Insurance Pro Blog Podcast | Life Insurance and Annuity Insights

Few aspects of life insurance are more misunderstood than the guarantees of a permanent life insurance contract (particularly whole life insurance).  You wouldn't believe many of the claims we've heard concerning life insurance guarantees, and we continue to be astonished at the perpetuation of inaccurate statements that surround discussions of guarantees. Some of my personal ... Keep Reading

We realize that premium finance is really big subject and there's much to say about this. In today's podcast we're discussing some the “less than savory” pitches circulating out there.

Much more to write on this subject…this post will be updated in the next few days. We ran out of time and wanted to get the podcast out asap but the numbers/illustrations we discuss will be added here soon.

We realize that premium finance is really big subject and there's much to say about this. In today's podcast we're discussing some the “less than savory” pitches circulating out there. Much more to write on this subject…this post will be updated in the next few days. We ran out of time and wanted to get ... Keep Reading

We all understand that life insurance provides a death benefit, but its ability to offer additional financial resources are spectacular and often understated.  If you've researched the topic of life insurance at all, you've likely run into mention of using life insurance to create income.  Many time the discussion revolves around retirement income and this has likely raised a few questions in your mind.

How does an insurance policy provide me with income while I'm still alive?  I thought this was something that only paid when I die?

We want to answer those questions today.  We also want to discuss some nuanced but remarkable benefits of life insurance when used to create income.

Certain Types of Life Insurance can Generate Retirement Income

Only certain types of life insurance can generate income.  This is important to understand.  Term life insurance might be great for the low-cost death benefit, but it will do nothing for you if you want to create income with life insurance.

For this discussion, we are talking about whole life and universal life insurance.  When you own one of these life insurance policies, the premiums you pay accumulate cash value.  Not all of the premiums you pay go to directly to the cash value, but a portion of the premium does.

Accumulated cash values in the life insurance policy can be taken out at any time and for any reason. You don't have to die in order to use the cash value in his or her life insurance policy.

Distributions from Life Insurance Policies

You can take cash values out of a life insurance policy in two different ways.

* Withdraw cash from the policy

* Take a loan against the policy

Withdrawals from a life insurance policy mean you removed the cash from the policy.  This option is available for most life insurance contracts.  There are restrictions to withdrawals with some types of life insurance policies.

A loan does not mean you removed cash from the policy.  Instead, the insurance company lends you money.  You then pledge cash in your life insurance policy as collateral for the loan.

The method you choose to access cash in a policy depends on specific circumstances.  These circumstances include personal matters about the policyholder as well as the specific life insurance contract.

Please note: throughout the rest of this article I will use the terms withdrawal and loan very specifically.  When I use one vs. the other, I mean exactly what I outlined above.

Receive Tax-Free Income

One of the biggest touted benefits of life insurance is it's almost universal tax-free status.  Death benefits generally have no tax liability.  Monies distributed from a policy also do not usually have a tax liability.  This means you can use life insurance to generate income and pay no taxes on that income, however, that tax-free income comes with certain requirements.

You can only withdraw your cost basis from a life insurance policy without tax liability.  Here is an example to better illustrate what I'm talking about:

Let's say you have a policy where you paid $100,000 in premiums.  The policy also has $200,000 in cash value.  You can withdraw up to $100,000 from the policy without incurring a tax liability on the withdrawal.  Any withdrawal beyond the $100,000 (your cost basis) carries taxable consequences at ordinary income tax rates.  In order to access the remaining $100,000 without paying taxes on it, you can use loans.

Loans do not create any tax liability regardless of policy c...

We all understand that life insurance provides a death benefit, but its ability to offer additional financial resources are spectacular and often understated.  If you've researched the topic of life insurance at all, you've likely run into mention of using life insurance to create income.  Many time the discussion revolves around retirement income and this ... Keep Reading

Our focus within the life insurance industry is helping our clients maximize the potential for cash surrender value accumulation of whole life insurance and indexed universal life insurance policies. In fact, I'm not exaggerating when I say that we've placed dozens of policies for our clients with this goal in mind over the last few years. (Should probably do a count for an actual total at some point).

But at least a few times a week we're faced with questions like, “does it really work?”, “is it worth it?”, etc.

I should also mention, that we've helped a lot of people who thought that they were signing up for this sort of thing but understood sometime after that they got their policy that they actually got something a little different. If you want to understand more about that, read this article we wrote a few years ago. 

If you don't wanna take the time to read that article, I'll skip the salad and serve you the steak. There is a “right way” to setup whole life insurance if your primary goal is cash value growth.

That being said, we're open to the idea that a lot of poorly designed life insurance policies (those not optimally designed for cash value growth) can be pretty good wealth accumulation tools even without a highly customized design that boosts the rate of return.

Best Decision I Ever Made

As a matter of fact, we've met a lot of people who own whole life insurance and most of them didn't buy policies from us.  And most of these discussions have started without us initiating any sort sales presentation. We never had any intention of selling life insurance to them and they had no intention of buying a policy from us.

A casual conversation with a stranger sometimes results in a discussion about our professional lives and neither of us have any knack for elevator pitches or finding clever ways to tell people what we do.  “I sell life insurance,” is my description of choice–I can feel my former sales manager grimace every time I say it.

While the majority of people we talk to in a casual setting are quick to move on to a different subject, there are those who share their story. It's often been a tale of how they purchased cash value life insurance and held onto it for a while.  Fascinating stories to say the least.

Eyes light up a bit and they say something like “I have this whole life policy I bought from XYZ company back in 1970 something, and let me tell you that was one of the best decisions I ever made!”  They exclaim.

Why?

Because that boring whole life policy now has a boatload of cash value that they'd never have if they'd tried to save it some other way–by their own admission. We're not coaxing that response from people.

Just how much cash value you might ask?  Let me give you an example.

Real Numbers from Whole Life Insurance Policies

Almost three years ago, we published this piece on the subject of “badly designed” whole life insurance and how it could work out quite well.  I want to recap the numbers for this example.

That article was special for two reasons.

* It had substantial historical data–36 years to be exact–on a whole life policy

* It reported numbers from a whole life policy issued by State Farm–a company that has completely changed focus away from dividend-paying whole life insurance

We calculated the effective internal rate of return on this whole life insurance policy back then and it turns out it achieved a 6% return over those 36 years.  Could Jim (the contributor who shared the information on his whole life policy) have...

If you have extra cash, time, and an open mind, whole life insurance is worth it. Over the long term, you can expect to earn returns similar to bonds and secure lifetime death benefit coverage that your beneficiaries will receive tax-free. On the other hand, if you're young, just getting started in your career, and ... Keep Reading

“Whole life insurance/universal life insurance is a terrible investment because the rate of return is horrible.”  We've heard that before.  You don't have to wander the interwebs far to find someone peddling this bologna.  If you don't believe me, see here, here, here, and here.  None of those four authors hold a license to sell life insurance, but I digress.

Though we’ve addressed this statement a few times on the Insurance Pro Blog, I wanted to distill the point many people miss into one simple notion that should be approachable by just about anyone.

Rate of Return…Focus your Attention Over Here

When it comes to personal finance (and all the various subsections thereof) few terms are used in a more misleading fashion than the rate of return.

The mutual fund industry has enjoyed confusing arithmetic mean and geometric mean for decades. We also see financial pundits “cherry pick” their favorite periods of time to support the case for being invested in the market. They want you to believe that investing in the stock market is an imperative.

But what does rate of return even mean for you and me?

Answer this question to yourself (that way you’re less apt to lie): If I could guarantee an adjustment to your savings/investment plans that guaranteed an 8% annual rate of return over the next 10 years, would you know what to do with the money you made?  Don't lie now.

Most people wouldn’t, and this is the trap that most of us step into when it comes to the rate of return on various savings/investment options. It's swell to make an awesome return for a given period time but then what?

I can't even begin to tell you how many people have told me they were thrilled with their investment portfolio because it returned X percentage points over Y number of years.  They proclaim this with a certain chest inflated pride, but then sheepishly deflate and ask “that's good, right?”  Sigh…(insert eye roll here).

A Retirement Income Case Study

Keeping pace with the promise that I want my point to be so simple a caveman could do it, and hammering on the notion that retirement planning is about what you can actually do with your money, I present you with the following scenario:

A 35-year-old male wants to target a retirement income of $75,000 commencing when he turns 66.

He’s going to earn that elusive 8% compounding annual return on the stock market we often hear about (though several sources don’t believe in it), and using the old 4% rule about safe withdrawal percentages (whatever it inflates the numbers a bit in favor of stocks) we determine the need is $1,875,000 at retirement to generate his target income.

Given these parameters, we can easily calculate the sum he needs to save each year at $15,325 (assuming he makes his investment at the beginning of the year all at once).

Now, how much do we have to save if we want to generate this same income amount using life insurance?

“Whole life insurance/universal life insurance is a terrible investment because the rate of return is horrible.”  We've heard that before.  You don't have to wander the interwebs far to find someone peddling this bologna.  If you don't believe me, see here, here, here, and here.  None of those four authors hold a license to sell ... Keep Reading

The Center for Retirement Research at Boston College has released their latest report which compiles information from the Federal Reserve's: Survey of Consumer Finances (SCF) which provides a glimpse into 401k balances etc.

However, what's really important is the information lurking just below the surface. You've gotta read between the lines a bit to see it.

Listen to find out what's not apparent if you just read the research.

Here's a link to the actual research report

The Center for Retirement Research at Boston College has released their latest report which compiles information from the Federal Reserve's: Survey of Consumer Finances (SCF) which provides a glimpse into 401k balances etc.

However, what's really important is the information lurking just below the surface. You've gotta read between the lines a bit to see it.

Listen to find out what's not apparent if you just read the research.

Here's a link to the actual research report