by KD » Sun Aug 15, 2010 02:55 am
I recently was told that my father had a life insurance policy he intended to go to his six children from his first marriage. His third and last wife told my brother that the policy was cancelled and we would receive nothing. I suspect, if there was a policy, she may have changed the beneficiary to herself shortly before my father died. He was quite ill before he passed. Is there any way we can find out if a policy did exist and do we have an legal rights to contest it?
Posted: Tue Sep 14, 2010 03:00 am Post Subject:
Why not design life insurance to be a savings vehicle? It can be done with an overfunded UL or WL policy (WL using PUA's)?
Again, rate of return smokes other low risk savings options (savings account, CD's, money markets, etc.). Even if we see rates begin to rise on those types of accounts, life insurance yields will rise accordingly.
The allusion of giving up control of money to an insurance company is somewhat short-sighted wouldn't you agree. If I give my money to a bank I'm giving up some control over the money in certain products--there's a reason they call them demand deposit/non-demand deposits.
If I give it to the mutual fund company I'm giving up control to them. It's all a matter of giving someone my money in hopes that I'll end up with more than I gave them.
Sure I can get into equity backed securities, but there's a much higher exposure to risk with that option now isn't there? By the way pop quiz, what's' the 20 year actual realized return by the average mutual fund investor? 4.5% at last check, a statistic the mutual fund industry isn't crazy about.
Again, you make too big of a deal over the notion that a dividend is a return of premium, and read too matter-of-factly on that topic.
I don't understand why insurance agents want to run away from this. Why not espouse insurance products for one of the greatest benefits they bring to the table? Instead we rollover and play dead to other products, because we're too busy pretending that we aren't insurance agents but rather financial advisors, like that ever helped anyone.
Posted: Tue Sep 14, 2010 10:20 am Post Subject:
Why not design life insurance to be a savings vehicle?
Because, if that is the primary goal, it's not the best vehicle to do this.
By all means, do what you are suggesting if there is the need for insurance.
However, it is not a substitute for equities, just like equities aren't a substitute for life insurance.
By the way pop quiz, what's' the 20 year actual realized return by the average mutual fund investor? 4.5% at last check, a statistic the mutual fund industry isn't crazy about.
I'm guessing that you are talking about a DALBAR study. Look into the methodology and you'll see that it doesn't have much meaning.
Posted: Tue Sep 14, 2010 01:26 pm Post Subject:
I'm guessing that you are talking about a DALBAR study. Look into the methodology and you'll see that it doesn't have much meaning.
Nope actually I'm quoting a statistic from JP Morgan Chase, which gets updated quarterly. I used to get their little market update quarterly handbooks. They stopped sending them to me when I moved.
Because, if that is the primary goal, it's not the best vehicle to do this.
By all means, do what you are suggesting if there is the need for insurance.
However, it is not a substitute for equities, just like equities aren't a substitute for life insurance.
So you reject an idea without providing any substantive proof that what you say is accurate. "Because it's not the best vehicle to do this" isn't going to cut it.
What is?
The savings account at the bank? CDs? MMMFs? Equities?
We've talked about all of these already. I'm still trying to figure out what makes them so great.
What is the superior savings method? And what makes it superior?
Posted: Tue Sep 14, 2010 05:20 pm Post Subject:
The allusion of giving up control of money to an insurance company is somewhat short-sighted wouldn't you agree.
Not short-sighted, but one of philosophical perspective. As "Guest" above stated, each financial product has its place. You shouldn't use one for something it was not "intended" to do, even though it could be used for that purpose. Kind of like doctors and pharmaceuticals -- the FDA approves a medication for one or two specific purposes but may not interfere with a doctor prescribing it for some other use, as long as it is not prohibited.
Overfunding UL? How about simply funding it properly? Most agents run illustrations in order to lowball the premium and make the sale to get a commission check. The heck with the fact that the policy will not support itself.
But let's get back to the philosophical giving up control of one's money. When I give my money to an insurance company, I cannot get it back without a penalty -- if I need it too soon. That's a loss of control -- if I think of it as "my money". But I miss the point that it's no longer my money. I voluntarily transferred it to the insurer in exchange for the benefits of the contract -- a death benefit, primarily. Since the insurer is promising something of value to me, they can make the rules about anything I do that diminishes their value -- hence surrender charges as a means to influence me to leave the money alone. That's giving up control.
When I put money in a bank, in a standard savings or checking account, the worst case scenario is the depression-era clause in my depositor's contract that says, if the bank insists, I might have to give them 6 months advance notice of a withdrawal. That's giving up control, albeit no bank, to my knowledge has invoked that privilege in the last 70+ years. (And life insurance policy loan provisions have the same language, and I don't know of any who have had to use it either.)
But if I put the money in a CD at the bank, I am giving up greater control. Because I am making a contract with the bank to leave the money for a specific length of time -- essentially giving up all control for that time period. They agree to pay me a higher rate of interest (a pathetic 2%-3% today), and I agree to give up a portion of the interest if I touch the money too soon. That's giving up control.
Mutual funds are a different matter. Yes, I turn my money over to the fund manager to invest in my behalf. He has the right to use the money according to the fund's stated objectives as he sees fit, which is giving up control.
But if I am in agreement with the funds objectives, I don't mind what he does with the money. I'm hoping for a profit but understand I could lose value too. I understand I don't have any guarantees like I would in a whole life policy or a bank deposit account, but in exchange I have the opportunity to earn a greater rate of return, which is my objective.
But, and here's the big difference between a mutual fund and either a life policy or a bank account, if I need the money for any reason, I can liquidate some or all of my shares in the fund, and by law, must have the money sent to me within 7 days. Current technology has improved on that and I can get it overnight by ACH transfer into my checking or savings account, or for a delivery fee, by check via FedEx/UPS.
That is not giving up control -- it's my money. And I am entitled to the full value of it. No penalties (although there could be a back-end sales charge). Only the risk that my shares are worth less today than they were yesterday or the day I first purchased them. That's not giving up control, just a reality when my money is at work in the stock market.
Same risk attached to a VUL policy, but without the surrender penalties. Philosophically, I am opposed to the surrender penalties.
From an insurance company executive's position, I understand them and endorse them -- it's in my best interest, and that of my SHAREHOLDERS. It is a relatively "minor" concession for my policyowner, except that it could mean thousands of lost dollars to them added to my balance sheet.
We can agree that in any financial transaction between a vendor and a purchaser, there are "considerations" exchanged between each party. Each party obtains something of importance to them. And each party must abide by the contract between them. Every contract has pros and cons for each party. But we should also agree that bank and insurance company contracts are written mostly in favor of the banks and insurance companies when it comes to fees and expenses.
Mutual funds are governed by similar provisions, and there are fees and expenses, but they generally affect only my rate of return, not my ability to access my money.
And it's the words "my money" that are most important. The money I pay to the insurance company ceases to be "MY MONEY" the moment I write the check. The money I give to the bank for safe keeping is still "my money", but I have to agree to the contract they make with me that may give up a little bit of control over the money. I have far greater control over my bank account than my life insurance cash value.
But the money in my mutual fund is MY MONEY, and I have ultimate control over the money -- not from the perspective of where it's being invested, but from that of being able to ACCESS my money as needed and without penalty. (We can debate no-load fund CDSCs all you want, but I can avoid those by buying A shares and paying the sales charge up front -- same as happens in a VUL policy -- so the issue is relative.)
By the way pop quiz, what's' the 20 year actual realized return by the average mutual fund investor? 4.5% at last check,
And what's the average life expectancy of a typically-funded UL policy? About 7-12 years before the policy lapses. Longer for some, shorter for others, that's what "average" is all about. For every "average" mutual fund that only gets 4.5% (wherever that number came from), there is one that got a greater rate of return and one that got a lesser rate of return. If I'm only in the funds that got the greater rates of return in those 20 years, what do I care about the guy who was in the 4.5% fund or the -20% fund?
Statistical debates such as this are meaningless, because this is a philosophical matter. Which means there is no right answer. Only an answer that appeals to you or to me. We can agree that each position is right and accept that each position is wrong. Depending on our philosophical bent.
I knew it would touch a nerve to mention dividends, and as I said above, we've gone down that road. I see dividends in a particular way, and you see them somewhat differently. I have never said that dividends are a bad thing. And I don't disparage insurance companies that "pay" them. I just think agents make too much out of them, and clients misunderstand them.
And they are not guaranteed, even if they've been paid for the last 150 years. So they deserve to be defined, and they have been . . . by others with greater credentials to do so before me, and I merely accept that definition. Philosophically, you don't agree with that definition, and I accept and acknowledge that. We don't need to debate it further. Each of us can be right and wrong at the same time -- it's really nothing that important.
Most philosophers disagree with other philosophers, too. On matters far more important, in their minds, than life insurance.
Posted: Tue Sep 14, 2010 05:31 pm Post Subject:
Nope actually I'm quoting a statistic from JP Morgan Chase, which gets updated quarterly. I used to get their little market update quarterly handbooks. They stopped sending them to me when I moved.
I'm willing to be that the information comes from JP Morgan Chase with their source being Dalbar. For instance, this link is from one of their brochures. (Shoot, I can't post the link. In their brochures, they get their comparative info from Dalbar.)
Take a look at page 16. Notice that for the time horizon covered, it shows the S&P 500 getting 8.35% and the average mutual fund investor getting 1.87%. What's the problem here? 1)Nobody can invest in the S&P 500 and have no costs like is being shown. 2)The mutual fund investors have all sorts of expenses taken out. 3) The biggie: look at the time horizon. It is 20 years vs. 3.1 years.
Take the time to understand the methodology. Ex. If “Jim” invested $100,000 20 years ago and he died the next day, for purposes of this study, it will look like he got a 0% return for the 20 years. Yet, if he put the money in the S&P 500, somehow his money would have grown to over $500,000 despite being dead for 20 years. In other words, the Dalbar study assumes that all money was invested 20 years ago and stayed invested for 20 years, but they got their numbers based upon inflows and outflows. Ex. 2: Jack started investing 5 years ago, his $100,000 has grown to $200,000 which equals a 15% annual return. For the purpose of this study, it would be a 3.5% return because the assumption is that the money went in 20 years ago.
What is true is that the average mutual fund investor does worse than the average mutual fund, but the difference isn’t some gigantic number like Dalbar makes it out to be.
As professionals, we shouldn’t quote things to help us make our point without understanding what we are quoting.
Posted: Tue Sep 14, 2010 05:43 pm Post Subject:
I was about to append the following to my post above, when I was interrupted.
What is the superior savings method? And what makes it superior?
I think this is what is driving your perspective. I don't see it as a matter of superiority. There is no "superior" savings vehicle. There are only "different" savings vehicles. Each has advantages and disadvantages. And the person intending to "save money" or "accumulate savings" is entitled to know both. They are entitled to know about most or all of the alternative vehicles available to them. When an insurance agent only represents the savings component of a life policy, to the exclusion of all other possibilities, they are doing a disservice to the client. In fairness to the agent, it may be all they know.
And, as I have said, a whole life policy today might provide as much as ten times greater a rate of return than a passbook savings account -- spectacular by most measures! And when combined with the potential of a death benefit thousands of times greater than the actual cash accumulation, it leaves the bank and its products in the dust. I have far less to say about the "disadvantages" column when it comes to banks and bank accounts than I have to say about the disadvantages of a whole life policy.
And if it came down to a choice between a bank account and a life policy as a "savings" vehicle, I would have to agree that almost any non-variable life insurance policy offers a "superior" rate of return today. But the one disadvantage of a whole life policy I cannot overlook or fail to share with my client, is the fact that the cash value is not "my money" -- it is only what I am entitled to, in the longest sense, if I choose to terminate my policy.
I do not have "free access" to it. I may borrow against it, and pay a fee (interest) to do so. If I want or need all of it, I must give up the greater guarantee of the death benefit. So I may be torn between the need for money in hand today and the need to protect my family if I should die tomorrow. But it's not my money. I have given up control of my money to the insurance company.
I can hedge against that by having the insurance AND having separate savings. If I need to tap my savings, I do not interfere with my insurance.
The bank doesn't charge me interest when I need to use my money (although they may penalize me by keeping a portion of my earned interest for taking it out too soon). So I can have the best of both worlds by keeping the two separate. I can have savings in a whole life policy and a bank account, or I can have term life insurance and be able to put more money into the savings account.
And I can substitute a mutual fund or other true investment for some or all of the bank savings, but that may not be a wise decision either.
So, in reality, advantages or disadvantages notwithstanding, I probably should have all three . . . placing no greater importance on one over the other (although I might devote more resources to one than another). That's what agents sometimes fail to do. They often play the importance of one over the other as being "superior" as if both were apples, when they should be discussing the need for apples and oranges and bananas.
Posted: Tue Sep 14, 2010 05:49 pm Post Subject:
You're missing the point, I didn't suggest that life insurance be the only possible savings vehicle out there, just that it's a viable option whith many great qualities, and sadly way overlooked and too quickly thrown out as a suggestion. Took my a long time to wrap my head around it, longer than I like to admit, but it works. For the young couple planning to buy a house in a few years, no. To the old couple who didn't save enough and now needs to pray they can find that magical equity that'll yield 10+% for the next 5 years, no. But for someone who is looking for an option regarding money that they are saving for a some indefinite period of time, that they may or may not want access to in some degree over the next 5 to 20 years it's a decent option. It yields better than it's other low risk counterparts, and is much more predictable than money on the stock market.
Sure there are many agents out there who suck at this, perhaps they are just in it for the money--if such a thing can exist. During the first half of that last century it was a very common practice to store money in Whole Life insurance.
But to suggest that it should be overlooked until other options are exhausted is short-sighted.
Posted: Tue Sep 14, 2010 05:49 pm Post Subject:
The dividend is a refund of excess premium (I know, we've argued this point, too, but it is the "textbook" definition that even a CFP learns), so you can have it in cash or use the value to purchase more insurance
Max, I'm in agreement with most of what you are saying here, but this definition of dividend is incorrect. That is how a dividend is treated for tax purposes, but that is not the definition.
If my premium is $5,000 and I pay $5100, I'll get $100 back from me because I paid excess premium, but it certainly isn't a dividend.
In short, the correct definition is, “It is an equitable portion of the company’s earnings known as “divisible surplus”.
Posted: Tue Sep 14, 2010 05:52 pm Post Subject:
BNTRS,
I'm with you that it's a good savings vehicle. I just think that there also has to be a need for a permanent death benefit. Otherwise, there are simply too many negatives such as the high acquisition costs which means that the returns will probably be negative for quite a while combined with the fact that one must keep contributing.
Posted: Tue Sep 14, 2010 05:58 pm Post Subject:
JP Morgan Chase
You don't suppose they have a vested interest in trying to downplay the value of money at work outside the banking system do you?
What is Chase doing with its money? They aren't doing anyone any favors by lending it. And they certainly aren't encouraging anyone to save it by paying 0.25% on a $1,000 CD for 6 or 12 months (1.01% for a 36 month CD, and 2.00% if a person is willing to throw $100,000 in their direction).
They're quite happy, however, to charge 19.24% for a cash advance, overdraft, or balance transfer on their "Sapphire" rewards credit card (12.24% standard rate on purchases and a 29.94% penalty interest rate if you "fail to make any minimum payment" -- might they interpret that to mean a minimum payment on your Kohl's card?).
Chase is doing no one any special favors in retail banking, especially after having acquired WaMu and enlarging their presence in the West overnight.
And they may be doing a disservice to anyone who chooses to misunderstand what they have said about mutual fund returns.
When it comes to doing business with an insurance company or a bank, I'll take the insurance company almost every time. With a grain of salt.
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