Insurance Pro Blog Podcast | Life Insurance and Annuity Insights

 

In episode 8 of the Insurance Pro Blog Podcast we're talking about whole life insurance policy blending. Sounds exciting right?

It might be to those of you who've been listening to and/or reading our stuff for a while and have heard us bring up the term “blending” but never really understood what we actually meant. Being true to form…we like to talk about things ad nauseam but never actually explain what they mean.

It's not a great business strategy.

But we're coming back to it (blending) in this podcast. Blending is simply the process of using a combination of term insurance coupled inside of whole life insurance policy with a heavy use of paid-up additions (crucial ingredient). That's crystal clear right?

The concept isn't difficult to understand. The execution of the concept is a tad more complicated (but that's mainly because every company has a different approach).

We're not trying to detail exactly how to do it with every life insurance company and every policy. That would be impossibly long and incredibly difficult to explain clearly.

Instead, our goal of today's episode is give you some functional understanding–along with the pros and cons.

If you want more written detail on the subject of policy blending, check out these articles that we've published on the topic:

How Policy Blending Works

Whole Blending: Does Design Really Matter?

Historical Proof that Blended Whole Life Insurance Really Works

Why the Blended Whole Life Idea is Conceptually Perfect, but sometimes Practically Flawed

And if you'd like to see how a blended policy might work out for you, please feel free to contact us, we're always happy to help.

 

 

Well, we knew that you would need something to distract you from all the things you SHOULD be doing today…shopping for last minute gifts, going to family gatherings, snapping together plastic stuff for your children etc. So we published a short episode this week to give you reprieve from those activities. This is a recap ... Keep Reading

 

Well, we knew that you would need something to distract you from all the things you SHOULD be doing today…shopping for last minute gifts, going to family gatherings, snapping together plastic stuff for your children etc.

So we published a short episode this week to give you reprieve from those activities.

This is a recap of the dividend announcements that rolled out from companies that offer participating whole insurance policies. And before anyone gets their feathers ruffled, it’s not an exhaustive recap.

There are a handful of companies that we can’t get data from. I might add, not for lack of trying…they just won’t speak to us (imagine that).

At any rate, hope you find our commentary useful. This is our last episode of 2015, we won’t be publishing next week.

But we always do our best to answer your emails, so feel free to reach out to us and we’ll get back to you as soon as reasonably possible given the time of year.

Thanks for caring enough to keep us going one more year, your listening and/or reading means more than you know and really keeps us doing this every week.

In the world of risk there are specific things that typically get mentioned–market risk, liquidity risk, interest rate risk and systemic risk. But before you all run away thinking that we're going to get in some mind-numbing conversation about such esoteric concepts…don't fret, we're not. No, in fact we're going to discuss a different type of ... Keep Reading

 

In the world of risk there are specific things that typically get mentioned–market risk, liquidity risk, interest rate risk and systemic risk. But before you all run away thinking that we’re going to get in some mind-numbing conversation about such esoteric concepts…don’t fret, we’re not.

No, in fact we’re going to discuss a different type of risk altogether. One that is much more practical and is very real. Or at least should be very real to us all.

There’s one risk that is the most infamous of them all (or should be)…sequence of returns risk. I know we throw around such terminology as if it means anything to the rest of the world.

We refer to it as if it’s as common as Advil®.

But what does “sequence of returns risk” really mean? It’s the risk that you face as you accumulate and/or spend down the assets you’ve accumulated and having returns that occur in a particular order that accelerates the risk that you’ll run out of money more rapidly than you thought.

It’s a concept we’ve outlined before in our very obscurely named post:

Why Life Insurance Works So Well for Retirement Income.

An Illustration to Make it Real

Let’s talk about Bob.

Bob has a portfolio with a value of $1 million. He has decided that he’s going to take $50,000 (5% of his balance) each year from his portfolio as “income” to supplement his social security and his small pension.

For this illustration we’re looking at a 20 year time period and we’re assuming an assortment of various returns (in our attempt to model how the market might behave–ups and downs).

The average return for the 20 year period is 6.85%.

If we’re being super geeky, we would refer to this 6.85% as the arithmetic mean.

Assuming this set of random returns, we distribute Bob’s $50,000 per year from the $1 million balance. And after 20 years, Bob has a bit more than a $1 million.

By virtue of market appreciation, Bob hasn’t lost any of his principal balance. In fact, he’s a little better off than when he started out and he’s managed to take out $50,000 per year.

So, he’s taken a total of $1 million (20 years x $50k/year) from his portfolio and he still has a bit more than a $1 million.

Pretty sweet.

Now, to get show clearly illustrate for you sequence of returns risk, we’ve taken the exact same returns…only we flipped them over so that they occur in reverse order.

Bob starts with the same $1 million and withdraws $50,000 per year. The average return is the same 6.85%.

But because the returns fall at different times during the 20 year timeframe, Bob runs out of money at the end of year 19. See the numbers below.

What’s happening here? Why does Bob run out of money if his average return is the same?

Assume that scenario #1 is akin to Bob starting his 50k “income distribution” in the late 90’s when the tech bubble was the tide raising all ships. Scenario #2 is like Bob taking the same 50k but starting in early 2007 or maybe the spring of 2000 is a better example.

As a result of being hit with negative years at the very beginning, the portfolio takes a beating. And because Bob is taking out 50k every year, he compounds the effect of the problem.

The big issue here that’s totally out of Bob’s control (and everyone else’s for that matter) is the timing at which a particular return takes place. You can diversity all you want and you can reduce certain risks.

But the diversification is too often misapplied. Too many people assume that a certain portfolio mix (stocks, bonds,

When most people think of life insurance, the first thing that comes to mind is the death benefit that it provides to loved ones or causes after you die…right? That's a pretty obvious benefit and not one that should be downplayed to any extent. We've seen firsthand the power of a life insurance benefit ... Keep Reading

 

When most people think of life insurance, the first thing that comes to mind is the death benefit that it provides to loved ones or causes after you die…right?

That’s a pretty obvious benefit and not one that should be downplayed to any extent. We’ve seen firsthand the power of a life insurance benefit left behind for a family that’s lost their primary breadwinner. It certainly doesn’t make handling death any easier, but it does a great deal to ease financial pain.

If you’ve spent any time reading and/or listening our material, you know that most of our clients are not primarily focused on the death benefit.

Yes, it turns out that life insurance has some other nifty features that can actually benefit you while you’re still upright and breathing.

One of which (the one we’re focusing on in episode 005) is the ability for it to create a pretty swell income whenever you decide you want it to (assuming you have cash in your policy).

Today, we’re diving into some specifics on that very subject and how that may work in your favor if this something you’re considering.

Actually, based on a lot of scenarios we’ve looked at, life insurance does a better job of producing a stable income than other alternatives that are more regularly recommended by your “run of the mill” financial advisor.

Listen to the full episode to get the specifics.

And if this something that interests you, please reach out to us. This is our specialty.

Over the last few years…basically since the beginning of the Insurance Pro Blog going back to the summer of 2011, we've been preaching the gospel of whole life insurance. Sure, there have been plenty of people who've come along to tell us how wrong we are and how a simple investment in an index fund ... Keep Reading

 

Over the last few years…basically since the beginning of the Insurance Pro Blog going back to the summer of 2011, we’ve been preaching the gospel of whole life insurance.

Sure, there have been plenty of people who’ve come along to tell us how wrong we are and how a simple investment in an index fund could certainly outperform the return on the cash value of a whole life insurance policy.

To this, we’ve never disagreed. Yes, in fact, we too believe that a long term investment in stocks or equity funds of any kind should…outperform the return on cash in a whole life policy. But that’s kind of like us all agreeing we’d live a much longer and healthier life if we only ate raw vegetables and less prime rib smothered in butter.

Data is one thing, human behavior is another altogether.

I should preface this introduction to episode 004 by saying that if you’ve not read these two posts, you should, it will give you a great frame of reference for the discussion in the episode and there are numbers discussed that you can see in the post(s):

* Historical Proof That Blended Whole Life Really Works

* Blended Whole Life Insurance vs. the Stock Market

Our point is that while average annual returns for various index funds and the indices themselves look great, most people aren’t able to achieve returns anywhere close to those numbers.

Here are some numbers from DALBAR’s annual “Quantitative Analysis of Investor Behavior” based on end-of-year 2014 returns.

Here’s a more detailed rundown of the DALBAR report:

* In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return. (13.69% vs. 5.50%).

* In 2014, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor.(5.97% vs. 1.16%).

* Retention rates are

* slightly higher than the previous year for equity funds and

* increased by almost 6-months for fixed income funds after dropping by almost a year in 2013.

* Asset allocation fund retention rates also increased to 4.78 years, reaching their highest mark since plummeting to 3.86 years in 2008. Asset allocation funds continue to be held longer than equity funds (4.19 years) or fixed income funds (2.94 years).

* In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.

* In 8 out of 12 months, investors guessed right about the market direction the following month.Despite “guessing right” 67% of the time in 2014, the average mutual fund investor was not able to come close to beating the market based on the actual volume of buying and selling at the right times.

Just further proof that behavior rarely aligns with reality.

Psychology and emotion play a very large part in your long term financial success. It’s better to build a plan to “control the control-ables”. It’s not sexy, it involves more planning and probably requires you to save more money because you’re accepting a plan based on lower average returns.

But in the end, if you plan conservatively, and end up with more money,

When it comes to battles in the life insurance world, none rivals the one that exists between those squarely in favor of whole life insurance always being the best option versus indexed universal life insurance. And it's a debate and/or fight that mostly serves to confuse consumers. So, we thought it would be appropriate to ... Keep Reading