Insurance Pro Blog Podcast | Life Insurance and Annuity Insights

 

Something we hear and/or read repeatedly is that a life insurance contract is simply too complicated for any mere mortal to understand. The complexity is just too great. How could ever understand what you're actually buying?

We don't disagree that if you were to sit down and ready your policy from cover to cover it would prove to be a bit confusing. However, is it any more confusing than a mutual fund prospectus? Or complete financial reports for a publicly traded company?

We think not.

If you understand the basics, have a properly designed policy and an adept agent to help you navigate it, a cash value life insurance policy will be the most simple part of your savings strategy and it's likely to be one of the most stable.

 

We’ve discussed “Sequence of Returns Risk” numerous times in the past, but most of those discussions focused on how this phenomenon affects your assets in a draw down period (i.e. a time when you are spending the money you saved to cover expenses and/or generate income). Today we want to talk about sequence of returns in ... Keep Reading

 

We’ve discussed “Sequence of Returns Risk” numerous times in the past, but most of those discussions focused on how this phenomenon affects your assets in a draw down period (i.e. a time when you are spending the money you saved to cover expenses and/or generate income).

Today we want to talk about sequence of returns in a slightly different light and note a problem it poses for all savers while they are attempting to accumulate more value in their portfolios.

Average Returns…We Hate Them

There is little doubt that we despise discussions about investment returns when one references the average rate of return as justification for an anticipated accumulation scenario.

In other words, anyone who tells you that you will have X amount of dollars in your portfolio Y number of years into the future because the stock market has on average performed Z percent per year is often making a huge error in their underlying assumptions about how a particular investment (usually the stock market) performs. This error is especially profound given its inability to adequately model real investment behavior with real asset movements.

Distilling this point to its most easily understood point is to suggest that one always ask when confronted with a claim about achieving a certain investment result based on a certain quoted “average” return is whether or not the individual making the claim is referencing the arithmetic or geometric mean when making claims about average returns.

Average Return vs. Geometric Return…Why it Matters

The best way to illustrate why you need to be aware of what “average” is being used to justify investment expectations is with an example:

Assume for a moment that you plan to make a $10,000 annual investment in a passive index fund tracking the S&P500. You plan to do this for the next 10 years and then retire. Consider the two following scenarios unfolding:

Scenario 1

Scenario 2

To the untrained eye, these could just be numbers on a page showing two “different” possibilities for how the stock market could behave over this 10 year period. But look a little closer and you’ll notice that all of the annual returns are identical in both scenarios.

The difference is we simply flip them around. This means the arithmetic mean (average annual rate of return) is the same in both cases–8%. But the balance of the investment account at the end of year 10 varies greatly, by about $53,000 or 41%.

Now look at this scenario where we’ve simply mixed the returns, but have kept all of them throughout the 10 years:

Scenario 3

Again, our average return is identical to scenarios 1 and 2, but our ending account balance is again different. We usually explain this result as the difference between arithmetic means and geometric means, and that is a correct explanation. But that explanation is also somewhat esoteric and practically useless to the average American just looking to save some money for retirement.

I’d like to instead note that this phenomenon is a function of sequence of returns risk applied to your accumulation years.

Think of it like this, the only difference between scenarios 1 and 2 is when the re...

One question that we seem to get repeatedly is, “Should I put all of my emergency fund into a whole life policy?” The first few times we got this question we figured maybe it was just coincidence? But, after having been around ye olde interwebs for over five years now, and talking to over 1000 ... Keep Reading

 

One question that we seem to get repeatedly is, “Should I put all of my emergency fund into a whole life policy?” The first few times we got this question we figured maybe it was just coincidence?

But, after having been around ye olde interwebs for over five years now, and talking to over 1000 people who've actively engaged us in conversations specifically around using whole life insurance as an asset, we discovered there are multiple sources of this “advice”.

Or at least multiple sources that are responsible for planting the seed.

There's also the corollary which suggests to people that using whole life insurance as an asset is a great idea for everyone!

On the surface, it doesn't seem like a bad idea. But as usual we've got an opinion that probably doesn't align with the proprietors of this over-simplified advice. Shocker right?

So…

When is it appropriate to use whole life insurance as an asset? Who is it appropriate for? What scenarios represent a “best use” case?

Ahh…you'll have to listen to find out!

It's that time of year again…time for companies that offer participating whole life insurance policies to make their dividend announcements for the coming year. (And yes, we realize these are technically the 2017 dividend announcements but since they're made in 2016 we refer to it as the 2016 season.) So far, we've heard from Northwestern ... Keep Reading

 

It's that time of year again…time for companies that offer participating whole life insurance policies to make their dividend announcements for the coming year. (And yes, we realize these are technically the 2017 dividend announcements but since they're made in 2016 we refer to it as the 2016 season.)

So far, we've heard from Northwestern Mutual and Mass Mutual.

You can read our posts about those announcements here and here.

This year the “trend is not your friend” as both of the two companies that have made their announcements public have lowered their dividend scale by 45 and 40 bps respectively. So…what does that mean for the rest of the companies yet to announce?

Well, my crystal ball says that if they hold their dividend that will be great. But we're leaning more toward more lowering announcements. It's unlikely that we'll see any increases.

But…I'll be happy to plate up some cold crow if the announcements improve.

We'll do our best to keep you posted as the announcements roll in.

We are often asked about 10 Pay Whole life policies as a strategy to accumulate cash value at a more rapid rate. So, today were getting into why this might not be the best idea. As a quick review a true 10 Pay Whole Life Insurance requires just 10 premium payments.  After those 10 payments ... Keep Reading

 

We are often asked about 10 Pay Whole life policies as a strategy to accumulate cash value at a more rapid rate. So, today were getting into why this might not be the best idea.

As a quick review a true 10 Pay Whole Life Insurance requires just 10 premium payments.  After those 10 payments it is contractually paid up requiring no further premiums. Agents and brokers often use this product for its higher than average cash accumulation capabilities and for the very short time period of premium commitment.

 

Most people think that creating a Modified Endowment Contract (MEC) is a bad thing. We discussed that at some length in last week's episode. That's mainly because the tax advantages of using life insurance are pretty widely known and discussed my agents…ourselves included. So, why in the world would anyone want to intentionally make ... Keep Reading