Young, High Income, Low Assets

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Akkula's picture
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Wanted to see how many of you deal with these types of clients.  So far I have found that it is very difficult to pry someone away from a trusted advisor but I have seemed to find people who fit into the 30-mid 40s demographic that are making good money and that have a lot of assets tied up safely with their current employer's 401k but a lot less where I can get to it immediately.  What is a wirehouse rep to do with these types of prospects and still maintain enough PCs to justify my work?
Many of them have kids, etc.
Here are my thoughts that really go against the current wirehouse model:
1. A shares with a good fund company where they can switch to other funds within the family without paying another load.  Any favorites aside from American Funds?
2.  Universal Variable/Term Life insurance.  The whole life policies can help cover insurance costs but can I really get good performance in them when selecting investments?
What are your thoughts?

B24's picture
B24
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I think they are good prospects for ANYONE young in the business.  I have brought on several people in this category.  Primarily, since these will be future "real" clients for me.  They are doing a good job saving, they make a lot of money, they may switch jobs, whatever.  But there is nothing wrong with a bunch of well-paid 40 year olds that will roll over a large 401K to you someday.  NO prospecting required for that rollover, you will get referrals from them, and you don't have to spend lots of time with them each month, as they are not withdrawing, they are a long way from retirement, they may need insurance, etc.
Yes, you may not make much from them today, but if you could use that strategy to line up your future retirees, not a bad way to go.  As long as they are not TOO needy, and you are not spending all your time chasing down this type of client, I think it's a great idea.
Another caveat - you have to make sure they are the right type of client.  This can't be the 32 year-old making 43K working in the town engineering department (no offense to them).  They have to be people that have accumulation power and a proven ability to save (look at 401K balance).
 

entrylevelFA's picture
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In service, non-hardship distribution.  Look it up.

deekay's picture
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Ice hit the nail on the head.  They need life and disability insurance.  Hook up with an experienced insurance agent and split the commissions.
 
Do a search on VUL.  You are doing them a disservice if you try to sell that.  Get them a small whole life insurance policy with a lot of term insurance on the side.

B24's picture
B24
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entrylevelFA wrote:In service, non-hardship distribution.  Look it up.
 
I am quite fortunate in that two of the major companies in my area allow this.  I have done probably 15 of these with existing clients (including the one I mentioned above).  It's sometimes a tough sell when their 401K is "free" (BIG italics there), but when they see what my portfolios look like compared to their options, it's an easier sell.

Spaceman Spiff's picture
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Here's a link for you re: in service withdrawals:
 
www.iprosource.com/iprofinancial/pdfNonhardship.pdf
 
I've done a couple from AT&T.  Working on one from BA and Chrysler right now.  The ones from AT&T are quick and easy.  No penalties to the clients.  BA employees lose their match for 6 months, but their plan sucks, so it's not a great loss.  The Chrysler one is still in progress. 

anonymous's picture
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Akkula, these are great prospects for guys like me and Deekay.  For someone trying to survive at a wirehouse, time spent with these prospects will take one a step closer to failure.  These people are future good prospects to you, but present good clients for me. 
You don't have the luxury to spend time with people that will be profitable in the future.  You need to survive and do what is best for today and not worry about the future. 
If you are selling UL/VUL products, it's because you don't understand these products.  They are definitely not appropriate for these clients.   Term is appropriate.  WL is appropriate.  Most of these people should have a combination of WL and term.  Most of them also need DI coverage. 
One of your problems being a wirehouse rep is that for the same insurance sale, I'll make 4x as much income as you (overrides and no grid).
The bottom line is that if you are going against the wirehouse model, a wirehouse is not the place to be.

theironhorse's picture
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spiff-i do not know the specifics, but can you expand on the "plan sucks" comment.  even a straight S&P 500 index fund is worth it for the match, no?  and don't overlook supplemental DI for clients like this who say "i have group di."  dig deeper and find out just how much.and a vul should be way way way down the ladder of investments for these people.

deekay's picture
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theironhorse wrote:spiff-i do not know the specifics, but can you expand on the "plan sucks" comment.  even a straight S&P 500 index fund is worth it for the match, no?  and don't overlook supplemental DI for clients like this who say "i have group di."  dig deeper and find out just how much.and a vul should be way way way down the ladder of investments for these people.
 
If you really understand how VUL is manufactured, it will not be on the ladder for any client.
 
Wrap DI is a great idea, especially if the group plan is either employer paid (benefit will be taxable) or they are a high income earner and the group plan only covers up to a certain amount.  I have had a lot of success dealing with commissioned sales people in different industries where, when digging a bit deeper, finding that their group DI plan does not cover commissions. 
 
As anonymous has stated however, these are not good wirehouse prospects.  I love these kinds of clients.  They are very profitable now, when they make even more money, and when they retire.  These clients refer me to their parents who, in many cases, have money.  Their colleagues can be very profitable as well to me. 

theironhorse's picture
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gee- guess i need to throw a few more "ways" on there for you to get the meaning of my post.  vul's are not ALWAYS a bad move.  they have their place, they are just used more than they should be, so the majority of them make the appropriate ones look bad.

deekay's picture
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When is a VUL appropriate?  I'm trying to learn - but I can't conceivably come up with a situation where it would fit.  All I see are high priced investments combined with a cost of insurance that goes up every year - and goes up quicker than a separate Annual Renewable Term policy.  Don't misunderstand, permanent insurance is a large part of my practice, but it is whole life and not VUL.

Akkula's picture
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I am surely not an insurance person but isn't VUL basically the same as a whole life policy except that you have the opportunity to earn a higher rate of return on your cash value than you would have under a traditional whole life policy and you can have some premium flexibility?
Can't there be some advantages to investing in a VUL if you are already maxing out your 401k plan and you aren't eligible for an IRA/Roth?  Isn't there also some tax advantages of not having to deal with capital gains and dividends pass throughs like you would on a mutual fund investment?  Furthermore, doesn't a whole life policy protect your insurability better than a term policy if you have an unexpected health issue? Is the investment performance really that bad in a VUL?  You are always going to have to pay the cost of insurance so is that cost of insurance what makes the performance look bad relative to a straight mutual fund investment?
 
I am no insurance expert so I am just wondering what you others may think.

deekay's picture
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Akkula wrote:
I am surely not an insurance person but isn't VUL basically the same as a whole life policy except that you have the opportunity to earn a higher rate of return on your cash value than you would have under a traditional whole life policy and you can have some premium flexibility?
First, VUL/UL is not the same as Whole Life.  UL has cost of insurance that rises every year.  WL locks in your cost of insurance once you pay for the policy.  Yes, potentially you have the ability to have a higher CSV in a VUL policy than a WL policy.  However, the cost of insurance will eat into returns once the market goes down.  Finally, you have premium flexibility in a UL product.  I'm not so sure that's a good thing.  If you have an ever-increasing cost of insurance, declining market, and no premium going into the policy, eventually the policy is going to blow up.  Even if you continue to pay premium into a UL policy, there is no guarantee there will be CSV in the policy.
 
Can't there be some advantages to investing in a VUL if you are already maxing out your 401k plan and you aren't eligible for an IRA/Roth?  Isn't there also some tax advantages of not having to deal with capital gains and dividends pass throughs like you would on a mutual fund investment?  Furthermore, doesn't a whole life policy protect your insurability better than a term policy if you have an unexpected health issue? Is the investment performance really that bad in a VUL?  You are always going to have to pay the cost of insurance so is that cost of insurance what makes the performance look bad relative to a straight mutual fund investment?
 
UL/VUL provides for tax-deferred growth.  As I have stated, there is no guarantee there will be CSV in the policy.  So, if you pay into a policy with the intention of having money for retirement, you may be very disappointed.  If you look at a UL/VUL policy and graph the CSV, you will notice a parabolic curve.  There is a point mid-way through the life of the policy where there is some CSV.  Eventually, however, the COI eats into the CSV to keep the policy afloat.  Ultimately, if you're lucky you have a death benefit at the end, but no CSV.  Now, there is a lot of value in having a permanent death benefit, but if your intent was to sock away additional money for retirement, there are many obstacles that will keep you from reaching your goal.
 
I use term and WL with my clients.  Our goal is to eventually have a full WL policy.  We accomplish this by converting a bit of the term every year.  My client will not have to show evidence of insurability to do this, thus guaranteeing more of his death benefit every year.  I get paid again for the conversion.  Win/Win.  
 
Once cash value and dividends are paid into a WL policy, they cannot be taken away from the policy holder due to the market, interest rates, or at the discretion of the insurance company.  We don't have to worry about underfunding.  We have many options in the future when it comes to premium payment.  Eventually, the dividend usually will be higher than the premium.  It can be used to pay the premium.  Or, the cash value built up can be used to pay premiums if the client does not want to pay out of pocket.  Or, the client can accept a reduced paid up policy and never pay a premium again. 
 
I am no insurance expert so I am just wondering what you others may think.
 
VUL works well in a lab, but not so much in the real world.  WL works from a practial point of view.  It's not meant to be an investment, but it can be utilized to acheive great rates of return.  How?  For example, the CSV that builds can be used just like how cash is used.  Imagine you've got a good deal of CSV built up in your WL policy.  You drive through a nice neighborhood with tons of foreclosed properties.  You can take a loan from your policy to get a depressed property, with the intent that the property will go up in value.

anonymous's picture
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"vul's are not ALWAYS a bad move.  they have their place, they are just used more than they should be, so the majority of them make the appropriate ones look bad."
Theironhorse, I have tried very hard to not be one of those people who think such and such product is good or bad.  I'm a big believer that everything is either appropriate or inappropriate.   However, VUL is really stretching me on this one.  I'm having trouble coming up with any fact pattern that would make VUL the best choice for a client. 
 
Can you do guys like me and Deekay a favor?  Make up any realistic fact pattern that you would like in which a VUL policy makes the most sense for a client.  I simply can't come with one, but I'm smart enough to know that this doesn't mean that one doesn't exist.

Akkula's picture
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You said, "UL has cost of insurance that rises every year.  WL locks in your cost of insurance once you pay for the policy." 
Why is that?   Why would you ever do something aside from term or whole life given this comment? 

deekay's picture
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Akkula wrote:
You said, "UL has cost of insurance that rises every year.  WL locks in your cost of insurance once you pay for the policy." 
Why is that?   Why would you ever do something aside from term or whole life given this comment? 
 
For most folks, UL is not the best choice.  There are places (mostly estate planning for the 70+ crowd) where guaranteed UL works best, mainly where the only concern is a death benefit.  Otherwise, term and WL works best.  Remember, life insurance is about protection, promises, and guarantees.  I don't want to have to answer the question, "Why is it that I have to either pay more money or have this policy blow up?"

anonymous's picture
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Akkula, I'll try to address all of your points/questions.
"I am surely not an insurance person"
Become one!  I'm not saying to focus on insurance.  However, we have a responsibility to know what we don't know.  Otherwise, we can really hurt our clients.  Until you get a much better understanding, you may be making money at the expense of your clients.
 
but isn't VUL basically the same as a whole life policy
 
No.  It's not even close.  VUL is nothing more than annually renewable term insurance (ART) coupled with a side fund which can be invested in separate accounts.  (UL is the same thing without the ability to invest in separate accounts.)   Do you understand ART?  ART is term insurance which increases in cost every year.  When a 30 year old buys a policy, they pay the rates of a 30 year old.  This same 30 year old, pays the rates of 40 year old in ten years.  When they're 70, they pay the rates of a 70 year old.  This continues until death.  This is what happens with the Cost of Insurance (COI) inside of a VUL policy.  If the insurance is ever canceled or lapses, all gains are taxed as income.
 
Would you ever recommend that someone who wants life time insurance coverage buy an ART policy?  This is exactly what you are doing with VUL.  Do you know what the COI per thousand is at age 70?  Age 80?  Age 81? Age 82?
 
Would you recommend that someone buys an ART policy in which the COI was not competetive? This is exactly what you are doing with VUL.  The COI is much more expensive than a stand alone term policy?
 
Would you recommend that someone buys an ART policy in which a 5% sales charge was added to the premium? This is exactly what you are doing with VUL.
 
Would you recommend that someone buys an ART policy in which the insurance company charged a hefty extra fee just in case they weren't charging enough for the already overpriced insurance?    This is exactly what you are doing with VUL.  It's in the form of an M&E charge and is often in the neighborhood of 1% of the cash value.  What really sucks about this for the consumer is that the less that the insurance company has at risk, the more that they charge!  Ex. Client A has a $500,000 VUL policy with no cash value.  The insurance company has $500,000 at risk.  They are charging nothing for M&E.  Client B has the same thing, but with $200,000 cash value.  The insurance company only has $300,000 at risk, but is charging an M&E charge of $2000!
 
Would you recommend that someone buys an investment that has a 5% sales load and no breakpoints?   Ex. The cheapest option inside of a VUL is often an S&P index fund.  One is typically looking at a front end load and then an ER of .6%.  The M&E is then another huge drag on performance.
 
VUL IS NOTHING MORE THAN OVERPRICE ART COUPLED WITH OVERPRICED INVESTMENTS IN ONE PACKAGE.
 
Whole Life is very different.   Most importantly, think of it as being based upon a lifetime level term policy instead of ART.  In other words, when a policy is purchased by a 30 year old, they are still paying the 30 year old rates when they are 70.  Additionally, just like VUL/UL charge a COI that is higher than they need to do, WL is also based upon a higher COI than is needed.  The difference is that with UL/VUL this "over charge" is profit for the insurance company.  With WL, it comes back in the form of a dividend.  What this means is that one pays a pre-determined COI with UL/VUL and this cost is higher than the actual mortality expenses.  With a participating WL, the insured ultimately just pays the actual mortality charges
 
"except that you have the opportunity to earn a higher rate of return on your cash value than you would have under a traditional whole life policy "
 
This is 100% accurate, but you are comparing apples to oranges.  One has the opportunity to earn more money in the stock market than their savings account.  So what?  Let's compare things with similar risk characteristics.   Before one can worry about WL vs VUL, one needs to address VUL vs Buy Term and Invest the Difference (BTID).  BTID kicks the butt of VUL.  In other words, investment dollars don't belong inside of a universal life insurance policy.
 
and you can have some premium flexibility?
 
This is a complete fantasy.   What must be paid into a UL policy is the cost of insurance + any other expenses.  One has flexibility because any amount more (within limits) than this amount can be paid.  If one pays less, it is still being paid, but it's coming out of policy values.  The amount that needs to go into a VUL policy keeps increasing every year.  If one takes advantage of "flexibility", it means that they'll have to pay more in the future and it greatly increases the likelihood of a lapse. 
 
WL actually has much more flexibility, but just not in the early years.  This is because the dividend can be used to pay premiums and the dividend gets bigger every year while the guaranteed costs stay identical.
 
Can't there be some advantages to investing in a VUL if you are already maxing out your 401k plan and you aren't eligible for an IRA/Roth? 
 
No.  It's because the costs are too high 
 
Isn't there also some tax advantages of not having to deal with capital gains and dividends pass throughs like you would on a mutual fund investment? 
 
No, because at death, this will give less after tax money than BTID and in order to get to a decent amount of the cash, one will be paying income taxes on the gain.  Getting money out without paying tax via surrenders and loans, greatly increases the chance of policy lapse. 
 
"Furthermore, doesn't a whole life policy protect your insurability better than a term policy if you have an unexpected health issue?"
 
Only if the term policy is not covertible. 
 
"Is the investment performance really that bad in a VUL?"
 
Choose 2 of the exact same investments.  With the first investment, add a 5% sales load with no break points and a little bit to the ER.  Also add another 1% to the ER for an M&E charge.   Buy the second investment outside of the VUL policy.  Get breakpoints and have the expenses be more than 1% less.  Which investment do you want?
 
  "You are always going to have to pay the cost of insurance so is that cost of insurance what makes the performance look bad relative to a straight mutual fund investment?"
 
It's overpriced cost of insurance, so this is part of it.  It's also completely inappropriate to have ART for a lifetime insurance need.  One is much better paying actual mortality instead of COI.
 
By the way, the problem of VUL isn't necessarily that it's variable and isn't necessarily that it's universal.  It's the combination of both of these.  UL can make sense in some circumstances.  VL can make sense in some situations.  But, I don't know any situations in which VUL makes the most sense.
 
 
 
I am no insurance expert so I am just wondering what you others may think.
 
If you are getting opinions, get opinions from experts.  Here's something that you can do that will make you more of an expert than 99% of those who sell VUL:
 
Choose an age, an amount of insurance, and an annual premium.  Put this amount into a VUL policy of your choosing.  Choose whatever gross rate of return that you would like.  Compare this to buying the cheapest term policy that you can find and taking the extra and putting it directly into the same investment.  The term + investment will blow away the VUL. 

Akkula's picture
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anonymous wrote:
No.  It's not even close.  VUL is nothing more than annually renewable term insurance (ART) coupled with a side fund which can be invested in separate accounts.  (UL is the same thing without the ability to invest in separate accounts.)   Do you understand ART?  ART is term insurance which increases in cost every year.  When a 30 year old buys a policy, they pay the rates of a 30 year old.  This same 30 year old, pays the rates of 40 year old in ten years.  When they're 70, they pay the rates of a 70 year old.  This continues until death.  This is what happens with the Cost of Insurance (COI) inside of a VUL policy.  If the insurance is ever canceled or lapses, all gains are taxed as income. 
 
I guess I am having a hard time understanding why ALL VUL is structured this way.  Aside from making money, why do insurance companies have to structure VUL and UL this way?  Why can't they structure the insurance component like a whole life policy?  Give all the insurance companies out there, one would think that market forces would have helped to make this leap unless there is some kind of rationale for making the insurance portion of the VUL structured like this.  

theironhorse's picture
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anonymous-i left my insurance firm 3 years ago mainly because of this situation.  vul's were being sold left and right as a "roth on steroids" as the internal called them in company meetings.  i have sold a grand total of ZERO vul's in the trailing 12 months.  i too do a TON of term, some guaranteed db ul, and a very tiny amount of 2nd to die.  i am not a fan of the vul either.  i would really only even consider it with a single client, very high earner, has liquidty completely wrapped up-meaning plenty of nq assets as well.  i would not recommend it over most other investment choices.  this is when i would CONSIDER it, not use it no questions asked.  as i said, i have not sold 1 in the trailing 12, but can't you get a guaranteed db vul?  i would use the vul with a minimal db and max fund it to the top of the corridor if i did use one.when i first started as an insurance agent, way back at NML, i was taught how wonderful these variable contracts are, and in my early days i took the bait admittedly.  now i realize just how inappropriate they are in 99% of real life situations.  i wish i had a $ for every client i met with that owned a vul of 150-200K face being funded with $75-$150/month.not to change the thread, but what are your thoughts (anyone) on these new indexed life contracts?  i know little about them.akkula-some companies do have variable life, NOT just variable universal life contracts.

anonymous's picture
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Aside from making money, why do insurance companies have to structure VUL and UL this way?
 
Why does there have to be a secondary reason?   All companies are in business for the  reason of making a profit for the owners of the company.  The owners of most insurance companies are the stockholders.  Their needs come ahead of the policy holders.  With mutual insurance companies, the owners are the policy holders.  It's not coincidental that stock companies focus on UL/VUL and mutual companies focus on WL.  UL /VUL is best for the stock holders.  WL is best for the policy holders.
 
Why can't they structure the insurance component like a whole life policy? 
 
Well, if they structured UL like WL, it would no longer be UL, it would be WL.
 
If they structured VUL like WL, it would no longer be VUL, it would be VL.   This product exists.  Very few companies sell it.   It could absolutely make sense for the right client.  Personally, I'm not a big fan of it,  but that's simply because I think that insurance isn't the best place to take investment risk, but it could certainly be appropriate based upon the facts.

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not to change the thread, but what are your thoughts (anyone) on these new indexed life contracts?  i know little about them.
I think that you know everything about them.  You understand UL.  It's simply UL with a different crediting method.  If UL makes sense for someone, IUL makes sense as long as they are willing to take the chance of getting a little better return in exchange for getting a worse return.   The problem is though, just like we've been discussing, when does lifetime ART make any sense?  The only UL I sell is GUL.  I can't imagine a scenario where IUL makes sense.

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no, i was being serious.  i do not pretend to know the complete inner workings of index annuities, have sold 1 my entire lifetime, but i feel i know enough to steer clear of them MOST of the time.  i assume you have done more research on them and was asking for an honest opinion.  i am seriously asking for your thoughts on where they fit in on the insurance landscape.

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I know that you were being serious.  What I'm tellling you is that they are the same as any UL product, but they simply have a different crediting method.
 
They aren't any different than EIA's.  An EIA is a fixed annuity with a different crediting method.  An IUL is a UL with a different crediting method.  It's still overpriced ART with a side fund and extra expenses.
 
They are appropriate for someone who wants UL, but would rather have the performance of their UL tied to an index instead of interest rates.  I see no reason long term for an IUL product to outperform a traditional UL product.  Regardless, I see very little use for a UL product except at old ages on a guaranteed basis.
 
So, where do I see them fitting in?  I don't for the most part, but I won't say that they are never appropriate.

Akkula's picture
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anonymous wrote:
Why can't they structure the insurance component like a whole life policy? 
 
Well, if they structured UL like WL, it would no longer be UL, it would be WL.
 
If they structured VUL like WL, it would no longer be VUL, it would be VL.   This product exists.  Very few companies sell it.   It could absolutely make sense for the right client.  Personally, I'm not a big fan of it,  but that's simply because I think that insurance isn't the best place to take investment risk, but it could certainly be appropriate based upon the facts.
 
So the real culprit that makes these expensive is the "universal" part and not the "variable" part?  What companies do VL?  On VL does the cost of insurance not resemble ART?
 
To me when I think of "variable" I think of a better long term growth in the cash value.

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I actually don't know who does VL.  Northwestern Mutual does, but I don't know of anyone else, but I'm sure that there are others. 
 
There's no question that the "universal" part is the bigger part of the problem.  There is also the issue of taking investment risk with one's life insurance. 
 
Do you believe that one should have a portfolio that has both aggressive investments and conservative investments?  If so, what happens if some of the money that was going to be put away in a conservative manner instead goes into a whole life insurance policy?  If you can wrap your arms around this, you'll see why I'm such a big believer in WL.
 
Personally, I can only see VL making sense if someone wants to be 100% in equities at all times no matter what...which doesn't make sense.  VUL only makes sense if the client is a labatory rat animal.  What I mean is that it won't make sense in a real world environment. 
 
Also, it may help you if you stop thinking of it as "cash value" and think of it as "cash surrender value" and at the same time realize that the true value of life insurance is the death benefit.   Anyone who thinks that the life insurance death benefit only benefits the beneficiary doesn't understand life insurance.

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anonymous, just wanted to chime in and say thanks for your input. I am very new and eager to learn.

Akkula's picture
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BSinger82 wrote:
anonymous, just wanted to chime in and say thanks for your input. I am very new and eager to learn.
 
Smart man/woman; try to stay on his good side

Akkula's picture
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anonymous wrote:
Do you believe that one should have a portfolio that has both aggressive investments and conservative investments?  If so, what happens if some of the money that was going to be put away in a conservative manner instead goes into a whole life insurance policy?  If you can wrap your arms around this, you'll see why I'm such a big believer in WL.
 
 Also, it may help you if you stop thinking of it as "cash value" and think of it as "cash surrender value" and at the same time realize that the true value of life insurance is the death benefit.   Anyone who thinks that the life insurance death benefit only benefits the beneficiary doesn't understand life insurance.
 
Can you expand on these two statements?

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"Can you expand on these two statements?"
 
Mr. Akkula has decided that based upon his risk tolerance he is going to put away $3600 a year away in a conservative manner.   He's using a combination of CDs, bonds, fixed annuities, or whatever else makes him happy.  Over the next 40 years, this grows at 5.5% after tax and is worth about $535,000.
 
Mr. Anonymous is similar, but one of those high commission whole life sales people talked him into putting that money into a $400,000 WL policy instead.  (Obviously, if death occurs early, Mrs. Anonymous is going to be in better shape than Mr. Akkula, but we'll assume that someone gave Mr. Akkula free term insurance, so we can ignore that difference).   If the conservative investments are going to grow at 5.5%, the cash surrender value will do about the same.    Therefore, from a net worth standpoint, it doesn't make any difference.
 
Other than this, Mr. Akkula and Mr. Anonymous made all the identical financial decisions.   Who is in better financial shape?  Mr. Anonymous.  (Let's ignore the rest of their portfolio since it's identical.)
 
Mr. Akkula has $535,000 dollars.  Mr. Anonymous has a life insurance policy with a death benefit that has grown to $925,000 with a cash surrender value of $535,000.   Would a wife rather be married to Mr. Akkula or Mr. Anonymous?  Would you rather be Mr. Akkula or Mr. Anonymous?
 
If both Mr. Akkula and Mr. Anonymous want to leave $500,000 to their spouse,  Mr. Akkula can only spend $35,000 of the $535,000 portfolio.  Mr. Anonymous can spend $425,000 of the death benefit and still leave $500,000.  That's how the death benefit benefits the living.
 
 
 
 
 
 
 

deekay's picture
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I think anon's point was, if you feel younger investors should have a portion of their investment dollars in conservative investments, WL is the most attractive option for their conservative dollars.  Not only in terms of the tax-free growth of the CSV, but adding a permanent death benefit is a huge addition when planning for maximum retirement income. 

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I am starting to think that whole life insurance is going to enjoy a bit of a renaissance.  What type of investments actually beat the crap out of the market in 2008, insurance products.  No other "asset class" can really claim the same.  Also, talk about a non-correlated asset and a way to lower beta...

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iceco1d wrote:
No offense, but that sounds a bit like an example that was home-grown in a life insurance laboratory.
Who invests $3,600 for 40 years in a conservative manner, with an after tax expected return of 5.5%? 
 
I suppose, the most conservative 25 year-old in existence...but the "investor behavior card" (not that it isn't valid in certain circumstances) might be a bit far-fetched here. 
 
Feel free to change the dollar amount to $1,000 or $10,000.  It doesn't matter.   
 
I'm not sure why you find $3600 to be such a far fetched number.   Is it unreasonable for a 35 year old to invest 80% aggressive and 20% conservative?  How about a 35 year old making $100,000 and putting 18% of their pay away?  They would be investing $14,400 aggressively and $3600 conservatively.   Don't you think that this same person as they make more money in the future will keep putting this amount or more away in a conservative manner?
 
I will freely concede that someone who doesn't believe that any of their money should be put away in a conservative manner is typically a bad candidate for WL insurance.  Term insurance pays me commissions and it supports families at death. 
 
Expected return doesn't have much meaning.  If a conservative portfolio is going to do worse than this, the life insurance will also do worse.  If it's going to do better, the life insurance should do better.

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Akkula wrote:I am starting to think that whole life insurance is going to enjoy a bit of a renaissance.  What type of investments actually beat the crap out of the market in 2008, insurance products.  No other "asset class" can really claim the same.  Also, talk about a non-correlated asset and a way to lower beta...
 
There is a heck of lot of value in having an asset in one's portfolio that is guaranteed to increase in value every year.

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How do you decide if a client is a better fit for a fixed annuity or life insurance?  The need for a larger death benefit?

Akkula's picture
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iceco1d wrote:anonymous wrote:iceco1d wrote:
No offense, but that sounds a bit like an example that was home-grown in a life insurance laboratory.
Who invests $3,600 for 40 years in a conservative manner, with an after tax expected return of 5.5%? 
 
I suppose, the most conservative 25 year-old in existence...but the "investor behavior card" (not that it isn't valid in certain circumstances) might be a bit far-fetched here. 
 
Feel free to change the dollar amount to $1,000 or $10,000.  It doesn't matter.   
 
I'm not sure why you find $3600 to be such a far fetched number.   Is it unreasonable for a 35 year old to invest 80% aggressive and 20% conservative?  How about a 35 year old making $100,000 and putting 18% of their pay away?  They would be investing $14,400 aggressively and $3600 conservatively.   Don't you think that this same person as they make more money in the future will keep putting this amount or more away in a conservative manner?
 
I will freely concede that someone who doesn't believe that any of their money should be put away in a conservative manner is typically a bad candidate for WL insurance.  Term insurance pays me commissions and it supports families at death. 
 
Expected return doesn't have much meaning.  If a conservative portfolio is going to do worse than this, the life insurance will also do worse.  If it's going to do better, the life insurance should do better.
 
For the record, I had no problem with the $3,600 number.  I was referring to the 40 year time horizon on a conservative (non)investment. 
 
So let me just make sure I have this straight (and if I'm coming across as either a dick, or an idiot, I apologize in advance because neither is intended)..
 
The hypothetical client comes to you, with no plan or retirement savings at all (35 y/o makes $100K, wants to save 18%).  You could possibly recommend to him that he should defer $14,400 per year into his 401K, or ROTH 401K, or maybe some in a ROTH IRA, etc., and put $3,600 into XYZ WL policy.  Because of the CSV in the WL policy being the "conservative" part of his overall portfolio, he should invest his 401K/Roth IRA/etc. in 100% equity?  Assuming of course, this guy has a risk tolerance suited for an 80/20ish allocation. 
 
Just want to make sure I'm following this...
 
I think that is correct.  I talked to MassMutual today and one of the producers said he was selling WL all day long.  He actually said he worked a lot with executives and asked them if they understood and/or qualified for a Roth.  Usually because of income they could not do Roth.  He was using WL with a nice 6% credit rate (I think) on the MassMutual WL policy and he was able to write policies for execs all day with such a high credited rate.  Life is a pretty good option in this kind of environment it seems. 
 
I think you basically take the whole life and replace the coservative part of the portfolio that doesn't need to be liquid with WL or other insruance contracts.  The rates are better than they are on CDs and treasuries and you can actually get paid on them.

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"So let me just make sure I have this straight (and if I'm coming across as either a dick, or an idiot, I apologize in advance because neither is intended)..
 
The hypothetical client comes to you, with no plan or retirement savings at all (35 y/o makes $100K, wants to save 18%).  You could possibly recommend to him that he should defer $14,400 per year into his 401K, or ROTH 401K, or maybe some in a ROTH IRA, etc., and put $3,600 into XYZ WL policy.  Because of the CSV in the WL policy being the "conservative" part of his overall portfolio, he should invest his 401K/Roth IRA/etc. in 100% equity?  Assuming of course, this guy has a risk tolerance suited for an 80/20ish allocation. 
 
Just want to make sure I'm following this..."
 
Before the subject of WL is even brought up, there are some things that he needs first:
 
1)Health insurance
2)Disability Income Insurance
3)Term Life insurance  (amount of coverage is much more important than type of coverage)
4)No high interest debt
5)Savings
6)Maximum Funding his Roth IRA
7)Taking advantage of the match in his 401(k) plan
 
Additionally, for WL to make sense, he needs to want to leave money behind at death regardless of when death occurs.
 
If all of that is in place, WL will typically be used for some of his conservative money.  In your example, it would be $3600 at the most and might be less.  It is correct that the fact that he has WL will allow the rest of his portfolio to be invested in a more aggressive manner.
 
Let me change one thing about what you wrote.  It is not the CSV of the WL that is used as part of the conservative part of his portfolio.  It is the policy itself.  The true value is the death benefit.     The CSV simply allows part of the death benefit to be accessed prior to death. 

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"How do you decide if a client is a better fit for a fixed annuity or life insurance?  The need for a larger death benefit?"
 
Although the money comes from the part of their portfolio that is used for conservative investments, I don't call life insurance an investment.  It gets used because of the value of the death benefit.   I can't think of a scenario in which we would be making a choice between these two products.   

anonymous's picture
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The typical person should not own whole life insurance.    Our typical client, though, can usually benefit from owning some.
Also, I almost never recommend WL to a prospect.   I do recommend it to clients often.

Hank Moody's picture
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Joined: 2008-11-10

anonymous wrote:The typical person should not own whole life insurance.    Our typical client, though, can usually benefit from owning some.
Also, I almost never recommend WL to a prospect.   I do recommend it to clients often.WHat is it about you that makes your clients need WL, unlike everyone else?

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I didn't make myself clear.  This wasn't about my clients.  This was meant to compare the typical person with the typical person who is a client of a financial advisor.
The typical person is not a good candidate for WL insurance while the typical client usually is.  It simply stems from the fact that the typical person does not make an ideal client.
 
Hank, I'm willing to bet that your typical client is more likely to own the local McDonald's than be the fry cook.  The fry cook is the typical person.  The owner is the typical client.

Hank Moody's picture
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anonymous wrote:I didn't make myself clear.  This wasn't about my clients.  This was meant to compare the typical person with the typical person who is a client of a financial advisor.
The typical person is not a good candidate for WL insurance while the typical client usually is.  It simply stems from the fact that the typical person does not make an ideal client.
 
Hank, I'm willing to bet that your typical client is more likely to own the local McDonald's than be the fry cook.  The fry cook is the typical person.  The owner is the typical client.Oh. I was afraid that you were murdering your clients.

anonymous's picture
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If I was murdering them, I'd recommend term coverage.

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