there is a difference. A well diversified portfolio is the best, and Par WL with PUA or a Overfunded UL has its place within any well balance portfolio.
For WL, ROI is a misnomer, a misleading measure. It falsely assumes expenses, commissions, and mortality are consistent among companies. Because it doesn't work, this method has consistently been opposed by regulators as well as most carriers.
Par WL can share excess gains (i.e., from interest, expenses, and/or mortality) by paying dividends to the policyholders, but only after they're earned. That tends to put them slightly behind the potential gain on UL, but more secure, because their guaranteed interest and mortality (inside the premium rates) are usually better than the UL guarantees. UL CV can be more competitive on a current basis than par WL, because the carrier can take a bigger risk on interest (& mortality/expense savings) in advance, by raising the current crediting rate, which can result in a greater long-term return (e.g., if net earned interest rates stay higher than guarantees).
Sorry if that's a lot to swallow -- I'm an actuary, I love complex stuff.
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I thought this WAS a real job!
James - your comparing the best insurance return with the average investor return. This is completely apples and toys. You need to limit your comparison to similar things, such as the best to the best, or average to average. Unless of course, your selling to someone.
James - your comparing the best insurance return with the average investor return. This is completely apples and toys. You need to limit your comparison to similar things, such as the best to the best, or average to average. Unless of course, your selling to someone.
Dan
Well the average person buying a Par WL with PUA, will make anywhere from 4-8%, the average person investing in MF's will make around 3.5% as indicated by more then one Study that shows investment habits over a large groups and over or around 100 years! Is that better? Plus the person with WL if dies before they have accomplished their savings have a plan that will finnish it for them!
Well the average person buying a Par WL with PUA, will make anywhere from 4-8%, the average person investing in MF's will make around 3.5% as indicated by more then one Study that shows investment habits over a large groups and over or around 100 years! Is that better? Plus the person with WL if dies before they have accomplished their savings have a plan that will finnish it for them!
At what point does a policyholder earn 4-8%, is that on surrender value or upon death? They don't make that at surrender for a very long time, and they can't make much more that 4-5% based on current investments.
Well the average person buying a Par WL with PUA, will make anywhere from 4-8%, the average person investing in MF's will make around 3.5% as indicated by more then one Study that shows investment habits over a large groups and over or around 100 years! Is that better? Plus the person with WL if dies before they have accomplished their savings have a plan that will finnish it for them!
Can you reference the studies that you are citing? 3.5% for mutual funds, depending on investment style and risk tolerance, seems a bit low. It is not in line with what I have seen. That said, you mention investment habits, which implies it's not the true return, but people not being disciplined in their habits, which is why I'd like to see the study.
This is really beating a dead horse. If you don't believe in WL, simply don't sell it. Is your whole presentation centered around how "bad" everything else is but what "your" showing? Good luck, you will get what you deserve.
Of all you folks beating your chests about return.. how many have a series 6,7 and other designations that allow YOU to actually practice what you preach? or do you have an index annuity for their ira...
You don't understand risk and how each thing is comparable. A life policy is not a stock and to bad mouth it in comparison doesn't make the life policy look bad... it makes the advisor look bad..
Each product we have at our fingertips fits somewhere, sometime. To not realize that really means you don't understand insurance and it's application. I would no more bad mouth wl than I would term. both work for the people that want them, what more do you need to know beyond that?
Can you reference the studies that you are citing? 3.5% for mutual funds, depending on investment style and risk tolerance, seems a bit low. It is not in line with what I have seen. That said, you mention investment habits, which implies it's not the true return, but people not being disciplined in their habits, which is why I'd like to see the study.
Dan
The Dalbar Study is the main one, they look over a period of about 100 years in investment habits of people. Exactly, people are people and they tend to follow a certain line of actions, as in predicatability.
It is definitely true that wall street does take in net investment during bull markets and the reverse during bear markets which indicates that there are people out there trying to time the market. In doing so, they add to their risk.
Those who were chasing tech stocks around 2000-2001 got clobbered with incredibly negative returns that brought everyone down, no doubt about it. In hindsight, they shoulda never done it.
It is a fallacy, though, to imply that everybody or even most people attempt to time the market simply from the statistical fact that some do.
The Dalbar Study is the main one, they look over a period of about 100 years in investment habits of people. Exactly, people are people and they tend to follow a certain line of actions, as in predicatability.
Ps google the Dalbar, the link I had to the study no longer working. Oh well, you'll get a lot of hits about it.
Okay, so if I understand this study correctly, there isn't a problem with the investment per the study, the problem is with the investor. This does not change with the investment vehicle though, so it still goes back to your original point, get your financial house in order, and invest with a plan for the future.
4 steps to wealth building (feel free to use this)
- Make a decent living (seems pretty obvious). You don't have to make a lot of money, but enough to put food on the table.
- Spend less than you earn. We're all bad about this step.
- Work with a financial professional to develop and stick with a plan to invest the difference.
- As your wealth builds, work with an insurance professional to ensure you are properly protecting your growing wealth.
Why does WL have such a poor ROI
I'm confident that the Insurance Dividend will be with us for quite some time to come. NW is the best paying company with around 8% and MM, Guardian, MT and others are coming in right behind them. Now let us compare that to the average Investors Returns in the Mutual Fund arena that the Dalbar and others studies showing 3.4% return on average, and you have to pay taxes on that unless it is a part of a Qualified Plan.
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