Bogleheads® Chapter Series – All about life insurance

00:00:00.000 | [MUSIC]

00:00:02.400 | Welcome to the Bogleheads Chapter Series.

00:00:05.200 | This episode was hosted by the Life Stage Chapters and recorded October 29th, 2024.

00:00:11.680 | It features longtime Boglehead and insurance expert Stinky, also known as Wayne,

00:00:16.480 | presenting the topic, "All About Life Insurance."

00:00:19.040 | Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence.

00:00:24.560 | This recording is for informational purposes only and should not be construed as personalized

00:00:29.440 | investment advice.

00:00:30.400 | Tonight we have, we're delighted to host Wayne, who is in his program on All About Life Insurance.

00:00:40.480 | It's a very important part of financial planning.

00:00:44.640 | Actually, life insurance, I think people have questions about life insurance from the beginning,

00:00:49.600 | when they're first getting life insurance, all the way through retirement, when they have these

00:00:54.240 | policies and they don't know really what to do with them, whether to keep them or not.

00:00:59.040 | Let me introduce my, I'll let Wayne introduce himself in just a moment.

00:01:03.040 | Let me introduce my helpers, Lady Geek from Pennsylvania, Allen from Tampa, Jim from Chicago.

00:01:11.600 | Jim will also be recording.

00:01:16.400 | It will be recorded audio-visual and we will put it out on the Bogleheads YouTube channel.

00:01:22.800 | If you don't want yourself on YouTube, just turn your video off.

00:01:28.800 | After Wayne's presentation, we will turn off the video and we will just keep it on audio.

00:01:35.920 | That will be recorded because after the presentation, we can have questions and we can

00:01:41.120 | discuss life insurance and ask him any kind of question about life insurance.

00:01:47.440 | Wayne's presentation will be in two parts.

00:01:50.320 | He's going to stop it halfway through and you can ask your questions about what he has

00:01:55.920 | talked about up to that point.

00:01:58.160 | Please put your questions in the chat or you can, at that point, raise your hand.

00:02:03.120 | Let me see what else.

00:02:05.600 | Jim?

00:02:09.360 | No?

00:02:15.360 | Okay.

00:02:16.560 | So Wayne, why don't you get started?

00:02:18.480 | It's yours.

00:02:19.040 | And I will share the screen here.

00:02:22.720 | Give me a minute to find the proper.

00:02:29.600 | Here we are.

00:02:38.480 | Share.

00:02:42.880 | And I will start with the, start the slideshow.

00:02:50.000 | Okay.

00:02:50.480 | All about life insurance.

00:02:52.000 | So I'll introduce myself here first.

00:02:55.440 | My first name is Wayne.

00:02:57.600 | I'm known as Stinky on the Boglehead Forum.

00:03:00.640 | Stinky is my nickname since childhood, kind of a takeoff on my last name.

00:03:06.560 | I have 40 years of work experience in senior financial positions at major life insurance

00:03:13.520 | companies.

00:03:14.080 | I'm really, really passionate about life insurance.

00:03:18.080 | I'm really, because of that work, quite familiar with the product design and pricing for most

00:03:23.920 | all kinds of life insurance and annuity.

00:03:25.760 | I've seen what my company did for pricing and product development.

00:03:29.840 | I've also seen what other companies have done when we did due diligence on buying other

00:03:34.320 | companies or buying other blocks of business.

00:03:36.160 | I'm pretty active on the Boglehead Forum.

00:03:39.120 | I've got over 15,000 posts on the forum now, many of them on, you know, answering threads

00:03:44.880 | on life insurance and annuities.

00:03:46.720 | I do try and answer or weigh in on most all the threads on life insurance and annuities.

00:03:51.200 | And if somebody has a question that they want to pose, I've gotten many, many private messages

00:03:56.480 | from folks.

00:03:56.960 | I'm happy to take private messages and offer my views on things.

00:04:00.880 | I've also got a thread on the forum called Purchasing MIGAs.

00:04:05.200 | MIGAs are multi-year guaranteed annuities.

00:04:07.360 | And that thread has now been running strong for almost four years, since late 2020.

00:04:13.200 | And as of now, it has almost 3,000 posts and almost 400,000 views on that one thread.

00:04:20.800 | And just looking at what people have said about that thread, it appears that dozens

00:04:24.960 | of people have been better informed about what a multi-year guaranteed annuity is, kind

00:04:30.080 | of like a CD issued by an insurance company, a bank CD.

00:04:34.160 | And they've been able to buy with some confidence MIGAs and advance their financial position.

00:04:38.400 | So I'm really kind of proud and gratified of that thread.

00:04:43.680 | Let me give you a disclaimer for what we have here.

00:04:46.480 | First, I am not your financial advisor.

00:04:48.560 | This presentation is not financial advice.

00:04:51.040 | You need to consult with a financial or tax or accounting or other advisor.

00:04:55.200 | It's a high level overview of life insurance.

00:04:58.000 | I think I'm going to end up talking for almost an hour here between the two sections of the

00:05:02.640 | presentation.

00:05:03.600 | But I could go two or three hours if you wanted to go really deep on certain topics.

00:05:07.520 | And so it is a high level overview covering most all areas of life insurance.

00:05:12.080 | It's not comprehensive.

00:05:13.600 | You can certainly forward any questions, pose them here during the presentation or during

00:05:19.520 | the question periods or private message me on anything you have questions about.

00:05:23.120 | Don't rely on this presentation for purchasing or surrendering any life insurance or financial

00:05:27.600 | products.

00:05:28.480 | The views expressed are my own.

00:05:30.080 | I formed my views from my experience in work.

00:05:33.360 | And also I formed my views from observing people's situations on the forum and elsewhere

00:05:38.800 | in real life.

00:05:39.440 | But they're my own views, of course.

00:05:41.120 | And I've never been in sales.

00:05:42.880 | I'm not a sales guy.

00:05:43.760 | I'm more of a numbers guy, a back office, a financial guy.

00:05:46.880 | And my knowledge, therefore, comes from being in home office, leadership roles, but not

00:05:52.640 | a sales role.

00:05:53.440 | So here's the way that we'll have the agenda for tonight.

00:05:57.760 | First, I'll talk about what is life insurance and what are reasons that a person might buy

00:06:01.600 | it, and then we'll go into a deep dive on term insurance, individual term insurance,

00:06:06.480 | and then a little bit about group insurance that you might get from your employer, describing

00:06:10.800 | the product, going through the purchase process and other parts of that.

00:06:14.080 | Then we'll break for five or 10 minutes for any questions that you might have about term

00:06:18.080 | insurance.

00:06:18.560 | Then the second half of the presentation is other topics, permanent life insurance, which

00:06:23.680 | is whole life, universal life, et cetera, a couple of specialty kinds of insurance, juvenile

00:06:28.800 | and final expense, and then finally closing out with how is life insurance taxed and how

00:06:34.480 | are life insurance policyholders protected from the default of the insurance company.

00:06:38.880 | So what is life insurance?

00:06:40.960 | Life insurance at its core is a contract where an insurance company promises to pay your

00:06:47.600 | beneficiaries a death benefit if you die with the policies in force.

00:06:52.640 | It's as simple as that.

00:06:54.480 | And there are really two separate kinds of life insurance you can divide all these various

00:07:00.640 | products into.

00:07:01.360 | One is term, and I'm just going to define term as protection intended for less than

00:07:07.280 | your full lifetime, for 10 years, 20 years, 30 years, or maybe one year in certain situations,

00:07:12.560 | but not for your full lifetime.

00:07:14.240 | Contrast term with permanent, which is protection for your entire lifetime, and that also usually

00:07:21.360 | includes a cash value buildup.

00:07:23.280 | Not all people keep permanent insurance for their whole lifetime, but it's positioned

00:07:27.200 | to be available to you for your entire lifetime.

00:07:30.400 | And measured by face amount, the majority of sales are term life insurance.

00:07:35.360 | Term is by far the more popular product by face amount, but because the premiums per

00:07:40.160 | thousand are so much higher on permanent insurance, the majority of sales by premium are permanent

00:07:47.520 | life insurance sales, but by far the vast majority of sales by face amount are term.

00:07:52.400 | Why should somebody buy life insurance?

00:07:55.360 | The primary use case for any kind of life insurance is to provide financial support

00:08:01.680 | for your dependents, usually a child and/or a spouse after your death.

00:08:05.840 | A use case, I'm going to talk here about a 30-year-old breadwinner, be it male or female,

00:08:11.600 | but a 30-year-old who's supporting a spouse and children, that 30-year-old, if that person

00:08:19.200 | were to die, then it's a tragedy, certainly a human tragedy, but also a financial tragedy

00:08:25.280 | because those dependents, those children, that spouse, were depending upon the income

00:08:30.720 | of that breadwinner for their livelihood for years and years to come, and term life insurance

00:08:37.360 | is unique in that it can drop a whole bucket of money into a household for a fairly nominal

00:08:44.000 | premium after a person dies without income taxes.

00:08:49.360 | It is a unique product in that way.

00:08:50.640 | There is no bank product that can do that.

00:08:52.560 | There's no other kind of insurance product that can do that.

00:08:54.800 | Life insurance can do that, and the primary use case is to give financial support for

00:08:59.840 | your dependents, usually a child or a spouse, after your death.

00:09:03.360 | There are some secondary use cases.

00:09:07.040 | Most of these could be covered by a permanent life insurance policy, and most of these cases

00:09:11.760 | also have other financial solutions.

00:09:14.080 | For example, the first one, to provide liquidity to cover estate taxes.

00:09:18.240 | If your estate is high enough that you expect to pay estate taxes, which is going to be

00:09:24.080 | somewhere under current tax law, if you're married, somewhere in the $15, $20 million,

00:09:30.720 | $30 million range, somewhere in there, if you are going to pay estate taxes, that can

00:09:35.280 | provide liquidity for you to pay those estate taxes, cash available to you.

00:09:39.440 | But of course, you can also solve that need for paying estate taxes by putting aside some

00:09:43.680 | cash somewhere, letting that accumulate, and have that available.

00:09:46.720 | So insurance can provide that need, and often agents will sell it that way.

00:09:51.680 | Other things can provide that need also.

00:09:53.440 | Another use could be to provide for a disabled child who's expected to outlive you.

00:09:58.000 | There are some disabilities that children have that cause them to be maybe not fully

00:10:03.520 | functioning as regular adults, but their life expectancy is normal.

00:10:08.160 | They don't expect to have a shorter lifespan.

00:10:10.640 | Therefore, there's a good chance that they'll live beyond you, and provide support for them

00:10:15.680 | after your death, then life insurance can be used for that.

00:10:18.800 | You can benefit a favorite charity no matter when you die.

00:10:21.840 | There's some people who posted on the forum who have interesting use cases, who find that

00:10:28.160 | if they're in a very high tax state, typically California, and they're at a very high income

00:10:33.600 | level, a 37% federal income level, plus top California rates, et cetera, et cetera, they

00:10:40.000 | have found that life insurance, cash value life insurance, can provide a reasonable rate

00:10:45.120 | of return as an after-tax investment vehicle, after they exhaust everything else they can

00:10:50.080 | do, like 401(k)s, and IRAs, and HSAs, and 529s, and everything else.

00:10:56.400 | There's not many people like that that can really effectively use permanent life insurance

00:11:01.040 | in that way, but there are some people that do that.

00:11:03.440 | But going back to the primary use case, the primary use case is as a death benefit, and

00:11:09.040 | the rest of these I regard as kind of ancillary use cases for permanent life insurance, typically.

00:11:13.520 | Individual term life insurance, it's the simplest form of life insurance, pure death benefit

00:11:19.760 | protection, no savings element.

00:11:22.560 | It's commonly available for 10, 15, 20, and 30-year periods.

00:11:26.560 | So, for example, we have our 30-year-old breadwinner.

00:11:29.840 | That breadwinner has a young child or two.

00:11:32.720 | If that person buys a 20-year term policy, then that 20-year term policy will be in place

00:11:39.120 | from the time that the insured is age 30 to age 50.

00:11:42.640 | By that time, the child will have grown from being two years old to 22 years old, and either

00:11:48.640 | out of college or close to out of college.

00:11:51.200 | You know, so that's kind of the lifespan that a lot of folks look at.

00:11:54.880 | When are the kids flying the nest, and so how long do I need to provide support for

00:12:00.880 | those children?

00:12:01.440 | And the way that the level term policies are sold is that they will have a level death

00:12:08.640 | benefit and a level premium for that entire 20-year period.

00:12:11.760 | You buy a policy at age 30, you pay the same premium every month or every year or every

00:12:16.480 | whatever, and you'll pay that same rate for each year for 20 years, and you'll have a

00:12:20.960 | level death benefit protection also for that 20-year period.

00:12:23.440 | Now, one thing that I'll come back to a couple times here in the presentation is that the

00:12:28.640 | chance of death grows a little bit each year as you get older.

00:12:33.120 | The chance of death in any particular year is very low until you're in your 60s or 70s,

00:12:38.480 | but a 31-year-old is marginally more likely to die in a certain year than a 30-year-old

00:12:44.880 | in a 40-year-old.

00:12:46.160 | And a 40-year-old is more likely to die than a 30-year-old, and on and on and on.

00:12:50.880 | Therefore, the 30-year-old is going to pay a certain premium rate.

00:12:54.240 | If that person waits until age 31 or 32 to buy a 20-year term, they'll pay a little bit

00:13:00.720 | more premium for that 20-year period because they're a little bit older.

00:13:05.600 | Also, if that 30-year-old person buys a 30-year term policy, taking them out to age 60, then

00:13:14.000 | they'll pay more premium for that every year than for a 20-year term policy because you're

00:13:19.120 | covering those years from age 50 to age 60, and the person's older, the chances of death

00:13:23.680 | are higher there.

00:13:24.320 | So the rates are level and guaranteed, and the rates will change a little bit as you

00:13:31.040 | get older or as the term insured grows longer.

00:13:34.880 | Now, after the level term period, these policies that we call level term kind of colloquially

00:13:43.520 | are not really term insurance.

00:13:45.600 | A strict actual definition of term insurance is the policy would conclude after 20 years,

00:13:51.280 | and that doesn't happen.

00:13:52.160 | The policies almost always carry on beyond 20 years, but they'll carry on usually at

00:13:58.080 | a much, much higher premium rate, maybe five times, 10 times, or even more than the premium

00:14:04.000 | was.

00:14:04.560 | So your age 51 premium might be five times what your age 50 premium was.

00:14:10.400 | Most policyholders just still need coverage after that level term period expires.

00:14:14.240 | They'll just buy new coverage.

00:14:15.680 | They will not renew the policy.

00:14:17.360 | They'll just buy new coverage.

00:14:18.560 | Term insurance gives the largest death benefit for dollar premium.

00:14:24.240 | So I looked at termforsale.com, which is a website frequently mentioned on the forum,

00:14:30.880 | and a male, non-smoker, age 30, in good health can buy a million dollars a 20-year term for

00:14:38.800 | 40 bucks a month.

00:14:40.480 | 40 bucks a month is less than your cell phone bill.

00:14:42.640 | It's less than your internet bill.

00:14:44.560 | It's less than a meal out for two, unless you go to McDonald's and are cheap.

00:14:49.280 | It's a very inexpensive cost to dump a million dollars into your family if you die.

00:14:55.920 | Your chances of death are low, but the financial cost of your death is catastrophic.

00:14:59.840 | So that's a very inexpensive way, in my view, of ensuring the income for you to pass away

00:15:08.640 | prematurely.

00:15:09.360 | Now, I did not give the best rate class there.

00:15:13.200 | If you're in excellent health, you could pay less than $40 a month.

00:15:15.840 | If you're unhealthy, somewhat unhealthy, you can pay more than that.

00:15:19.680 | And smokers, when I was younger, when I was in my 20s, smoking was a lot more prevalent

00:15:25.040 | than it is now.

00:15:26.160 | Smoking is really not socially acceptable for most folks these days.

00:15:30.000 | But smokers legitimately, even in those ages of 20s, 30s, and 40s, have materially, measurably

00:15:37.840 | higher death rates than nonsmokers do.

00:15:40.720 | And so smokers will pay two to three times the price that a nonsmoker will pay.

00:15:44.240 | That's maybe the best demonstration there is as to how bad smoking is for your health,

00:15:49.360 | that the life insurance companies, which are totally rational in this area, are charging

00:15:53.200 | two to three times more for term insurance for smokers than they charge for nonsmokers.

00:15:57.680 | Now, I would argue-- go back to my 30-year-old breadwinner here.

00:16:04.640 | My 30-year-old breadwinner has maybe a modest 401(k) balance, maybe has some equity in a

00:16:10.080 | house, maybe has some savings, maybe has an IRA balance.

00:16:15.760 | So they have begun building assets.

00:16:19.120 | And there are some people in the forum who report having net worths of $200,000, $500,000,

00:16:24.720 | maybe even $1 million by age 30.

00:16:26.800 | But by far, their largest asset is their ability to earn future income.

00:16:32.800 | It's not an asset you can put on a balance sheet.

00:16:34.640 | It's not anything you can cash or borrow against, necessarily.

00:16:39.040 | But it is something that is real and is out there in support of your family.

00:16:43.440 | And so that present value of future earnings for the next 30, 40, whatever number of years

00:16:49.920 | you plan to work after you're age 30, that is a huge asset.

00:16:54.160 | And term insurance, I think, provides the most cost-efficient way to replace that lost

00:16:58.800 | future income if they die young.

00:17:00.240 | So that's what you're insuring is your future ability to earn money.

00:17:05.040 | Now, what can a term life insurance policy owner do?

00:17:12.480 | One thing he can do, he or she can do, is to cease paying premium after a grace period.

00:17:18.000 | The policy will lapse without value.

00:17:19.680 | I'll give an example, a personal example, as to me.

00:17:22.960 | I bought, for a variety of reasons, 20-year term insurance when I was 55 years old.

00:17:28.400 | I didn't know how much longer I'd be working.

00:17:31.440 | I thought I might continue working after my formal retirement date.

00:17:34.720 | I thought it might be a good idea to have term insurance.

00:17:36.640 | It took me out to age 75.

00:17:39.200 | But as things turned out, when I turned 65, I retired.

00:17:42.480 | I was not working for income anymore.

00:17:44.400 | So I just stopped paying premiums.

00:17:45.840 | And after about a 60-day grace period, the policy lapsed.

00:17:49.920 | No value, no cash return to me.

00:17:52.160 | But I didn't have an insurance need anymore because I was not earning income.

00:17:56.160 | And so my income replacement need went away.

00:17:58.160 | And I lapsed the term policy.

00:18:01.120 | So that's the first option you have, is to lapse the policy.

00:18:05.200 | The owner can change beneficiaries.

00:18:08.640 | Often the beneficiary will be the spouse or a trust in favor of the children,

00:18:12.240 | something like that.

00:18:12.960 | The owner can reduce the face amount if they find that the face amount is more

00:18:17.200 | than they need as their assets grow.

00:18:19.120 | Another valuable option that exists on many term policies is the option to

00:18:25.280 | convert to a permanent life insurance policy without additional medical exams.

00:18:30.080 | Let's consider my 30-year-old again.

00:18:32.160 | And he's 15 years into the policy.

00:18:34.320 | And he's developed a really bad, life-threatening condition that's going

00:18:38.320 | to cause -- that's likely to cause his death, you know, maybe not immediately,

00:18:43.280 | but in the next 10 to 15 years.

00:18:45.280 | If he chose to, he could convert his term policy into a permanent life

00:18:50.640 | insurance policy.

00:18:52.000 | He's going to pay a much higher premium, but he will be able to keep that

00:18:54.960 | insurance and not provide new evidence of insurability.

00:18:58.240 | Or if he went to buy a new term insurance policy, since his death is

00:19:01.440 | imminent, he would not be able to buy that.

00:19:03.440 | And so some people find that converting a term life policy into a permanent

00:19:07.760 | policy makes financial sense for them if they've developed a life-threatening

00:19:11.840 | condition while that term policy was in force.

00:19:14.240 | On to where can you buy a term life insurance policy?

00:19:20.960 | There are many multi-state agencies that have an online presence and give

00:19:26.000 | quotes from multiple insurance companies.

00:19:27.840 | You look at the Internet, the Boglehead Forum, termforsale.com is frequently

00:19:33.680 | mentioned.

00:19:34.320 | I have frequently mentioned that as a place people can go to look for quotes

00:19:38.400 | and that particular site, if you put in your demographic information, your age,

00:19:43.440 | your sex, your state of residence, how much insurance you need, how long you

00:19:48.640 | need to have it for, whether you're a smoker or not, and your estimate of your

00:19:54.160 | own risk classification based on superior or excellent, whatever, it'll give you

00:20:00.320 | quotes from several dozen insurance companies as to what they would charge

00:20:04.640 | you for a policy.

00:20:06.720 | And then you can go and work with a local agent that they'll recommend to you

00:20:12.320 | to buy a policy from one of those companies.

00:20:15.600 | And there are other websites that do exactly the same thing.

00:20:19.360 | Zander.com is promoted by Dave Ramsey.

00:20:23.200 | I've actually bought my insurance from Zander.com back in the day.

00:20:28.480 | SelectQuotes, another agency that you have, there's a variety of places you

00:20:32.080 | can buy life insurance.

00:20:34.720 | Now, local agents will also sell term life insurance.

00:20:37.040 | You might be able to find an agent that's licensed with many, many companies

00:20:40.560 | also that can provide the same service for you.

00:20:43.280 | But I wouldn't go necessarily to my Northwestern Mutual agent or my State

00:20:48.400 | Farm agent because they might only be able to sell insurance from their

00:20:53.520 | primary company, Northwestern or State Farm, or just a very limited number of

00:20:57.120 | companies.

00:20:58.480 | You're going to find the premiums vary widely for the same coverage.

00:21:01.280 | Now, if I get a quote from ABC Life from TermForSale.com, I'll be able to get

00:21:07.840 | that same policy from ABC Life anywhere at the same price.

00:21:11.840 | But ABC Life and DEF Life may have dramatically different rates with the

00:21:17.680 | same 20-year term coverage from ALH30.

00:21:20.880 | And so many Vogleheads, myself included, view price as the primary factor in

00:21:26.160 | deciding which insurer to choose.

00:21:27.600 | How do you buy a term life insurance policy?

00:21:32.880 | Now, an agent will guide you through the purchase process.

00:21:35.680 | Every company has an agent.

00:21:42.320 | You'll be working through an agent if you go through TermForSale.com, a local

00:21:46.240 | agent.

00:21:46.800 | You'll be going through Zander or the Select Float agency if you work with

00:21:50.560 | them.

00:21:51.280 | And even if you call in to one of the life insurance companies that appears to

00:21:55.360 | sell direct, they will have an agent, a commission, a salaried agent,

00:21:59.440 | typically, employed by the company who will walk you through the process.

00:22:03.520 | They will have an extensive written application that includes medical

00:22:08.400 | history.

00:22:08.880 | All I can say about the application is don't lie.

00:22:11.920 | Don't fudge.

00:22:12.800 | You have honest answers.

00:22:13.920 | They'll also ask you to sign an authorization for them to do further due

00:22:18.640 | diligence on you.

00:22:19.760 | And that authorization is really required for them to proceed in the

00:22:23.360 | process.

00:22:24.560 | Once they have that authorization, they can get many, many data points on you,

00:22:28.560 | your prescription drug records, your medical history from your doctor, your

00:22:33.840 | motor vehicle records, your credit reports.

00:22:36.080 | All kinds of things like that are available through the authorizations that

00:22:40.080 | they have.

00:22:40.800 | And they can build a pretty good profile on most folks for most amounts of

00:22:44.640 | insurance from those data points that they get there.

00:22:47.920 | Now, depending on the age or face amount, for higher ages or higher face

00:22:52.960 | amounts, the insurer might need a quick medical exam.

00:22:56.000 | So the insurance company would pay for a medical examiner to come to your

00:22:59.680 | home or to your office, weigh you, measure you, maybe do a blood pressure,

00:23:05.280 | maybe do an EKG, and then possibly also take blood, urine, saliva.

00:23:10.400 | Those bodily fluids can be really, really helpful in determining your

00:23:15.040 | health with the tests that they have these days.

00:23:16.960 | The insurer will assess all that information.

00:23:19.840 | The insurer will issue the policy.

00:23:21.920 | You'll pay the first premium.

00:23:23.360 | And then the policy's in force.

00:23:24.640 | I will note that the insurer will give you the option of paying premiums

00:23:29.520 | monthly via bank draft or quarterly or semi-annually or annually.

00:23:34.320 | And I've found that almost always the cheapest way to do it is paying annually

00:23:39.120 | because the effective interest rate is often about 10% if you want to pay

00:23:43.600 | monthly.

00:23:44.100 | A typical question on the forum, a lot of folks ask, "How much term insurance

00:23:50.720 | should I buy when I do buy it and for how long?"

00:23:53.280 | There's no single answer for that.

00:23:55.920 | In a partial list of considerations to think about, for how long will someone

00:24:00.320 | be dependent on my income?

00:24:01.440 | If I got a newly born kid and I'm expecting more kids, it may very well be

00:24:06.800 | the 20 or 25 or 30-year term makes sense for me.

00:24:10.480 | But if I'm buying insurance or increasing insurance now and my kids are

00:24:14.480 | 10 or 12 or 15, I might just need 10-year term insurance.

00:24:18.720 | How much income replacement should I provide for?

00:24:21.520 | And along with the fourth question, are my assets large enough that I can

00:24:24.560 | partially or fully self-insure?

00:24:26.720 | If you've got a $100 million net worth, then you probably don't need term life

00:24:31.920 | insurance.

00:24:32.420 | And so it may be that you can reduce the amount that any equation might have

00:24:37.280 | just based on the assets that you have.

00:24:39.360 | Further, the third point that I have there, are your survivors eligible for

00:24:43.040 | Social Security, which can be a very valuable thing, especially for dependent

00:24:46.800 | children until they're, I believe, 18.

00:24:49.920 | If they can get income from that, that'll mitigate the amount of life

00:24:53.600 | insurance you need to have.

00:24:54.480 | Another important question is, should you buy insurance on a stay-at-home

00:24:58.640 | spouse?

00:24:59.520 | You know, the stay-at-home spouse, on the one hand, is not bringing income

00:25:03.040 | into the household, so there's no cash loss from that source if a stay-at-home

00:25:09.120 | spouse were to pass away.

00:25:10.880 | But there is a loss, a financial loss, if you have increased child care or

00:25:14.640 | things like that.

00:25:15.840 | So it's frequent that people will say, "I should put $100,000 or $250,000 or

00:25:20.160 | $500,000 on my stay-at-home spouse," even if they're not earning an income

00:25:24.080 | outside the house.

00:25:24.800 | There was a historic rule of thumb, "10 times earnings until kids leave the

00:25:29.440 | nest."

00:25:30.000 | I wouldn't say that's accurate, but you could at least use that as a guide

00:25:32.960 | point.

00:25:33.460 | There are many online calculators.

00:25:35.360 | If you want to go ahead and Google, "How much insurance should I buy?"

00:25:39.280 | You can get a lot of opinions from various places where you put in certain

00:25:42.800 | information, and they'll spit out a recommendation as to how much term

00:25:46.240 | insurance to buy.

00:25:46.960 | One thing frequently mentioned in the forum is laddering policies.

00:25:51.360 | Let's say that I determine that I have a $2 million need for term life

00:25:55.120 | insurance, and I could buy that for a 20-year period, 2 million, 20-year term,

00:26:01.360 | done.

00:26:01.860 | But if I expect that my assets will be increasing over the next 10 years, I

00:26:07.360 | might buy $2 million in two separate policies, $1 million of 10-year term,

00:26:12.720 | and $1 million of 20-year term.

00:26:14.240 | And that way, for the first 10 years, I will have both policies in force, so a

00:26:20.320 | total of $2 million of death benefit, and that'll reduce to $1 million of

00:26:23.600 | death benefit when I get past that 10th year.

00:26:26.800 | And if I choose to, when that 10th year is over, I can consider buying more

00:26:30.160 | insurance at that point if I need it.

00:26:32.000 | Finally, the last slide in this part of the presentation is changing away from

00:26:39.760 | individual term life insurance to group term life insurance.

00:26:44.320 | Now, many employers, most employers probably, offer some amount of life

00:26:49.600 | insurance as an employee benefit.

00:26:51.760 | This is a part of their regular benefits package.

00:26:53.600 | Usually, some part of that is free.

00:26:56.800 | It's frequent that you'll be given one-time salary or two-time salary as a

00:27:02.800 | free amount with no cost to you.

00:27:04.400 | You might get $50,000.

00:27:07.040 | The reason for that $50,000 number is that, it's my belief under the federal

00:27:11.200 | tax code, that's an amount that an employer can give in life insurance without

00:27:17.440 | having taxable income imputed to the employee.

00:27:19.920 | So you might get some free amount.

00:27:21.840 | Then they might also give you the option of having additional amounts of life

00:27:25.680 | insurance on top of that that you'll pay for by yourself as opposed to the

00:27:30.080 | employer paying for it, but you'll get it through your work relationship.

00:27:34.080 | One benefit to group term life insurance is that typically no evidence of

00:27:39.440 | insurability is needed.

00:27:40.880 | You won't have to give blood or saliva.

00:27:43.040 | You won't have to have any kind of a medical exam or credit report or anything

00:27:46.640 | else.

00:27:47.360 | Just because you're employed, you'll be able to get life insurance except for

00:27:52.080 | high amounts.

00:27:52.640 | If you're applying for excess amounts on yourself, it might require evidence of

00:27:56.560 | insurability.

00:27:57.360 | But just the fact that you're employed is enough evidence that the group life

00:28:00.640 | insurer will need to put insurance on you.

00:28:03.680 | Now, the bad thing about group term life is that coverage ceases when you

00:28:07.680 | leave your job.

00:28:08.320 | And with the number of job changes that many people make these days, it's

00:28:14.320 | really not a sound financial thing to do to have your life insurance tied to

00:28:20.000 | your employment.

00:28:21.120 | Because you can go through periods of unemployment.

00:28:23.440 | You might have a new employer that doesn't offer term life insurance.

00:28:26.240 | And if you have a real need for term life insurance, you should be buying

00:28:29.520 | individual life insurance that will stay with you whether you're employed

00:28:33.360 | with employer A or employer B or not employed at all.

00:28:36.400 | And the only option that you have when you leave your employer is you can

00:28:40.560 | convert your term life policy to an extremely high cost conversion permanent

00:28:46.240 | life policy.

00:28:47.440 | Again, that would be a last ditch effort.

00:28:50.400 | But that would be not the optimal solution.

00:28:54.320 | The consensus on the Vogelhead Forum seems to be that a person should take

00:29:00.640 | the free coverage that is offered by your employer and decline any excess

00:29:04.560 | amount.

00:29:05.360 | Buy the insurance you need through the individual market.

00:29:07.360 | So with that, I've gone for about half an hour now.

00:29:13.440 | And we'll see if there's any questions to have based on the first part of the

00:29:16.880 | presentation here.

00:29:17.680 | >> Okay.

00:29:18.880 | Does anybody have any questions that you wish to raise your hand for?

00:29:22.400 | I have one question, Wayne.

00:29:29.920 | On the laddering of the term policies, is there any downside to, for example,

00:29:37.680 | buying, let's say, a 10-year term policy when you're very, very young?

00:29:41.440 | You're just starting out.

00:29:42.960 | You're married.

00:29:43.680 | And then maybe five years later, you buy another 10-year term policy.

00:29:50.800 | Let's say you first buy a half a million one.

00:29:53.600 | Then you buy another half a million one when you have your first child.

00:29:57.280 | Then you start having more children, and you just keep buying half a million

00:30:01.760 | dollar policies every five years until when the kids are, let's say, in high

00:30:06.720 | school.

00:30:07.760 | And it's really very expensive, high school and college, to raise a big

00:30:12.880 | family, and your life insurance has increased during that time.

00:30:17.360 | And then gradually, the terms disappear, and your life insurance winds down as

00:30:24.480 | your big family winds down.

00:30:26.800 | Well, that could make some sense.

00:30:28.400 | And the only negative to that that I would see is that there are kind of

00:30:32.320 | volume discounts for life insurance.

00:30:35.120 | The larger face amounts, you end up with a lower cost per thousand, and

00:30:40.560 | there's usually a flat cost or a policy fee for a policy.

00:30:44.160 | And therefore, almost always, a $1 million policy is cheaper than two

00:30:50.240 | $500,000 policies.

00:30:51.680 | Well, $1 million is cheaper than two $500,000?

00:30:55.680 | Yes.

00:30:56.400 | OK.

00:30:57.040 | Almost always that's the case, because basically, it's volume discounts.

00:31:02.320 | And it's economies of scale by the insurance company.

00:31:05.440 | Plus, the mortality on million dollar policies is slightly better for the

00:31:10.720 | insurance company than the mortality on half a million dollar policies.

00:31:13.680 | But yes, I mean, the idea of buying insurance as you need it makes some

00:31:20.880 | sense, and laddering policies make sense.

00:31:22.800 | But I wouldn't want to have four or five term life insurance policies in place.

00:31:26.880 | A couple might be fine, but going much more than that, you ought to probably

00:31:31.360 | think about combining some policies that you have into one larger policy.

00:31:35.680 | All right.

00:31:36.880 | Good question.

00:31:37.440 | Thank you.

00:31:38.400 | OK.

00:31:39.120 | Lady Geek, did you have a question?

00:31:40.560 | It's an observation.

00:31:44.720 | When Wayne was talking about annual versus monthly premiums,

00:31:50.720 | he used the word "effective rate."

00:31:53.120 | And to me, that triggered a keyword when you're talking about investments,

00:31:58.080 | because you mentioned 10%.

00:31:59.600 | And I don't think people understand the difference between monthly and annual

00:32:05.040 | rates, called APR and APY, when you talk about investments.

00:32:08.560 | So when someone's selling you something and saying it's only 10% per month,

00:32:13.520 | that will equate to a much larger percentage of premium per year.

00:32:18.640 | And so you're talking backwards.

00:32:19.920 | So I want to make sure that you're using the term "effective rate" to mean

00:32:23.920 | annual-- effective versus nominal, which is monthly.

00:32:28.560 | You're talking about the Excel formulas?

00:32:31.200 | Well, a typical-- I'm going back-- a typical factor for a-- if I have $100 annual

00:32:42.240 | premium, it'd be typical I'd have a $9 monthly premium.

00:32:47.040 | And that $9 monthly premium times 12 is $108 per year.

00:32:53.760 | So I can pay $100 one time, or I can pay $108 over the course of 12 months.

00:32:59.360 | And that works out to an interest rate of over 10%, if you kind of work it all through.

00:33:05.760 | It's not big dollars, typically.

00:33:07.360 | But it is-- I'm saving a little bit of money, but at an interest rate that ends up being

00:33:12.480 | 10% or higher for paying $100 up front instead of $9 a month.

00:33:17.520 | Yeah, that's what I say.

00:33:19.040 | It's the mathematical-- it's the concept of this effective versus annual.

00:33:23.200 | Paying per month, it's going to cost you more if it's because of the compounding.

00:33:26.960 | That's absolutely right.

00:33:28.640 | It's because of the compounding effect, and people need to understand.

00:33:31.680 | And the Wiki has some examples on investments, how they sell you

00:33:35.440 | loans and mortgages using this.

00:33:38.320 | And so I'll leave it at that.

00:33:40.480 | Yeah, if an insurance company would sell you $100 annual premium versus an $8.33 monthly

00:33:49.040 | premium, that'd be the same thing.

00:33:50.960 | They don't do that.

00:33:51.920 | It's going to be a $9 monthly premium, and that works out to an interest rate of over

00:33:55.920 | 10% per year.

00:33:57.200 | It ain't big dollars, but it is something that is there.

00:34:01.520 | On credit cards, it's a very big deal when they're 20% interest rates.

00:34:05.440 | Oh, yeah.

00:34:06.320 | On the credit cards, there's no doubt.

00:34:07.680 | The insurance companies sneak it in.

00:34:09.360 | You never see it.

00:34:10.080 | You've got to be a mathematician to figure out that they're screwing you.

00:34:13.520 | Yeah, yeah.

00:34:14.640 | They say the Wiki will show how you demystify some of that.

00:34:18.240 | OK, I'm done.

00:34:18.880 | OK, thank you.

00:34:20.320 | Thank you.

00:34:21.440 | Alan?

00:34:21.940 | Yes, Wayne, I'm just curious, the difference if you just let a policy-- you want to end

00:34:29.120 | your policy, you said you just can let it lapse, whereas you could also just call the

00:34:34.400 | insurer and say you want to cancel the policy.

00:34:36.720 | Other than getting dunning notices for lack of payment and during the grace period, is

00:34:40.560 | there any difference between letting it lapse versus calling them and canceling it?

00:34:44.880 | Well, let's say that I have a policy that I want to have-- that I come to the conclusion

00:34:51.600 | on January 1st that I don't want this policy anymore, and I'm on a monthly mode.

00:34:56.800 | If I call them up and say cancel, they'll cancel my insurance effective January 1st,

00:35:04.640 | and so I have no more insurance.

00:35:06.720 | If I simply don't pay a premium, then I'll have two more months of coverage.

00:35:10.480 | So if I'm unfortunate enough to die in the next two months, my beneficiaries will get

00:35:15.040 | their million-dollar benefit.

00:35:16.720 | That's the only effective difference.

00:35:19.360 | There's a required grace period, and the insurance does stay in force without payment

00:35:24.400 | of premiums for that typically two-month grace period.

00:35:27.440 | OK, very useful.

00:35:30.000 | One more.

00:35:30.480 | Are you going to address the possibility of selling a policy with viatical settlements?

00:35:35.200 | I don't know if you're going to address that at all.

00:35:36.560 | And what the situation might be that warrants that consideration.

00:35:41.120 | I'll touch on that now, and then we can come back to that after I finish everything here.

00:35:47.120 | The viatical company is making-- they're going to be looking at your in-force policy

00:35:57.840 | as an investment that they'll make.

00:35:59.440 | And so they're going to do an underwriting, kind of reverse underwriting on you.

00:36:04.560 | They're going to see how likely it is that you'll be dying at a certain time.

00:36:10.240 | And the sicker, the better, to be honest.

00:36:17.040 | And they'll want to see that you have a policy that's almost certainly a permanent policy.

00:36:21.760 | They don't want a term policy that might stay in force beyond the 20-year period and jack

00:36:26.000 | the premiums way up.

00:36:26.800 | They don't want to pay those high premiums.

00:36:29.520 | So selling a policy to a party other than the insurance company by surrendering, selling

00:36:37.120 | it to a third party can make sense financially for a buyer if the insured is old, if the

00:36:45.920 | policy is fairly large, $100,000 or more, and if there's premiums that are likely to be

00:36:52.000 | lowish going forward.

00:36:55.680 | I mean, they're trying to take advantage of the fact that you have higher mortality.

00:36:59.360 | Let's say that if you're really sick with cancer and likely to die in five years, you

00:37:05.440 | might be able to get an attractive price relative to what the insurance company would give you

00:37:09.440 | on a cash surrender by selling the policy.

00:37:11.680 | On the other hand, if you're going to hold on for that five years, your beneficiaries

00:37:16.080 | will get a lot more, because that biotical investor is going to ask for a rate of return

00:37:20.880 | of 10%, 15%, 20% on his money.

00:37:23.040 | He's not going to let that go cheap on you.

00:37:25.360 | So it's better, probably, than surrendering the policy, but not as good as letting it

00:37:29.760 | just mature into a regular death benefit.

00:37:31.920 | That almost never works on term insurance.

00:37:34.480 | So that's one reason I would not have mentioned it here, because term insurance is sold to

00:37:37.920 | young people who, as a class, are healthy.

00:37:39.600 | And the terms usually don't go out past age 50, 60, 70.

00:37:46.080 | And there are, unfortunately, deaths in that range.

00:37:49.040 | But there's many, many folks that are well, well beyond age 60 or age 70.

00:37:53.760 | It makes sense.

00:37:56.480 | Thanks.

00:37:57.200 | Yeah, and we can come back to that if there's more questions when we're done.

00:38:00.560 | OK, Sonny, did you have a question?

00:38:02.880 | I shall ask that after the next section.

00:38:07.360 | OK, thank you.

00:38:08.960 | OK, Wayne, anything from the chat?

00:38:12.720 | OK, Wayne, you're on.

00:38:16.320 | OK, we'll go on to permanent life insurance.

00:38:20.880 | You remember I divided the insurance between term and permanent.

00:38:25.600 | Term is the insurance that is meant for less-than-lifetime protection.

00:38:30.240 | Permanent can be used for lifetime protection, with premiums that are usually paid for your

00:38:35.840 | entire lifetime.

00:38:36.720 | The premiums are much higher than term life insurance, because the insurance coverage

00:38:41.920 | extends to older ages.

00:38:43.040 | Remember I said earlier that the chance of your death goes up every year as you age.

00:38:49.600 | Well, it's a heck of a lot higher when you're 75 or 80 years old than when you're 30 years

00:38:53.600 | old.

00:38:54.320 | And when you're paying a premium that's going to be leveled for your whole life to cover

00:38:58.480 | your entire lifetime, you've got to pay a lot more when you're 30 or 40 or 50 to cover

00:39:03.040 | those deaths in your 80s and 90s.

00:39:04.880 | So premiums are much, much higher than for term life insurance.

00:39:08.000 | And notably, most permanent life insurance policies have a savings element called surrender

00:39:16.960 | value or cash value, which grows on a tax-deferred basis that can be accessed through loans or

00:39:21.440 | withdrawals.

00:39:22.160 | And I'll talk more about that a little bit later.

00:39:24.000 | The forms of permanent life insurance.

00:39:27.760 | There are basically these divisions.

00:39:32.800 | Whole life insurance, which is the original.

00:39:35.040 | There are several forms of universal life, which all vary.

00:39:40.160 | They're all kind of basically the same, except for how the cash value is invested.

00:39:44.480 | There's traditional universal life, index universal life, and variable universal life.

00:39:49.200 | And note that all of the above types of insurance, whole life and all the universal lives,

00:39:54.720 | they do combine insurance and saving.

00:39:56.960 | There's one special kind of permanent life insurance, secondary guaranteed universal

00:40:03.440 | life, that does provide lifetime protection with minimal cash value buildup.

00:40:08.480 | And I'll get to that on a later slide.

00:40:12.560 | Let's talk about whole life first.

00:40:14.400 | Whole life dates back well more than 100 years, well into the middle 1800s.

00:40:19.600 | Some of the earliest insurance companies in the US were selling whole life insurance.

00:40:25.040 | It's got fixed and level premiums, usually for the insurer's entire life.

00:40:30.160 | You're paying an annual or a monthly premium every month from when the policy is issued

00:40:34.640 | until you die.

00:40:35.360 | That cash value grows over time because of the level premiums.

00:40:39.360 | If you think about it, if you're paying a level premium for an unlevel death benefit,

00:40:44.240 | the risk of death goes up year by year by year.

00:40:47.680 | So you're having to pre-fund some of those higher death benefit costs in the later policy

00:40:53.200 | years.

00:40:53.920 | And so you're building up a cash value inside the policy that funds those higher, later

00:40:59.040 | death benefits.

00:40:59.760 | Because it's a permanent policy, it's often used for estate planning.

00:41:06.960 | Whole life also pays policy dividends that are usually used to buy additional paid-off

00:41:12.000 | units of insurance or reduce out-of-pocket premiums.

00:41:14.000 | It's not counted as taxable income to you.

00:41:16.480 | It's not real dividends.

00:41:17.840 | It's called by the IRS a refund of excess premium.

00:41:20.640 | Whole life, if the policy is surrendered and it has a positive cash value, the cash value

00:41:27.920 | is paid out to the owner at the time of policy surrender.

00:41:31.360 | You can also get a policy loan.

00:41:34.000 | You can get a loan against the security of your policy.

00:41:37.040 | If you have a $10,000 cash value, you can get a loan from the life insurance company

00:41:41.280 | and get that $10,000 out.

00:41:43.040 | The policy cash value remains in place, but you're paying a loan charge, an interest charge

00:41:50.160 | to the insurance company for the use of that $10,000.

00:41:53.200 | And you have the right to go and pay back that policy loan if you want.

00:41:57.520 | If you don't pay it back, the insurance company will just net that out of the death benefit

00:42:01.360 | when you die.

00:42:03.440 | Notably, most whole life policies are issued by mutual life insurance companies.

00:42:08.400 | And two of the best are Northwestern Mutual, which is frequently mentioned on the forum,

00:42:12.960 | New York Life, also MassMutual, Guardian, Penn Mutual.

00:42:17.200 | Those are all mutual life insurance companies owned by the policyholders, not stockholders.

00:42:22.320 | They pay policy dividends out of the surplus of the company.

00:42:25.840 | And they are big riders of whole life insurance.

00:42:33.200 | Now to universal life.

00:42:34.800 | Universal life is a much more recent innovation.

00:42:38.080 | I actually was around in the early 1980s working in the insurance company when my company first

00:42:43.200 | introduced universal life.

00:42:44.480 | So the product itself is less than 50 years old.

00:42:47.200 | The best analogy I can give for a universal life policy is a money market fund plus a

00:42:53.760 | term life rider.

00:42:54.960 | So let me give you an example.

00:42:56.160 | The money market fund is really called an account value.

00:42:59.600 | So when you start off a universal life policy, you might pay a monthly or an annual premium.

00:43:05.520 | And there might be a percent of premium charge.

00:43:08.240 | But once that's paid, it goes into an account value.

00:43:10.720 | And that account value is credited with interest every month by the insurance company or some

00:43:15.760 | increase in value, usually interest.

00:43:18.880 | And then every month, the insurance company will deduct the cost of insurance for that

00:43:23.920 | month.

00:43:24.160 | There will be a schedule of cost of insurance charges.

00:43:27.280 | And they'll reduce the money market fund or the account value by the cost of insurance

00:43:31.600 | and also any rider fees or extra expenses or whatever.

00:43:34.720 | And so that really is a very solid analogy for universal life.

00:43:40.720 | A money market fund plus a term life rider and bundled together into one product.

00:43:46.240 | And it's got flexible premiums.

00:43:48.960 | If you choose to pay more, there's more money in the account value.

00:43:52.880 | The account value will earn more money, more interest.

00:43:55.840 | The policy will grow faster.

00:43:57.600 | If you choose to skip a few months or skip a few years, the policy will grow more slowly,

00:44:02.960 | but it'll stay in force.

00:44:04.080 | And it only lapses typically if that account value declines to zero.

00:44:08.480 | So you can skip premiums for a while, but eventually that account value is going to

00:44:12.800 | decline to zero.

00:44:13.600 | And so the policy is by no means guaranteed to stay in force for your entire life.

00:44:18.960 | You've got to pay the premiums to keep that account value positive and hopefully keep

00:44:22.480 | the account value growing so the interest earned can be on the account value can be

00:44:26.640 | a bigger and bigger factor in your overall policy.

00:44:30.480 | The account value is also available for policy surrenders and loans, very much like on whole

00:44:37.600 | life.

00:44:38.160 | And there will be explicit surrender charges in the early policy years that offset that

00:44:42.800 | to recover the cost of commissions and other acquisition expenses.

00:44:46.080 | So there are really three kinds of universal life that we'll talk about.

00:44:51.280 | The first version, which goes back to the early 1980s, is traditional universal life.

00:44:55.920 | And these three kinds of universal life vary primarily based upon how interest is credited

00:45:04.800 | to the account value.

00:45:06.080 | With traditional universal life, there's a declared interest rate by the insurance company,

00:45:11.040 | be it 3% or 4% or 5%, whatever it is.

00:45:15.120 | Many policies have guaranteed minimum rates of 2.5% and 3% per year, and many insurance

00:45:21.760 | companies reduced their credited rates to that guaranteed level during the last 10 years

00:45:26.320 | when interest rates were so low and they just kept them there.

00:45:29.360 | The interest rate can be changed by the insurer subject to policy guaranteed minimums.

00:45:33.680 | Some old policies issued in the '80s might have guaranteed rates as high as 5% or 6%,

00:45:38.480 | but those are a very rare commodity.

00:45:40.720 | And typically, policies issued these days are 2%, 2.5%, or 3% guarantees.

00:45:45.440 | But there's a declared interest by the insurance company every year, and the insurance company

00:45:49.920 | in its sole discretion can change those interest rates.

00:45:52.080 | I'll compare that to indexed universal life, which is a more recent innovation.

00:45:57.760 | With indexed universal life, there will be an external index like the S&P 500.

00:46:03.360 | And some part of that index return in a certain year will be credited to your account value.

00:46:10.160 | And almost always with an index policy, there will be a floor of zero.

00:46:14.960 | You can't have negative index performance that impacts negatively on your cash value.

00:46:19.680 | So let's say that the cap that the insurance company placed for this current policy year

00:46:24.320 | was 4%.

00:46:24.640 | If the S&P returned 10% this year, your policy would be credited 4%.

00:46:30.240 | If the S&P earned 4%, you'd make 4%.

00:46:34.160 | If the S&P earned 2%, you'd make 2%.

00:46:38.240 | But if the S&P lost 20%, you wouldn't lose anything.

00:46:41.120 | You'd be floored at zero.

00:46:42.160 | So you're giving up the upside of the possible interest rates in exchange for a downside

00:46:50.000 | guarantee where you won't have a negative interest credit or a reduction in your account

00:46:54.480 | value due to bad performance on the S&P 500.

00:46:57.200 | And the insurer has sole discretion to set the caps and the floors, the participation

00:47:03.520 | rates, everything else, except the floor is going to be floored at zero.

00:47:07.840 | So that's the way indexed universal life works with the same account value, money market

00:47:12.480 | fund, term rider type scheme that I described earlier in the last slide.

00:47:17.760 | The third kind of universal life is going to be variable universal life.

00:47:21.520 | Variable universal life, instead of the account value being invested by the insurer, it's

00:47:27.440 | really invested in mutual funds.

00:47:29.680 | And the mutual funds have fluctuating performance.

00:47:32.800 | They can grow, they can decline in value.

00:47:35.440 | And the policy order bears all the investment risk.

00:47:37.920 | You really is using that universal life policy as a pass through to get to the mutual funds

00:47:44.240 | and earning performance based on the performance of the mutual funds.

00:47:48.640 | And then you have the term insurance rider coming off of that.

00:47:50.720 | But that's the way the account value works on a variable universal life policy.

00:47:54.640 | So those three UL policies, all very similar in construction, but different ways that the

00:47:59.600 | account value can be increased by interest or equity credits.

00:48:04.800 | General comments on whole life and universal life.

00:48:08.320 | It's much more expensive than term life insurance.

00:48:11.520 | It's 10 to 20 times the cost of a term life insurance policy.

00:48:14.800 | It's not reasonable for my 30 year old breadwinner to buy the necessary amount of life insurance

00:48:21.760 | if it's all permanent life insurance.

00:48:23.520 | The premium is just too cotton, big and hot.

00:48:25.360 | They can't afford it.

00:48:26.880 | And so it's not, I don't know that many agents would try and sell a universal life insurance

00:48:33.520 | to sell a young family entirely on permanent life insurance.

00:48:37.040 | Another thing that it does, it provides insurance beyond the time that many families need coverage.

00:48:43.120 | If you think about that typical lifetime, you probably don't need to support your dependent

00:48:48.320 | children beyond their age 20 or 25.

00:48:50.960 | So you don't need to have life insurance.

00:48:53.680 | Typically, once you retire, once you've ceased having work where you're making money, once

00:49:01.360 | you've ceased providing explicit daily support to children, then you probably don't need

00:49:06.880 | life insurance anymore, or most folks don't need life insurance, but permanent life insurance

00:49:10.960 | continues on for your whole life.

00:49:12.480 | So it provides coverage for probably longer than you need.

00:49:15.040 | I'll also note that permanent life insurance is not a good short-term investment.

00:49:21.680 | The surrender value is less than the paid premium for many years.

00:49:24.880 | It'll often take between five and 10 years to break out where your cash value in a whole

00:49:31.840 | life or a universal life policy will even equal the premiums paid, much less be a return

00:49:37.600 | on your investment.

00:49:38.400 | So much of the early premiums you're paying are being consumed by commissions, by issue

00:49:44.640 | costs and other costs.

00:49:46.160 | And it is not a good short-term investment at all for a person because you'll be in the

00:49:52.480 | hole for many, many years after you buy that policy.

00:49:55.760 | Therefore, many bogleheads, and again, based on what I sense on the forum is consensus,

00:50:04.800 | many bogleheads believe that newly purchased whole life and universal life policies are

00:50:08.720 | attractive for only a very small subset of consumers.

00:50:11.280 | Permanent life insurance combines insurance and savings into one policy, and in my view,

00:50:17.680 | doesn't do either one very well.

00:50:19.520 | We don't buy auto insurance with a savings element.

00:50:23.040 | We don't buy home insurance with the savings element.

00:50:25.520 | We're buying pure protection.

00:50:27.200 | So it kind of alludes me as to why we should buy a whole life policy or a universal life

00:50:32.320 | policy combining insurance and investment.

00:50:35.040 | I, for one, would much rather have term life insurance and then save my money elsewhere.

00:50:43.920 | Now, what if I own a permanent policy that is 10, 20, or more years old?

00:50:49.680 | First, you could consider surrendering the policy if the insurance is no longer needed.

00:50:56.640 | That's always a possibility.

00:50:57.920 | But if you're looking at it as a possible investment, there are distinctly different

00:51:02.720 | situations based upon what kind of policy you have.

00:51:05.600 | We've seen a number of threads on the forum where somebody will have an old policy, often

00:51:11.200 | from Northwestern Mutual, that is 20 years old, and it's making a 4% return or so per

00:51:17.760 | year on the cash value.

00:51:19.440 | You can do a simple calculation if you have one of those old season whole life policies.

00:51:24.320 | What's my increase in cash value in a certain year?

00:51:27.200 | Reduce that increase in cash value by how much I paid into the policy and divide that

00:51:32.960 | answer by what my opening cash value was, and that'll give me a rate of return.

00:51:37.040 | How much did I make on my cash value?

00:51:39.680 | And often, these policies, after 20 years or so, are producing 4-ish percent per year

00:51:45.600 | returns.

00:51:46.160 | And on a fixed income asset that doesn't fluctuate in value at all, that's available

00:51:51.200 | for a loan or surrender, that's not a bad rate of return.

00:51:55.200 | And so there are many people that see those policies as a decent fixed income asset if

00:52:00.560 | they happen to have a 20-year-old policy.

00:52:02.720 | I would never recommend somebody buy a whole life policy and wait till 20 years to get

00:52:06.480 | that 4%, but if somebody bought one 20 years ago, has a 20-year-old policy right now, it's

00:52:12.720 | worth considering keeping it if it's a good 20-year-old from Northwestern Mutual or a

00:52:17.760 | similar company.

00:52:18.480 | However, universal life is a different situation.

00:52:22.000 | If you don't need the universal life insurance, I'd certainly suggest that you cancel it.

00:52:26.160 | Because what happens with universal life policies is that the cost of insurance goes up and

00:52:31.680 | up and up as you get older, and many policies have not performed as they were originally

00:52:38.080 | projected.

00:52:39.040 | I mean, back in the '80s and '90s, we would project interest rates of 8% or 6% or whatever

00:52:44.640 | on universal life.

00:52:46.160 | And interest rates have come down along since that time.

00:52:50.160 | And those policies have not performed and built the cash drive that was projected.

00:52:54.640 | So many of these universal life policies require additional premiums now.

00:52:59.200 | And if you don't need the insurance, why do you keep them?

00:53:01.360 | So I think it's a serious question.

00:53:03.920 | If you don't need the insurance anymore, why keep a universal life policy that's enforced?

00:53:09.040 | Because it's probably not a good investment when you consider all the costs and everything

00:53:12.640 | else.

00:53:12.960 | Now to a special kind of universal life called secondary guaranteed universal life.

00:53:20.720 | It's got various names.

00:53:22.320 | It's called guaranteed universal life, no lapsed universal life.

00:53:26.560 | It's a very specialized form of universal life.

00:53:29.040 | The primary characteristic of this is it builds very minimal cash values or no cash values

00:53:35.840 | at all.

00:53:36.640 | There are special actuarial tricks and things that happen in the policy that allow it to

00:53:41.840 | give you term-- instead of 20-year term or 30-year term, it can give you term to age

00:53:47.120 | 100, term-like coverage with no cash value to age 100, and a very nominal premium, much

00:53:53.520 | lower premium typically than for a fully funded whole life policy or universal life policy.

00:53:59.680 | It's very delicate.

00:54:02.080 | You need to be paying all the premiums when they're due or that no lapse guarantee might

00:54:08.880 | cease and might not be available for reinstatement.

00:54:11.280 | But it is the cheapest way.

00:54:12.320 | If you have a true lifelong insurance need, it's the cheapest way for you to get permanent

00:54:17.840 | life insurance coverage.

00:54:20.480 | I got a private message yesterday from someone who was thinking about buying a second to

00:54:24.400 | die policy for he and his wife to provide for their children after they both pass away.

00:54:31.040 | While I might not agree necessarily that that's a great thing to do, if the person wants to

00:54:34.960 | buy life insurance, I'd tell them to strongly consider a secondary guarantee, second to

00:54:39.760 | die universal life policy.

00:54:41.840 | That's probably the cheapest way of buying their half million or million dollars or whatever

00:54:45.760 | of coverage, cheaper than a whole life, cheaper than universal life.

00:54:49.600 | So it's called secondary guarantee or guaranteed universal life or no lapse universal life.

00:54:54.800 | Now I'm changing topics really entirely to two specialized forms of insurance, juvenile

00:55:03.600 | life insurance, and then final expense.

00:55:05.680 | Juvenile, I mean, many years ago, I had children.

00:55:09.520 | And back then I was deluged with offers from Globe Life and Gerber Life and companies like

00:55:15.840 | that to sell me $10,000 or $25,000 of coverage on my young child.

00:55:20.720 | Those two companies, Gerber Life and Globe Life, particularly target this juvenile life

00:55:26.480 | market for $10,000 to $25,000 policies.

00:55:29.280 | And they might also give some options for buying more insurance as a child gets older.

00:55:33.440 | If you look at the forum, many BOGO heads would argue against juvenile insurance.

00:55:40.080 | Being totally candid and blunt, no one's depending on the income of a child for their daily living.

00:55:47.680 | I mean, the child does not have income.

00:55:49.200 | A child's an expense item.

00:55:50.400 | And if you have enough money set aside to bury a child, there's really no financial

00:55:55.680 | loss if a child were to pass away.

00:55:57.840 | There's tremendous emotional loss, but there's not a financial loss except with the cost

00:56:02.000 | of the funeral.

00:56:02.640 | So I'd argue that the money is probably better spent instead of putting it into a whole life

00:56:08.720 | policy by doing a 529 plan or some other type of savings vehicle like that for the child.

00:56:17.360 | Also, the purchasing power of $10,000 to $25,000 will be eroded over time by inflation.

00:56:22.640 | That'll mean nothing to the child by the time that child is 20 or 30 or 40 years old in

00:56:27.040 | terms of the overall portfolio.

00:56:28.960 | So I would not be in favor of buying juvenile life insurance, which is solicited by a lot

00:56:34.560 | of these companies shortly after your child's born.

00:56:38.000 | Similarly, for final expense life insurance, final expense, you'll often see on daytime

00:56:42.480 | TV ads for guaranteed issue whole life.

00:56:44.960 | You can buy this amount and the premiums will never go up.

00:56:47.920 | They're guaranteed.

00:56:48.880 | Your coverage can't be canceled.

00:56:50.160 | Those are really just small base amount whole life policies issued to older folks ages 40

00:56:56.000 | to 70 or older.

00:56:57.760 | There's a limited or no health questions.

00:56:59.200 | That's one thing that might be attractive to some people and a way that the insurance

00:57:03.760 | company can make out if there are limited health questions is that if the insured dies

00:57:10.320 | in the first two years, typically the death benefit is only the premium paid.

00:57:14.880 | It's not the full $10,000 or $25,000 base amount.

00:57:18.560 | It's just going to be the premiums that are paid.

00:57:20.080 | Many Vogelheads argue against final expense insurance.

00:57:23.200 | Also, the premiums are high because the people are old and the underwriting is very limited.

00:57:28.400 | Vogelheads have a general bias against whole life and arguably people are better off just

00:57:32.400 | investing the premiums in something else like just a simple mutual fund or maybe even a

00:57:37.760 | savings account.

00:57:38.400 | They'll be better off putting it into final expense insurance.

00:57:41.040 | Taxation of life insurance.

00:57:46.080 | Death benefits are free from income tax.

00:57:49.440 | It's just a wonderful thing that not only can this young breadwinner who passes away,

00:57:54.640 | if the spouse can get a million dollar death benefit, but the death benefit is income tax

00:57:59.360 | free.

00:58:00.720 | Now, if a person is in a very high asset position and estate taxes are going to come into play,

00:58:07.120 | an insurance policy might be part of the estate, but for the vast majority of term life policy

00:58:11.280 | holders, that's not the situation and death benefits are income tax free.

00:58:15.760 | Another factor about life insurance, the buildup of cash value inside of life insurance policy

00:58:22.960 | is not reported as taxable income in the current year.

00:58:26.720 | Sales people for permanent life insurance will always be stressing that point, that

00:58:31.920 | there's no taxation on the internal buildup of the life insurance.

00:58:35.440 | Now, if the permanent life insurance policy surrendered, there can be a tax bill depending

00:58:40.960 | on what the relationship is of your surrender value to your premiums.

00:58:46.160 | For example, you've got a $40,000 premium you paid over the years.

00:58:50.320 | Your surrender value is $50,000, that'll be a $10,000 taxable income in the year that

00:58:56.160 | you surrender, and you can defer that income by doing a 1035 exchange into an annuity.

00:59:01.280 | I won't go into the details of that.

00:59:02.720 | You could private message or ring it up for questions, but you can defer the reporting

00:59:06.960 | of that income or postpone it by doing an exchange into an annuity.

00:59:10.640 | Finally, how are life insurance policy holders protected?

00:59:19.920 | Life insurance is not...

00:59:21.200 | Life insurers are not covered by any kind of a federal insurance guarantee.

00:59:25.040 | There's no FDIC or something like that for life insurance.

00:59:28.320 | Now, if you look at your state guarantee fund rules, many states will cover $300,000 of

00:59:35.120 | death benefit and $250,000 of surrender value.

00:59:38.480 | The coverage does vary by state.

00:59:39.920 | When I did the similar presentation on annuities a few months ago, guarantee fund limits are

00:59:47.680 | a big deal for annuities because in many states, that $250,000 limitation on surrender value

00:59:55.680 | is a big deal.

00:59:56.400 | But here in practice, for life insurance, there have been very few problems with life

01:00:01.520 | insurance policies issued by insolvent insurers.

01:00:04.720 | The fact is that if I'm an actuary looking at an in-force block of policies, that in-force

01:00:11.440 | block of policies where all the acquisition costs and commissions have already been paid,

01:00:15.680 | and if I can take over those policies, which is a transfer of what the policy reserves

01:00:21.360 | are, then there is profits in that business going forward.

01:00:25.120 | It's a profitable thing for me to take over.

01:00:27.040 | Instead of the guarantee fund having to step in and provide funding, another insurer will

01:00:33.840 | actually pay the insolvent company to take over their life insurance block, move it onto

01:00:38.720 | their paper, and provide the policyholders full benefits.

01:00:43.200 | In fact, life insurance policies almost never lose in an insolvency.

01:00:48.160 | The guarantee fund doesn't have to come into play at all.

01:00:52.160 | So it's a different situation here.

01:00:54.480 | I had million-dollar policies with single insurers, even though my state guarantee fund

01:01:00.240 | limit is $300,000 of death benefit.

01:01:02.560 | I have no concerns at all about that, and it's just entirely different for life insurance

01:01:07.200 | death benefits than it is for annuity cash surrenders.

01:01:11.680 | So that fairly well covers the things I wanted to talk about.

01:01:15.360 | There are three Boglehead Wiki articles on life insurance.

01:01:19.440 | I think I dealt already with the question about viaticals or about selling your life

01:01:24.960 | insurance policy, but I'll talk again here for just a minute.

01:01:27.840 | If I have a permanent life insurance policy, that's really the only kind of policy that

01:01:34.880 | could be sold to a third party.

01:01:36.960 | Third parties don't want term life insurance policies.

01:01:39.280 | They simply don't.

01:01:40.640 | They want a permanent life policy.

01:01:42.160 | And if I'm a policyholder who's sick, I can surrender my policy, get the cash surrender

01:01:48.880 | value from the company.

01:01:49.680 | I can wait out the death benefit or keep on paying premiums until I die and the death

01:01:55.920 | benefit can come in.

01:01:56.720 | If I want to get more cash than the insurance company will give me, I might search out a

01:02:01.680 | firm that will buy it from me.

01:02:04.080 | And for them to see a good deal in buying it from me, I've got to be sick enough that I'm

01:02:08.640 | going to die fairly soon and they can predict that with some certainty.

01:02:12.080 | It's got to be a large enough policy to make it worth their while and they've got to get

01:02:17.520 | a good rate of return on their investment that they have in taking over the policy and

01:02:21.920 | paying premiums on that policy until I die.

01:02:24.080 | So it's certainly possible to sell your life insurance policy, but unless it's a permanent

01:02:28.560 | life insurance policy for over $100,000 and you're sick and you're fairly old, it's not

01:02:34.800 | going to be worth anything beyond the cash surrender value.

01:02:38.960 | So with that, questions.

01:02:41.920 | Thank you, Stinky.

01:02:44.480 | Do we have any questions from the chat?

01:02:47.440 | Anybody would like to raise their hand with a question?

01:02:50.960 | Sonny.

01:02:51.440 | Hi, yes, thank you for your presentation.

01:02:55.280 | I had a question.

01:02:56.160 | Someone was pitching me, and I agree with you also, the same way term and that's the

01:03:01.200 | difference.

01:03:01.760 | But someone was pitching me on an IUL, specifically Kaizen.

01:03:06.320 | I don't know if you've heard of Kaizen.

01:03:09.280 | They use leverage.

01:03:10.400 | It's like three or five times the leverage and then you make yearly payments for five

01:03:16.880 | years and then because of the leverage, you get larger payouts after 15 years that are

01:03:22.560 | tax free.

01:03:23.280 | I'm just wondering your thoughts on that.

01:03:26.160 | What was that word you used?

01:03:28.320 | Kaizen is the name of the product.

01:03:31.920 | A-A-I-Z-E-N.

01:03:35.600 | Can you spell that?

01:03:36.400 | K-A-I-Z-E-N, yep.

01:03:38.720 | Kaizen, okay.

01:03:40.080 | It's an IUL, but leveraged IUL is my understanding.

01:03:44.560 | Okay.

01:03:45.060 | I've heard of it, and my snap judgment would be two things I don't like, index universal

01:03:53.680 | life and leverage.

01:03:54.560 | They're trying to lever the tax code, I guess.

01:04:01.280 | But if you're taking a product you don't like and then further increasing your risk by leveraging

01:04:11.680 | it there, I'd just look carefully at your downside.

01:04:14.720 | If you wanted to, for example, to get some illustrations and send them to me, private

01:04:20.800 | message, we could talk.

01:04:22.080 | I'd be concerned about that.

01:04:24.640 | I'm sure they can show you some pretty fancy numbers with that.

01:04:30.720 | Because of leverage, with leverage is risk.

01:04:32.960 | That's all I can say about that.

01:04:34.960 | What if the IUL doesn't perform?

01:04:36.480 | I'm going to rant here something more about indexed universal life.

01:04:42.240 | This is not about the indices, about some abusive practices that are going on right

01:04:46.880 | now.

01:04:47.440 | I should have thought of this before.

01:04:49.200 | This came up from a person who posted in the last couple of days about an index annuity.

01:04:57.040 | The issue was on the indexing was that the company was showing a 20-year return on some

01:05:05.920 | pokey made-up index that was 5.5% or 6%.

01:05:09.520 | It looked like a really attractive return they've gotten on that index.

01:05:13.600 | But in the small print, they noted that this is a 20-year return they're showing to 2023.

01:05:20.960 | But in the small print, they said this index was not conceived or put together until 2021.

01:05:27.760 | And so all the years from 2003 to 2021 were made up.

01:05:32.720 | They did as best they could to go back.

01:05:36.640 | If we'd had the foresight to have this index, what would it perform like during 2004 and

01:05:43.440 | 2005 and 2006?

01:05:44.960 | And I think insurance companies often work with financial providers of some type to conjure

01:05:51.440 | up indices that on backtesting, that's called backtesting.

01:05:55.520 | That on backtesting look good.

01:05:58.560 | They conform to what happened in the past.

01:06:00.240 | It's kind of looking at the results of a horse race in retrospect and saying, I bet on that

01:06:05.040 | horse.

01:06:05.360 | But the fact is that there's no guarantee that that's going to perform well going forward.

01:06:09.600 | But that's the way that they can get these ridiculous illustrated rates of 5% or 6% or

01:06:15.040 | 7%.

01:06:15.200 | I'd be very leery in your Kaizen example if you had an accredited rate of 5%, 6%, 7%

01:06:24.560 | assumed on your IUL.

01:06:25.760 | I'd look to see on that.

01:06:28.160 | I'd ask them to run it.

01:06:29.120 | What happens if it makes 4%?

01:06:30.160 | What if it makes 3.5%?

01:06:32.160 | Does the whole thing collapse?

01:06:34.480 | Does your leverage collapse in on you?

01:06:36.080 | Because I'd be very concerned.

01:06:38.560 | And there are games being played in the insurance industry right now on these indices where

01:06:43.200 | companies are doing things that I think are just destructive to their behavior.

01:06:46.640 | There's been lawsuits flying around when policies don't perform as they're illustrated.

01:06:52.000 | And I'd be looking very hard to see in your Kaizen illustration, what is the interest

01:06:56.720 | rate being assumed?

01:06:58.080 | What's the basis of the index that they're using for it?

01:07:00.880 | If it's the S&P 500, then that's been around forever.

01:07:03.680 | But if it's something that was just made up in the last two years and backcatched for

01:07:06.960 | 20 years, I'd be extremely leery of that.

01:07:09.280 | And that's a current example that has come up in an indexed annuity question on the forum

01:07:16.240 | in the last two days.

01:07:17.040 | Sunny, what kind of person tried to sell you this?

01:07:20.880 | Was it for investments or life insurance?

01:07:24.800 | Yeah, he's a life insurance agent and a friend of mine.

01:07:29.280 | But yeah, yeah.

01:07:31.760 | Gotta watch out for those grants.

01:07:32.480 | I wasn't going for it, but these are complicated investments.

01:07:35.600 | And when it gets too complicated, there's a lot of things, moving pieces that a great

01:07:40.560 | individual is not going to get.

01:07:41.680 | But I just wanted to get a better understanding from Wayne.

01:07:45.200 | I wasn't moving forward anyways with it.

01:07:46.960 | But I kind of wanted to get a better understanding, just because he makes a good argument, of

01:07:51.520 | course, because sales reps, that's what they do, their job.

01:07:54.080 | Yeah.

01:07:54.880 | I'd really look at that credited rate.

01:07:58.000 | I'd be concerned that the policy would collapse in a heap if they used a realistic credited

01:08:02.080 | rate.

01:08:02.400 | Yeah.

01:08:03.360 | Thank you.

01:08:03.680 | Wayne, we have a--

01:08:04.560 | Would you be able to put your email address in the chat?

01:08:13.200 | BirminghamBogleheads@gmail.com.

01:08:15.280 | And we can put that out.

01:08:17.440 | Maybe I can put that-- we'll figure out how to communicate that.

01:08:21.200 | But I'm the coordinator for a local chapter.

01:08:23.200 | And so I use BirminghamBogleheads@gmail.com is the email address that will get to me.

01:08:28.560 | Or you can private message me through the forum at Stinky, and we can communicate that

01:08:33.280 | way.

01:08:33.520 | OK.

01:08:34.400 | Thank you.

01:08:34.800 | Thank you.

01:08:36.400 | OK.

01:08:36.720 | Wayne, we have a comment in the chat from the Arctic Pineapple Corporation.

01:08:43.520 | Oh, my.

01:08:44.000 | And Arctic Pineapple said, "Also, with indexed annuities, they show you returns compared to

01:08:50.880 | the S&P 500 without dividends to make their rates look better than the S&P."

01:08:57.520 | Yeah.

01:08:59.280 | That's another issue with the term index.

01:09:03.680 | When they say S&P 500, people might reflexively think of the total return on the S&P 500.

01:09:10.560 | And the total return includes both price appreciation and dividends.

01:09:15.200 | But I'm unaware of any indexed annuities or universal life that pass on the dividends.

01:09:21.280 | But there may be one indexed annuity.

01:09:24.720 | But they are very far and few between.

01:09:27.440 | And the vast majority of these products do not include dividends in their return calculations.

01:09:33.360 | And so, that's exactly right.

01:09:34.560 | OK.

01:09:35.760 | Any other questions?

01:09:38.080 | Wayne, you want to turn off your screen?

01:09:43.520 | Or do you want to leave it on for any reason?

01:09:45.760 | That's fine.

01:09:46.240 | OK.

01:09:47.520 | Alan?

01:09:48.020 | Yes, Wayne.

01:09:49.760 | This is a peripheral area that you may or may not be familiar with.

01:09:53.440 | But I'm curious, nowadays, with the advent of genetic testing, people may have done 23andMe

01:09:58.640 | or other genetic tests.

01:10:00.640 | And my understanding, I heard peripherally that now there's some state or federal regulations

01:10:06.400 | that ensure that that data cannot be passed along and used for medical underwriting for

01:10:12.560 | insurance.

01:10:13.120 | Do you know anything about that?

01:10:14.240 | Are there any fears or concerns one must consider before getting such genetic testing?

01:10:19.840 | I'm a numbers guy.

01:10:22.480 | And I was never involved in underwriting.

01:10:26.160 | The people on the forum, I certainly note the people in the forum who seem knowledgeable

01:10:31.200 | about certain topics.

01:10:32.720 | And there are two posters I'll mention that I believe are both active insurance agents

01:10:39.360 | or insurance brokers.

01:10:40.960 | Chardo is one, C-H-A-R-D-O.

01:10:43.760 | And Brewdude, B-R-U-D-U-D-E.

01:10:46.720 | I know he's an insurance agent from some posts that he's made.

01:10:50.080 | And both those folks, in my view, follow kind of boglehead principles.

01:10:54.160 | They really are bogleheads.

01:10:56.000 | And I would pose questions like that to them because they're in the business of writing

01:11:01.520 | insurance and I'm not.

01:11:03.040 | I'd be guessing.

01:11:04.080 | But they would know from being on the ground and writing insurance.

01:11:07.280 | I respect both of those guys or girls, whatever, very much.

01:11:11.440 | All right.

01:11:13.200 | Thank you.

01:11:13.600 | In the chat, let me see.

01:11:18.480 | Great presentation.

01:11:22.000 | Thanks, Wayne.

01:11:23.440 | Well, thank you.

01:11:24.000 | The Arctic Pineapple Corporation.

01:11:27.120 | We owned a V-U-L and we own a G-U-L.

01:11:36.400 | We own both.

01:11:37.040 | And our V-U-L, the Variable Universal Life, was an interesting life insurance.

01:11:45.600 | We bought it years ago.

01:11:46.720 | My husband bought it.

01:11:48.320 | And it is invested-- there was what they called a subaccount, which had mutual funds in it.

01:11:55.520 | And we would select the mutual funds.

01:11:58.960 | And we selected five mutual funds or four mutual funds.

01:12:02.400 | And it had a premium that could go up if it had to.

01:12:08.800 | But our premium never went up.

01:12:10.320 | And over about 10 years, we decided to have it evaluated to see whether or not this was--

01:12:16.640 | because we had heard they were terrible products.

01:12:19.040 | So we sent it to a fellow who specialized in evaluating life insurance policies.

01:12:24.400 | And he told us that he knew it was coming.

01:12:27.840 | I had emailed him that it was coming.

01:12:29.760 | And he said to us, when he talked to us on the phone, he said,

01:12:33.760 | "I was just waiting to get your policy to see how terrible it was."

01:12:37.680 | And when he opened up the mail and he read it, he realized it was actually not a bad policy.

01:12:43.600 | But it was a rare policy, because it was sold to people who were not likely to pass away quickly.

01:12:49.600 | And he said they don't sell them anymore.

01:12:52.880 | It was a Lincoln Life policy.

01:12:54.720 | And it was interesting, because I would follow it along.

01:12:59.280 | He warned us to look for the cost of insurance.

01:13:03.440 | Like you said, my husband was getting older and older and older, and not younger.

01:13:08.960 | And the cost of insurance was going up.

01:13:12.720 | And I believe it went up on the anniversary of the policy.

01:13:15.600 | And when it went up, you could see that the insurance company

01:13:19.680 | was dipping into the mutual fund sub-account

01:13:24.400 | to pay for what our premiums didn't cover on the cost of insurance.

01:13:30.960 | You were dipping into-- I mean, they were supposed to.

01:13:33.680 | They dipped into there.

01:13:35.120 | And so fortunately, the mutual funds we had covered it,

01:13:40.160 | were able to keep the policy going and cover the cost of insurance,

01:13:46.800 | even during the recession, which was interesting.

01:13:50.240 | Now, I did notice that it went way, way down.

01:13:52.640 | And I was worried that the policy was going to--

01:13:55.120 | we were going to have to increase our premiums.

01:13:57.600 | We never had to.

01:13:59.840 | It lasted for 20 years.

01:14:01.520 | And then I could see, and we got a notice from them,

01:14:06.560 | the cost of insurance is too high.

01:14:08.400 | Your husband is too old.

01:14:10.080 | And therefore, you need to increase your premiums.

01:14:13.040 | But it lasted 20 years.

01:14:14.800 | It was an interesting-- it was interesting for us.

01:14:18.640 | And of course, we did not increase the premiums,

01:14:21.760 | because we didn't need the insurance anymore.

01:14:23.760 | Actually, we probably should have got rid of it earlier than that.

01:14:26.960 | A couple of comments about variable universal life.

01:14:30.400 | Yes, if you have good performance on your underlying assets,

01:14:34.400 | and you're appropriately aggressive on those underlying assets,

01:14:37.200 | and the stock market performs well, you can do OK with those.

01:14:40.320 | Where people get into problems with their universal life policies

01:14:45.760 | is that they skip some premiums, or the market doesn't do very well.

01:14:49.600 | And all of a sudden, those cost of insurance charges

01:14:52.080 | are chewing up more and more, and the cash value is not building.

01:14:54.800 | But on a VUL, if you can get a good head of steam going on those investments,

01:14:59.760 | then you can reduce the net amount of risk,

01:15:02.560 | the net amount of insurance that you have,

01:15:04.160 | reducing the charges there, and you can make a go of it.

01:15:07.600 | One of the things that I'll mention about variable universal life,

01:15:11.040 | quite often, those policies will have much higher expense charges

01:15:15.600 | on their mutual funds than what you might see outside the policy.

01:15:19.040 | So you might, for example, see a S&P 500 fund

01:15:22.160 | that you can get from Vanguard for four basis points,

01:15:25.120 | four 100s of 1%, that's being charged 60 basis points,

01:15:29.200 | or 1% or whatever within the variable universal life policy.

01:15:34.320 | You can't swap in your own mutual funds.

01:15:36.560 | You've got to work with only the panel of mutual funds

01:15:39.280 | provided by the insurance company.

01:15:41.120 | That being said, I'm glad that you had a good experience.

01:15:44.080 | And it sounds like a lot of it was due to the fact

01:15:46.960 | that you got into a policy at a time when the investment wins were behind you,

01:15:52.960 | and you made some decent money on your assets.

01:15:54.800 | Yeah.

01:15:55.760 | Good for you.

01:15:56.240 | Another thing we noticed was for a while there, maybe two years,

01:15:59.680 | we put it on a note, what they call a no bill.

01:16:03.120 | Yeah.

01:16:04.400 | A no bill means they didn't charge us for it.

01:16:07.600 | They simply dipped into the mutual fund account,

01:16:10.560 | the sub account to pay the premiums.

01:16:12.400 | If we had not done that, it would have lasted a little longer.

01:16:16.960 | But still, it would not have lasted at the same premium for too much longer.

01:16:21.280 | After a while, you have to increase your premiums,

01:16:23.680 | and it's just not worth it unless you, for some reason,

01:16:27.200 | really need the life insurance.

01:16:28.640 | In which case, your point is that the GUL is a better way to go.

01:16:33.920 | We also have a GUL, and that is a level life insurance till age 120.

01:16:40.160 | Yeah.

01:16:41.920 | With a policy like VUL or regular traditional UL or IUL,

01:16:45.280 | you really have two separate concepts going on there.

01:16:48.480 | One is the amount of premiums that you pay into the policy

01:16:52.080 | on a monthly or quarterly or annual basis, and that's flexible.

01:16:55.840 | You can pay in what you want, when you want,

01:16:57.760 | subject to the account value running out of gaps.

01:17:00.000 | On the other hand, you've got the cost of insurance charges

01:17:03.520 | being deducted from that account value,

01:17:05.760 | and that's going to happen every month.

01:17:07.520 | And the cost of insurance charges will be more as you get older,

01:17:10.880 | and they'll be more if your investments have not performed,

01:17:13.760 | and they've got a larger amount they have to be charging insurance premiums on.

01:17:17.360 | But there's really two separate concepts,

01:17:19.760 | the premiums you pay into the mutual fund or into the account value,

01:17:23.840 | and then the charges from the account value

01:17:26.080 | to pay the insurance company for its cost of insurance.

01:17:28.240 | Yeah.

01:17:29.680 | Okay, we have a question from the chat from Frank.

01:17:34.800 | Can you touch on how insurance is used for wealth transfer?

01:17:40.160 | I'm not so familiar with that.

01:17:47.680 | Frank wants to unmute and join in and provide more clarity.

01:17:52.080 | I can say that you're really not going to transfer wealth with a term life policy,

01:17:57.120 | because the vast majority of term life policies never pay out of the death benefit,

01:18:01.520 | because the lapse in the person's 50 or 60,

01:18:04.240 | and there's really not wealth, that's income replacement.

01:18:06.800 | So by definition, we'd have to have some kind of a permanent life insurance policy.

01:18:11.520 | And I guess I would just ask back to Frank,

01:18:15.120 | what are we trying to accomplish here?

01:18:17.120 | Um, you know, yes, I guess,

01:18:20.320 | if I wanted to buy a $5 million policy on myself right now,

01:18:26.400 | then I could pay a premium of whatever per year and build up.

01:18:32.880 | And then I'd have a $5 million death benefit for my children or my estate or whatever.

01:18:37.840 | But I might not, you know, you know, equal or better situation.

01:18:42.320 | If I just take those annual premiums I would have paid into that insurance policy

01:18:46.320 | and put that into equity mutual funds or some mix of stocks and bonds.

01:18:53.600 | You know, I don't know if the question is deeper than that,

01:18:56.960 | but it's got to be permanent life insurance.

01:18:59.200 | And I'm just wondering if it's more efficient and lower cost

01:19:02.720 | and not involving an insurance company,

01:19:04.880 | just to invest the money yourself into a broadly diversified portfolio.

01:19:09.120 | Frank, do you want to weigh in?

01:19:16.080 | - Okay, our next question was, I'm sorry, I had, yes, Wayne?

01:19:25.760 | What did you say? I'm sorry, I missed that.

01:19:27.120 | - Nothing.

01:19:28.160 | - Frank is on, sorry, can you hear me now? Sorry.

01:19:31.200 | - Oh, Frank, okay, hi.

01:19:32.480 | - No, I think you had it at one of your last slides.

01:19:35.360 | You just kind of put a link to it. That is a wiki discussion.

01:19:38.400 | I think it was transferring wealth.

01:19:42.320 | I guess there's some Bucklehead posts on that.

01:19:47.520 | And I've heard some stories about different types of,

01:19:50.160 | you know, obviously if you have a lot of assets or,

01:19:52.480 | you know, you have a lot of cash or whatever,

01:19:54.400 | and they want to try to pass it on to generational wealth,

01:19:58.320 | I guess is what they're calling it, you know, two years or something,

01:20:01.440 | you utilize a insurance vehicle to do that.

01:20:07.600 | - And that's probably going to be insurance for kind of the 1%,

01:20:12.000 | or the 1/10 of 1%.

01:20:12.960 | You know, I was really intending this to be more about

01:20:16.640 | the term insurance that is more useful.

01:20:19.920 | If we were to have a three-hour presentation,

01:20:22.480 | I'd probably become better versed on exactly

01:20:25.440 | how the extremely high-level, you know,

01:20:27.840 | high-wealth, high-asset market works.

01:20:32.880 | But I'm just not so deep on that.

01:20:34.320 | - Good, thank you. I wasn't expecting it.

01:20:38.960 | I just thought if you had it, you could just touch on it.

01:20:41.200 | But Doug, thank you, appreciate it.

01:20:42.400 | I'll look more into it.

01:20:43.680 | - And I appreciate your question.

01:20:45.440 | - Okay, we have a comment that my example is

01:20:50.080 | the perfect complicated insurance product

01:20:52.560 | that adds sequence of return risk as another variable.

01:20:57.600 | - Oh, your variable universal life policy has sequence of return?

01:21:05.840 | - Yeah, yeah.

01:21:06.000 | - And that is right.

01:21:07.120 | Yeah, if you had some crappy years early in your policy,

01:21:11.360 | you'd end up with a policy that's not performed very well

01:21:13.760 | in those early premiums.

01:21:14.800 | - Yeah, exactly.

01:21:15.360 | - And therefore your cost of insurance is higher

01:21:18.400 | and the policy starts to kind of consume itself.

01:21:20.560 | - Yeah, exactly. That's exactly right.

01:21:23.120 | Okay, we have a question from Ben.

01:21:25.680 | Any thoughts on specialty products like Coliboli,

01:21:30.720 | C-O-L-I-B-O-L-I or PPVUL?

01:21:38.160 | - Well, Coli is a corporate owned life insurance,

01:21:46.640 | B is bank owned life insurance.

01:21:48.320 | Those are not purchased by individuals

01:21:52.720 | or by most folks in Boglehead Nation.

01:21:55.360 | Coli would be often purchased on all the employees

01:22:00.400 | of a corporation by the corporation itself.

01:22:03.120 | And the corporation, because of the tax-free nature

01:22:07.600 | of life insurance buildup,

01:22:09.840 | the corporation can insure its employees

01:22:13.440 | or the bank can insure its own employees

01:22:16.560 | using an insurance vehicle

01:22:18.160 | and make a four or 5% return on their insurance policies.

01:22:23.280 | But it's not a product that would be bought by an individual.

01:22:26.960 | It'd be a product that would be bought

01:22:28.160 | by a corporation or a bank.

01:22:30.720 | And the point of view of the corporation or the bank,

01:22:32.720 | the treasurer or CFO or whatever would need to see

01:22:37.520 | if he has the funds to invest in this kind of a thing

01:22:39.760 | and if it's an attractive thing

01:22:41.360 | for the corporation or the bank to invest in with its funds.

01:22:45.600 | So that'd be my comment on Coli and Boli.

01:22:50.880 | My former employer writes both Coli and Boli

01:22:54.160 | and my former employer also bought a Coli policy

01:22:57.280 | on employees, including me.

01:22:58.800 | So I'm familiar with it from that point of view,

01:23:01.680 | but I've never priced it out

01:23:02.880 | and it's not a thing that an individual would buy.

01:23:06.320 | I'm not familiar with PPVUL.

01:23:08.640 | So two out of three.

01:23:11.120 | - Okay, are there any more questions, any discussion?

01:23:17.600 | Does anybody have any life insurance policies

01:23:22.640 | that they want to talk about, complain about?

01:23:26.480 | I will say that we were not too bright

01:23:34.720 | and that we did not buy more term life.

01:23:39.040 | We did not buy more term life policies when we were younger.

01:23:43.440 | And by that, I mean the laddering

01:23:44.880 | of the term life policies.

01:23:47.120 | - Well, I'm a big believer in term life.

01:23:52.720 | My employer, my former employer was a huge rider

01:23:56.080 | of term life for many, many years.

01:23:58.640 | And I mean, hearing the agents talk about it,

01:24:03.120 | it's not very frequent that somebody

01:24:05.120 | in their 30s or 40s will die.

01:24:06.720 | But being able to deliver that million dollar

01:24:09.680 | or $2 million check to the grieving spouse

01:24:12.720 | is just an absolute blessing.

01:24:14.720 | And there's no other financial product that can do that.

01:24:17.840 | Nothing else can provide that kind of a benefit

01:24:20.560 | by term life.

01:24:21.600 | And don't be cheap.

01:24:23.120 | Term life is so cotton picking cheap.

01:24:24.720 | When in doubt, round up, because it's inexpensive

01:24:30.160 | and because inflation will degrade the value

01:24:32.720 | of the policy.

01:24:33.280 | There's one negative here.

01:24:34.640 | It's my million dollar policy that I'm buying today.

01:24:37.280 | The purchasing power of that million dollars

01:24:38.960 | will be less as time goes on.

01:24:41.280 | And therefore, if it's a question

01:24:42.880 | of buying 750 or a million, I'd suggest a million.

01:24:47.440 | If it's a million or a million and a half,

01:24:48.800 | I'd buy the million and a half.

01:24:50.160 | It's not that much more money.

01:24:51.760 | And you won't, I doubt that your spouse

01:24:55.120 | will turn down the larger check if you were to die.

01:25:02.120 | Frank wrote in the chat, understanding

01:25:04.600 | every person's situation is different.

01:25:06.600 | Is there a sweet spot to buy like age by term life?

01:25:14.440 | Well, I'd say that it's not so much based on your age.

01:25:19.800 | It's based on your family obligations.

01:25:21.560 | I'd say that a 40-year-old with no dependents

01:25:27.480 | who's not married has no need for life insurance.

01:25:31.040 | I mean, they can choose to buy life insurance if they want,

01:25:34.720 | but there's no financial need for that 40-year-old

01:25:37.520 | to buy life insurance.

01:25:38.480 | But a 22-year-old who has a kid and a spouse

01:25:43.040 | has a need for life insurance.

01:25:44.240 | That person may not have a very big amount of assets,

01:25:48.800 | but they have a need for life insurance.

01:25:50.160 | And so I'd say it's more based upon,

01:25:54.000 | you should be buying that when you have a need for it.

01:25:57.600 | And that need is because others are dependent on your income

01:26:01.040 | or reasonably likely to become dependent on your income.

01:26:04.560 | If you're trying to have a child as a couple,

01:26:07.440 | that's not a bad time to do it.

01:26:09.440 | You don't need to wait till your spouse is nine months in labor.

01:26:14.560 | You don't need to wait on that.

01:26:16.880 | That's a sweet spot, is buying it when you need it.

01:26:20.240 | Alan?

01:26:25.280 | Yes.

01:26:25.780 | Wayne, I'm curious if somebody has a pre-existing medical condition

01:26:30.560 | that may make them rated higher risk and higher premium,

01:26:34.160 | is there a benefit to look at to other options

01:26:36.400 | rather than buying an individual policy,

01:26:38.080 | look at a policy through an affinity group

01:26:40.560 | or a trade organization, professional organization?

01:26:43.600 | Is there typically some additional safeguards

01:26:45.840 | to help you get coverage that route

01:26:48.080 | without paying the highest possible premium?

01:26:51.440 | Yes, certainly.

01:26:52.560 | Every comparison should be,

01:26:55.440 | what are my alternatives that I have here?

01:26:57.840 | If you could get insurance coverage from your employer

01:27:02.720 | a good bit cheaper than you can get it through the individual route

01:27:05.280 | because the employer is not requesting evidence of insurability,

01:27:10.400 | by all means, go ahead and take up the employer.

01:27:13.600 | If you were uninsurable,

01:27:15.200 | absolutely take any amount of insurance from your employer

01:27:18.640 | that you can get without evidence of insurability.

01:27:21.520 | You know, that's just the rational thing for you to do.

01:27:24.320 | Typically, it's cheaper to buy

01:27:27.360 | when you're providing your own evidence of insurability,

01:27:30.080 | presuming that you're in reasonable health.

01:27:32.480 | And a good 95% or more of the people are able to do that.

01:27:36.000 | But there is a small number of people

01:27:40.320 | for whom individual insurance is either unavailable

01:27:44.880 | or insanely expensive.

01:27:46.480 | And those folks seeking out association coverage,

01:27:49.280 | seeking out employer group coverage,

01:27:50.960 | that can make a lot of sense.

01:27:52.080 | It's unfortunate when we'll see sometimes posts in the forum

01:27:55.520 | with somebody who's had a bad health condition

01:27:57.920 | and just can't get insurance.

01:28:01.520 | Again, I've never worked in underwriting

01:28:04.320 | and I don't know the progression of things.

01:28:06.160 | It certainly is my impression that as time goes on,

01:28:09.840 | if you were rated at a higher level,

01:28:12.320 | if you had an unfavorable health condition and that's improved,

01:28:15.920 | for example, you have lost or are losing a bunch of weight,

01:28:20.800 | you had a cancer diagnosis and the cancer is in remission

01:28:24.240 | or it's gone and you're just waiting for the passage of time,

01:28:27.920 | that your rates,

01:28:29.120 | you might look better to an insurance company a few years out

01:28:31.840 | and you might be able to get a reduction in rates.

01:28:34.960 | And so having a qualified, competent life insurance agent

01:28:41.040 | to help you out at that point,

01:28:42.560 | if you're navigating situations like that,

01:28:44.560 | is really, really useful.

01:28:45.600 | - Yes, on the forum, BrewDude has often posted

01:28:50.720 | how there are different insurance companies

01:28:54.480 | that look at people differently

01:28:56.320 | and that you might be able to get a rate,

01:28:58.400 | a better rate from a different insurance company

01:29:00.640 | if you're searching around.

01:29:02.240 | And then also that you can wait a certain number of years

01:29:05.520 | and like you said,

01:29:06.640 | they are then more likely to be able to purchase life insurance

01:29:12.320 | at a more reasonable rate.

01:29:13.520 | - That's absolutely correct.

01:29:16.160 | The underwriters have well-refined skills

01:29:18.800 | based on actual experience

01:29:20.400 | as to how those things play out for the insurance company, yes.

01:29:22.960 | - Okay, more questions.

01:29:27.440 | Okay, Wayne, this was a very nice presentation.

01:29:42.560 | Thank you.

01:29:43.600 | Thank you, Helen, for coming and joining.

01:29:45.680 | Helen is here, our real estate agent.

01:29:50.800 | Let me, no more questions for Wayne.

01:29:57.360 | - Can I ask, can you recommend good books about this topic?

01:30:04.160 | Recommended books to read?

01:30:09.640 | - I don't really have any books that I'd read.

01:30:12.440 | I'd say that if you have questions about your situation,

01:30:16.520 | posting on the forum,

01:30:18.200 | send a message to me or post on the forum

01:30:21.080 | and just explain your situation.

01:30:23.720 | I mean, the questions you would have would be things like,

01:30:26.840 | how much insurance do I need?

01:30:30.120 | When do I need to have the insurance?

01:30:32.760 | How long should the term of the insurance be?

01:30:34.680 | What's a good insurance company?

01:30:37.080 | How can I choose between company A and company B?

01:30:39.720 | And those are the kinds of,

01:30:41.720 | I'm not familiar with any book that would really tell you

01:30:44.040 | in a Boglehead way.

01:30:45.000 | I think that there's enough folks on the forum

01:30:47.480 | that are knowledgeable about life insurance

01:30:49.240 | that I see posting.

01:30:50.440 | I think your best way of educating yourself

01:30:52.120 | is to form some basic questions like that

01:30:54.920 | and then come back to the forum and ask questions.

01:30:56.680 | You'll get some answers.

01:30:57.560 | I really don't have any source books to offer you there

01:31:01.320 | about kind of the basics of life insurance.

01:31:03.720 | Sorry.

01:31:06.440 | How about a life insurance for dummies?

01:31:08.760 | Is there such a book?

01:31:12.360 | I don't know.

01:31:13.560 | I would imagine.

01:31:14.680 | I would imagine.

01:31:15.480 | If there's no book, you should write it.

01:31:18.840 | Yeah, there's an idea for your retirement.

01:31:22.680 | Yeah.

01:31:23.180 | One more project.

01:31:25.640 | Thank you.

01:31:26.140 | Wayne, you know anybody named Matt?

01:31:29.560 | Yes, that might be my son.

01:31:32.760 | He says good info, dad.

01:31:34.200 | Good info.

01:31:35.720 | As they said in the forum, one of the little stinkers, huh?

01:31:40.200 | Well, he doesn't call himself that.

01:31:44.120 | I'll put it that way.

01:31:44.840 | I am the only stinky.

01:31:47.320 | Okay.

01:31:49.660 | So if we don't have any more questions,

01:31:53.720 | I will close this.

01:31:55.640 | But before you leave, first, a big thank you to Wayne

01:31:59.880 | for this presentation.

01:32:02.120 | First, we had annuities.

01:32:04.200 | Now we have life insurance.

01:32:05.640 | Wayne, what else do you know a lot about?

01:32:08.040 | You've hit the end of the internet, I'm afraid, with me.

01:32:16.040 | Okay.

01:32:17.420 | We, our next meeting, Vogelhead's meeting,

01:32:21.400 | that the life stages are going to run, will be in December.

01:32:26.280 | And we are going to feature the finance book, Harry Sitt.

01:32:31.320 | And he posts on the forum as TFB.

01:32:35.560 | He's a long-standing Vogelhead.

01:32:37.880 | He's been on the Vogelhead since the old days,

01:32:39.720 | since the Vanguard Diehards days.

01:32:42.120 | And he did speak this year at the Vogelhead's conference.

01:32:46.440 | Harry is going to speak about selecting your retirement home,

01:32:53.400 | the place where you retire, the area you retire,

01:32:57.560 | what kind of home you are going to get,

01:33:00.840 | how are you going to downsize.

01:33:02.840 | And he's going to do it from personal experience

01:33:05.240 | that he and his wife had,

01:33:06.760 | where I think it was like in three years,

01:33:09.720 | they had five homes until they finally got it right.

01:33:13.720 | And he's going to explain his thinking,

01:33:16.760 | his thought process, and what made,

01:33:19.480 | what was important to them,

01:33:22.280 | whether the money, the location, everything,

01:33:25.080 | how he analyzed it.

01:33:27.480 | It's a very interesting presentation

01:33:29.560 | that will be in December.

01:33:30.760 | The exact date is not yet set.

01:33:32.760 | So we'll post it on the forum.

01:33:36.280 | [Music]