by jeffsmitth » Sun Mar 17, 2013 08:48 pm
I know that this is stupid question that what is prominent Benefit of life Insurance. I think we need to get knowledge about this. Because every person has different benefit and reason.
I want to get views of people about this
I want to get views of people about this
Posted: Sun Mar 31, 2013 02:03 am Post Subject:
please let me know so that I can take a HELOC and invest and take my money from checking, savings, etc. You are the last person who I would expect to use that kind of terminology with life insurance.
There's nothing wrong with the terminology. It's the application of it that was not discussed.Most whole life policies are built around a (usually unstated) fixed internal rate of return between 3 and 5 percent -- the contract guarantees that. But the cost of insurance diminishes the amount of cash that actually earns any rate of return, and of course, surrender penalties (simply addressed as "Cash Surrender Value") obscure that in the first 5-15 years.
You cannot dispute that the internal rate of return is guaranteed. It's the only way the cash accumulation can possibly equal the face amount of insurance at maturity at age 121 (age 100 in older policies). A number of whole life policies now are marketed as paid up at age 100, but the cash value still has another 20 years to go before it reaches the face -- because the 3% to 5% IRR is calculated to that endowment age, not age 100.
It doesn't mean that you would actually see the full value of your premiums earn that 5 percent -- that's absurd, because someone has to pay for the cost of insurance, and it's not going to be the insurance company. If you are attempting to calculate a rate of return against the total premium paid over the life of the policy, the effective rate of return is somewhere around 1% to 2%. You cannot confuse the total cost of the policy with the internal rate of return. That's why life insurance should never be considered -- or marketed -- as an investment.
It's no different, in that sense, than making a play in fixed-rate bonds. You get a guaranteed rate of return, but after you account for commissions, income taxes, capital gains taxes (or the potential for principal loss if interest rates rise, which would only be partially offset by the deductibility of capital losses), your actual rate of return is not the same as that which the bond promised and paid. But you earned your guaranteed rate of return. (And if you bought your bonds at a premium then your yield to maturity would be considerably less than the stated interest rate.)
So don't go borrowing money on your home to "invest" in life insurance any time soon. Because you won't see that principal grow at a 5% rate of return. What's left and available for cash accumulation after policy charges, however, will.
It's only slightly different than the UL policy illustrations that purport to show a 5% or 6% interest rate based on "current assumptions" that most agents should know is pie-in-the-sky. Those rates, however, are not guaranteed (the minimum 0% to 3% is) and the current assumptions are generally faulty as far as the future is concerned. But that doesn't stop the agents from marketing the products as if the future is unchanging. They also tend to gloss over (or completely fail to discuss) the excessive policy charges that reduce the available cash accumulation substantially (by as much as 70% or more) in the first 2-5 years -- the money that would accelerate fastest in a compounding scenario over 30-50 years.
Posted: Sun Mar 31, 2013 07:28 am Post Subject:
There is only nothing wrong with the terminology because you struggle admitting when you are wrong. Guarantees on whole life policies are partially based upon returns of a minimum percentage of the insurance company's general account typically in the 4% range. To say that is a guaranteed Rate Of Return for a purchaser is completely misleading and wrong.
Posted: Sun Mar 31, 2013 12:41 pm Post Subject:
Guarantees on whole life policies are partially based upon returns of a minimum percentage of the insurance company's general account typically in the 4% range.
Now, like always, you are simply being argumentative -- and you're wrong. While the money itself to pay a death claim or cash surrender may come "in part" from actual returns in the insurer's general account, the guarantees in a whole life contract are absolute, and it's up to the insurance company to perform or go out of business trying. It is neither misleading nor wrong to discuss the guarantees of a whole life policy -- they will not be more nor will they be less, unless the company, as has happened to some, goes out of business.And at that point, the guarantees are meaningless unless the policy is picked up by another insurance company, otherwise it is subject to the rules of the state life insurance guarantee association, which are established in law by the state legislature and will not necessarily honor the contract (guarantees are limited to a specific face amount and/or cash value). And of course, state law prohibits discussing that fact until a policy is delivered. But when a policy is picked up by another insurer, it, too, honors the guarantees of the contract, even if it did not obtain 100% of the reserves that were supposed to be backing it.
Now, as far as the internal interest rate is concerned, both the 1980 and 2001 CSO Mortalitiy Tables (and the statutory reserves that are required) are based on the same 4.5% rate of return. Insureds pay the cost of their own mortality, plus the insurance company's expenses and some profit, and, in exchange for the cash flow this generates, they "earn" interest on their policy reserves, and Insurance companies cannot use a mortality table less conservative than this, but they can use one that is more liberal based on actual experience (The CSO tables are reported to be based on "the experience of 85% of the companies" that participated in the survey leading to the 2001 CSO.
Less conservative = lower interest rate, more liberal = higher interest rate. Which is EXACTLY the problem with UL policy illustrations and the premiums they generate on the basis of excessive interest crediting in the "Current Assumptions" columns. and why statutory reserves are being increased for no-lapse UL policies -- because the guarantees are too liberal, and the insurance company actuaries told their management this, but it was ignored. If you are remotely interested, you can read all about the development of the 2001 CSO here: http://www.actuary.org/content/cso-task-force-report (click on "The Report" link).
In order not to have to drastically lower premiums (i.e., less cash flow) in response to the extended age of mortality under the CSO 2001, many insurance companies have maintained their WL products (and even many UL products) with premiums payable only to age 100, which forces the premium higher. To stick with the CSO assumption of 4.5% forces the premium even higher, so naturally, the insurance company will look to a higher internal rate of return to build the contract's level premium lower to maintain competitiveness. And 5% is about the norm for the vast majority of companies. It's also why you won't see less than 4.5% as the "Current Assumption" in a UL illustration.
So no, your claim of 4% is entirely incorrect. It cannot be less than 4.5%, which is why 5% is more likely to be accurate, because few insurance companies use the CSO alone, especially at earlier ages, in order to obtain rates that are more favorable. And they rarely exceed 5% to 5.25% because of the statutory reserve requirements that would prohibit them from playing too liberally/speculatively with that money.
Posted: Sun Mar 31, 2013 01:36 pm Post Subject:
It is perfectly ok to discuss guarantees. It is perfectly ok to talk about it being based upon a guaranteed rate of return of the insurance company's general account portfolio. I said partially because it is also based upon mortality and general expenses. If it has to be 4.5%, that is something that I don't know anything about. It makes no sense to me that a company could not have more conservative guarantees. It sounds like more Max garbage to me. If you can back that up, I will apologize.
The returns of the insurer's general portfolio is not the rate of return of the policy and it is wrong to present it as such like you have done in this thread. It is perfectly fine to discuss the IRR of the cash value which is a number that will change every year and will usually be negative for quite a number of years.
Posted: Sun Mar 31, 2013 01:38 pm Post Subject:
As an aside to this discussion of reserves, insurance company actuaries base their mortality tables on interest assumptions somewhere between 4.5% and 5.5% -- a reasonable spread for the purpose of setting rates across all product lines. They leverage the interest rate with expected lapses that leave money in the reserve account while diminishing the insurance company's net amount at risk.
This is the particular problem with no-lapse UL -- fewer policies lapse due to the guarantee, and when only the minimum premiums are being paid, in times of low interest rate returns, more money has to be committed to reserves, and the premiums from other policies may have to support that. The current reality is that people are not lapsing their life insurance (any flavor) at the historical rates of about 4% of all policies in any given year.
Insurance commissioners are extremely nervous about this, and that's why statutory reserves for both no-lapse UL and GMWB/GLWB annuities are being raised across the country. [Aviva just increased the cost of its GMWB rider by 10 basis points to 0.95% effective 3-31-2013.]
The minimum earnings of 4.5% is all that is needed to comply with the statutory reserve requirement, and if the company investment team earns 5% or 6% or more in the statutory reserves, the company can devote more of its cash flow to its discretionary reserves and go looking for 7% - 8% or more with that money to drive overall profits. If the investment returns are less than 4.5%, then more cash flow will have to be committed to the statutory reserves (or money transferred from other accounts to the statutory reserves), in order to remain compliant with state law.
Many insurance companies hold more than the minimum required statutory reserves so that they don't have to fool around with their cash flow in years when returns do not meet expectations (as in the past several years). Companies that hold only the minimums in reserve put their policyholders at greater risk of company conservation or liquidation. The ratings services, like AM Best and Standard & Poor's exist to monitor that financial health for the public's benefit.
Posted: Sun Mar 31, 2013 01:56 pm Post Subject:
If it has to be 4.5%, that is something that I don't know anything about. It makes no sense to me that a company could not have more conservative guarantees. It sounds like more Max garbage to me. If you can back that up, I will apologize.
I gave you the link. Here it is again:You can read all about the development of the 2001 CSO here: http://www.actuary.org/content/cso-task-force-report (click on "The Report" link). The discussion begins on page 33 under the heading "Reserve Analysis."
The returns of the insurer's general portfolio is not the rate of return of the policy and it is wrong to present it as such like you have done
I did nothing of the sort. All I talked about were the contractual guarantees. Period. You're the one that attempted to derail that discussion.Posted: Sun Mar 31, 2013 02:03 pm Post Subject:
Why can't an insurance company have "more conservative" numbers? Because it inflates the cost of insurance and provides the insurance company with more cash flow that it can play with at the expense of policyholders. Companies that want to increase their cash flow do that by inflating their expense calculations, not the mortality rates. (Some companies have fooled around with their lapse rates and this has gotten them into regulatory trouble.)
And, it's unrealistic. Insurance companies have to document their mortality tables, and their financials, to the insurance commissioners who approve their products for sale. An insurance company whose earnings were consistently low would not be permitted to remain in business -- it places policyholders at risk. Insurance commissioners cannot, by law, accept any mortality tables less conservative than the currently adopted CSO.
Posted: Mon Apr 01, 2013 12:36 am Post Subject:
I did nothing of the sort. All I talked about were the contractual guarantees. Period. You're the one that attempted to derail that discussion.
There would be no problem here if you were talking about "contractual guarantees". You didn't do that. You talked about guaranteed rates of return of 0-5%. That's not language that is ever used by any insurance company and hopefully not used by professional salesmen. How does this 0-5% jive with your later posts saying 4.5% only?
Having reserve requirements that demand an assumption of 4.5% doesn't equate to a specific rate of return for someone who buys whole life insurance.
For the typical lifetime pay whole life policy, it will take many years just to have a guaranteed 0% rate of return on the cash value.
I read your link and I see that the reserve requirements are based upon a 4.5% assumption, but I see nothing that says that an insurance company can't have rates that are based upon a lower assumption. A lower assumption doesn't add risk. It takes risk away. It forces a larger premium. In this manner, it makes the insurance company and its customers safer if investment returns are worse than expected. I'm not saying that you are wrong on this, but I'd still like to see something that says that an insurance company can't use a lower assumption in their pricing. A lower assumption in their pricing (4% instead of 4.5%) = more premiums= greater actual reserves based upon the 4.5%. Do you have something?
Posted: Mon Apr 01, 2013 04:20 am Post Subject:
How does this 0-5% jive with your later posts saying 4.5% only?
It jives perfectly because that statement was made about CASH VALUE LIFE INSURANCE, which includes UL/IUL/VUL, and UL policies typically guarantee a 3% to 4% (or 4.5%) minimum interest rate, IUL policies tend to guarantee 0% to 2% or 3%, and VUL, of course, as a security, cannot guarantee anything, including not being able to guarantee 0%.[Guaranteed rates of return] That's not language that is ever used by any insurance company
Really, read the top of the column in a UL illustration that says, specifically, "GUARANTEED" -- as in guaranteed Cost of Insurance, Guaranteed Policy Charges and Expenses, and Guaranteed Interest Crediting Rate, which, by anyone's dictionary except yours, apparently, is synonymous with Rate of Return.Posted: Mon Apr 01, 2013 11:14 am Post Subject:
Didn't you say a couple of posts ago, that it had to be credited at 4.5% and they could go higher and not lower? Now you are saying that UL is typically 3-4%.
A "guaranteed interest crediting rate" is not synonymous with "guaranteed rate of return". You are the only person who I have ever heard try to claim that they were synonymous. An insurance company will never use those terms interchangeably. The ONLY time that I have ever heard it called a "guaranteed rate of return" has been with unscrupulous agents trying to trick people into buying life insurance as an investment and from Max Herr.
In fact, many insurance companies will allow expanded illustrations that do have columns for rates of return for both the cash value and the death benefit. In other words, when the insurance companies use the term "rate of return", it uses the definition that everyone but Max would use. If the premium is $2,000/year, and the cash surrender value is $28,000 after 14 years, it will show 0% as the rate of return at that point.
Report back when you can find a credible source that says that "interest crediting rate" is synonymous with "rate of return".
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