Welcome to the Bogleheads Chapter Series. This episode was hosted by the Life Stage Chapters and recorded October 29th, 2024. It features longtime Boglehead and insurance expert Stinky, also known as Wayne, presenting the topic, "All About Life Insurance." Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence.

This recording is for informational purposes only and should not be construed as personalized investment advice. Tonight we have, we're delighted to host Wayne, who is in his program on All About Life Insurance. It's a very important part of financial planning. Actually, life insurance, I think people have questions about life insurance from the beginning, when they're first getting life insurance, all the way through retirement, when they have these policies and they don't know really what to do with them, whether to keep them or not.

Let me introduce my, I'll let Wayne introduce himself in just a moment. Let me introduce my helpers, Lady Geek from Pennsylvania, Allen from Tampa, Jim from Chicago. Jim will also be recording. It will be recorded audio-visual and we will put it out on the Bogleheads YouTube channel. If you don't want yourself on YouTube, just turn your video off.

After Wayne's presentation, we will turn off the video and we will just keep it on audio. That will be recorded because after the presentation, we can have questions and we can discuss life insurance and ask him any kind of question about life insurance. Wayne's presentation will be in two parts.

He's going to stop it halfway through and you can ask your questions about what he has talked about up to that point. Please put your questions in the chat or you can, at that point, raise your hand. Let me see what else. Jim? No? Okay. So Wayne, why don't you get started?

It's yours. And I will share the screen here. Give me a minute to find the proper. Here we are. Share. And I will start with the, start the slideshow. Okay. All about life insurance. So I'll introduce myself here first. My first name is Wayne. I'm known as Stinky on the Boglehead Forum.

Stinky is my nickname since childhood, kind of a takeoff on my last name. I have 40 years of work experience in senior financial positions at major life insurance companies. I'm really, really passionate about life insurance. I'm really, because of that work, quite familiar with the product design and pricing for most all kinds of life insurance and annuity.

I've seen what my company did for pricing and product development. I've also seen what other companies have done when we did due diligence on buying other companies or buying other blocks of business. I'm pretty active on the Boglehead Forum. I've got over 15,000 posts on the forum now, many of them on, you know, answering threads on life insurance and annuities.

I do try and answer or weigh in on most all the threads on life insurance and annuities. And if somebody has a question that they want to pose, I've gotten many, many private messages from folks. I'm happy to take private messages and offer my views on things. I've also got a thread on the forum called Purchasing MIGAs.

MIGAs are multi-year guaranteed annuities. And that thread has now been running strong for almost four years, since late 2020. And as of now, it has almost 3,000 posts and almost 400,000 views on that one thread. And just looking at what people have said about that thread, it appears that dozens of people have been better informed about what a multi-year guaranteed annuity is, kind of like a CD issued by an insurance company, a bank CD.

And they've been able to buy with some confidence MIGAs and advance their financial position. So I'm really kind of proud and gratified of that thread. Let me give you a disclaimer for what we have here. First, I am not your financial advisor. This presentation is not financial advice. You need to consult with a financial or tax or accounting or other advisor.

It's a high level overview of life insurance. I think I'm going to end up talking for almost an hour here between the two sections of the presentation. But I could go two or three hours if you wanted to go really deep on certain topics. And so it is a high level overview covering most all areas of life insurance.

It's not comprehensive. You can certainly forward any questions, pose them here during the presentation or during the question periods or private message me on anything you have questions about. Don't rely on this presentation for purchasing or surrendering any life insurance or financial products. The views expressed are my own.

I formed my views from my experience in work. And also I formed my views from observing people's situations on the forum and elsewhere in real life. But they're my own views, of course. And I've never been in sales. I'm not a sales guy. I'm more of a numbers guy, a back office, a financial guy.

And my knowledge, therefore, comes from being in home office, leadership roles, but not a sales role. So here's the way that we'll have the agenda for tonight. First, I'll talk about what is life insurance and what are reasons that a person might buy it, and then we'll go into a deep dive on term insurance, individual term insurance, and then a little bit about group insurance that you might get from your employer, describing the product, going through the purchase process and other parts of that.

Then we'll break for five or 10 minutes for any questions that you might have about term insurance. Then the second half of the presentation is other topics, permanent life insurance, which is whole life, universal life, et cetera, a couple of specialty kinds of insurance, juvenile and final expense, and then finally closing out with how is life insurance taxed and how are life insurance policyholders protected from the default of the insurance company.

So what is life insurance? Life insurance at its core is a contract where an insurance company promises to pay your beneficiaries a death benefit if you die with the policies in force. It's as simple as that. And there are really two separate kinds of life insurance you can divide all these various products into.

One is term, and I'm just going to define term as protection intended for less than your full lifetime, for 10 years, 20 years, 30 years, or maybe one year in certain situations, but not for your full lifetime. Contrast term with permanent, which is protection for your entire lifetime, and that also usually includes a cash value buildup.

Not all people keep permanent insurance for their whole lifetime, but it's positioned to be available to you for your entire lifetime. And measured by face amount, the majority of sales are term life insurance. Term is by far the more popular product by face amount, but because the premiums per thousand are so much higher on permanent insurance, the majority of sales by premium are permanent life insurance sales, but by far the vast majority of sales by face amount are term.

Why should somebody buy life insurance? The primary use case for any kind of life insurance is to provide financial support for your dependents, usually a child and/or a spouse after your death. A use case, I'm going to talk here about a 30-year-old breadwinner, be it male or female, but a 30-year-old who's supporting a spouse and children, that 30-year-old, if that person were to die, then it's a tragedy, certainly a human tragedy, but also a financial tragedy because those dependents, those children, that spouse, were depending upon the income of that breadwinner for their livelihood for years and years to come, and term life insurance is unique in that it can drop a whole bucket of money into a household for a fairly nominal premium after a person dies without income taxes.

It is a unique product in that way. There is no bank product that can do that. There's no other kind of insurance product that can do that. Life insurance can do that, and the primary use case is to give financial support for your dependents, usually a child or a spouse, after your death.

There are some secondary use cases. Most of these could be covered by a permanent life insurance policy, and most of these cases also have other financial solutions. For example, the first one, to provide liquidity to cover estate taxes. If your estate is high enough that you expect to pay estate taxes, which is going to be somewhere under current tax law, if you're married, somewhere in the $15, $20 million, $30 million range, somewhere in there, if you are going to pay estate taxes, that can provide liquidity for you to pay those estate taxes, cash available to you.

But of course, you can also solve that need for paying estate taxes by putting aside some cash somewhere, letting that accumulate, and have that available. So insurance can provide that need, and often agents will sell it that way. Other things can provide that need also. Another use could be to provide for a disabled child who's expected to outlive you.

There are some disabilities that children have that cause them to be maybe not fully functioning as regular adults, but their life expectancy is normal. They don't expect to have a shorter lifespan. Therefore, there's a good chance that they'll live beyond you, and provide support for them after your death, then life insurance can be used for that.

You can benefit a favorite charity no matter when you die. There's some people who posted on the forum who have interesting use cases, who find that if they're in a very high tax state, typically California, and they're at a very high income level, a 37% federal income level, plus top California rates, et cetera, et cetera, they have found that life insurance, cash value life insurance, can provide a reasonable rate of return as an after-tax investment vehicle, after they exhaust everything else they can do, like 401(k)s, and IRAs, and HSAs, and 529s, and everything else.

There's not many people like that that can really effectively use permanent life insurance in that way, but there are some people that do that. But going back to the primary use case, the primary use case is as a death benefit, and the rest of these I regard as kind of ancillary use cases for permanent life insurance, typically.

Individual term life insurance, it's the simplest form of life insurance, pure death benefit protection, no savings element. It's commonly available for 10, 15, 20, and 30-year periods. So, for example, we have our 30-year-old breadwinner. That breadwinner has a young child or two. If that person buys a 20-year term policy, then that 20-year term policy will be in place from the time that the insured is age 30 to age 50.

By that time, the child will have grown from being two years old to 22 years old, and either out of college or close to out of college. You know, so that's kind of the lifespan that a lot of folks look at. When are the kids flying the nest, and so how long do I need to provide support for those children?

And the way that the level term policies are sold is that they will have a level death benefit and a level premium for that entire 20-year period. You buy a policy at age 30, you pay the same premium every month or every year or every whatever, and you'll pay that same rate for each year for 20 years, and you'll have a level death benefit protection also for that 20-year period.

Now, one thing that I'll come back to a couple times here in the presentation is that the chance of death grows a little bit each year as you get older. The chance of death in any particular year is very low until you're in your 60s or 70s, but a 31-year-old is marginally more likely to die in a certain year than a 30-year-old in a 40-year-old.

And a 40-year-old is more likely to die than a 30-year-old, and on and on and on. Therefore, the 30-year-old is going to pay a certain premium rate. If that person waits until age 31 or 32 to buy a 20-year term, they'll pay a little bit more premium for that 20-year period because they're a little bit older.

Also, if that 30-year-old person buys a 30-year term policy, taking them out to age 60, then they'll pay more premium for that every year than for a 20-year term policy because you're covering those years from age 50 to age 60, and the person's older, the chances of death are higher there.

So the rates are level and guaranteed, and the rates will change a little bit as you get older or as the term insured grows longer. Now, after the level term period, these policies that we call level term kind of colloquially are not really term insurance. A strict actual definition of term insurance is the policy would conclude after 20 years, and that doesn't happen.

The policies almost always carry on beyond 20 years, but they'll carry on usually at a much, much higher premium rate, maybe five times, 10 times, or even more than the premium was. So your age 51 premium might be five times what your age 50 premium was. Most policyholders just still need coverage after that level term period expires.

They'll just buy new coverage. They will not renew the policy. They'll just buy new coverage. Term insurance gives the largest death benefit for dollar premium. So I looked at termforsale.com, which is a website frequently mentioned on the forum, and a male, non-smoker, age 30, in good health can buy a million dollars a 20-year term for 40 bucks a month.

40 bucks a month is less than your cell phone bill. It's less than your internet bill. It's less than a meal out for two, unless you go to McDonald's and are cheap. It's a very inexpensive cost to dump a million dollars into your family if you die. Your chances of death are low, but the financial cost of your death is catastrophic.

So that's a very inexpensive way, in my view, of ensuring the income for you to pass away prematurely. Now, I did not give the best rate class there. If you're in excellent health, you could pay less than $40 a month. If you're unhealthy, somewhat unhealthy, you can pay more than that.

And smokers, when I was younger, when I was in my 20s, smoking was a lot more prevalent than it is now. Smoking is really not socially acceptable for most folks these days. But smokers legitimately, even in those ages of 20s, 30s, and 40s, have materially, measurably higher death rates than nonsmokers do.

And so smokers will pay two to three times the price that a nonsmoker will pay. That's maybe the best demonstration there is as to how bad smoking is for your health, that the life insurance companies, which are totally rational in this area, are charging two to three times more for term insurance for smokers than they charge for nonsmokers.

Now, I would argue-- go back to my 30-year-old breadwinner here. My 30-year-old breadwinner has maybe a modest 401(k) balance, maybe has some equity in a house, maybe has some savings, maybe has an IRA balance. So they have begun building assets. And there are some people in the forum who report having net worths of $200,000, $500,000, maybe even $1 million by age 30.

But by far, their largest asset is their ability to earn future income. It's not an asset you can put on a balance sheet. It's not anything you can cash or borrow against, necessarily. But it is something that is real and is out there in support of your family. And so that present value of future earnings for the next 30, 40, whatever number of years you plan to work after you're age 30, that is a huge asset.

And term insurance, I think, provides the most cost-efficient way to replace that lost future income if they die young. So that's what you're insuring is your future ability to earn money. Now, what can a term life insurance policy owner do? One thing he can do, he or she can do, is to cease paying premium after a grace period.

The policy will lapse without value. I'll give an example, a personal example, as to me. I bought, for a variety of reasons, 20-year term insurance when I was 55 years old. I didn't know how much longer I'd be working. I thought I might continue working after my formal retirement date.

I thought it might be a good idea to have term insurance. It took me out to age 75. But as things turned out, when I turned 65, I retired. I was not working for income anymore. So I just stopped paying premiums. And after about a 60-day grace period, the policy lapsed.

No value, no cash return to me. But I didn't have an insurance need anymore because I was not earning income. And so my income replacement need went away. And I lapsed the term policy. So that's the first option you have, is to lapse the policy. The owner can change beneficiaries.

Often the beneficiary will be the spouse or a trust in favor of the children, something like that. The owner can reduce the face amount if they find that the face amount is more than they need as their assets grow. Another valuable option that exists on many term policies is the option to convert to a permanent life insurance policy without additional medical exams.

Let's consider my 30-year-old again. And he's 15 years into the policy. And he's developed a really bad, life-threatening condition that's going to cause -- that's likely to cause his death, you know, maybe not immediately, but in the next 10 to 15 years. If he chose to, he could convert his term policy into a permanent life insurance policy.

He's going to pay a much higher premium, but he will be able to keep that insurance and not provide new evidence of insurability. Or if he went to buy a new term insurance policy, since his death is imminent, he would not be able to buy that. And so some people find that converting a term life policy into a permanent policy makes financial sense for them if they've developed a life-threatening condition while that term policy was in force.

On to where can you buy a term life insurance policy? There are many multi-state agencies that have an online presence and give quotes from multiple insurance companies. You look at the Internet, the Boglehead Forum, termforsale.com is frequently mentioned. I have frequently mentioned that as a place people can go to look for quotes and that particular site, if you put in your demographic information, your age, your sex, your state of residence, how much insurance you need, how long you need to have it for, whether you're a smoker or not, and your estimate of your own risk classification based on superior or excellent, whatever, it'll give you quotes from several dozen insurance companies as to what they would charge you for a policy.

And then you can go and work with a local agent that they'll recommend to you to buy a policy from one of those companies. And there are other websites that do exactly the same thing. Zander.com is promoted by Dave Ramsey. I've actually bought my insurance from Zander.com back in the day.

SelectQuotes, another agency that you have, there's a variety of places you can buy life insurance. Now, local agents will also sell term life insurance. You might be able to find an agent that's licensed with many, many companies also that can provide the same service for you. But I wouldn't go necessarily to my Northwestern Mutual agent or my State Farm agent because they might only be able to sell insurance from their primary company, Northwestern or State Farm, or just a very limited number of companies.

You're going to find the premiums vary widely for the same coverage. Now, if I get a quote from ABC Life from TermForSale.com, I'll be able to get that same policy from ABC Life anywhere at the same price. But ABC Life and DEF Life may have dramatically different rates with the same 20-year term coverage from ALH30.

And so many Vogleheads, myself included, view price as the primary factor in deciding which insurer to choose. How do you buy a term life insurance policy? Now, an agent will guide you through the purchase process. Every company has an agent. You'll be working through an agent if you go through TermForSale.com, a local agent.

You'll be going through Zander or the Select Float agency if you work with them. And even if you call in to one of the life insurance companies that appears to sell direct, they will have an agent, a commission, a salaried agent, typically, employed by the company who will walk you through the process.

They will have an extensive written application that includes medical history. All I can say about the application is don't lie. Don't fudge. You have honest answers. They'll also ask you to sign an authorization for them to do further due diligence on you. And that authorization is really required for them to proceed in the process.

Once they have that authorization, they can get many, many data points on you, your prescription drug records, your medical history from your doctor, your motor vehicle records, your credit reports. All kinds of things like that are available through the authorizations that they have. And they can build a pretty good profile on most folks for most amounts of insurance from those data points that they get there.

Now, depending on the age or face amount, for higher ages or higher face amounts, the insurer might need a quick medical exam. So the insurance company would pay for a medical examiner to come to your home or to your office, weigh you, measure you, maybe do a blood pressure, maybe do an EKG, and then possibly also take blood, urine, saliva.

Those bodily fluids can be really, really helpful in determining your health with the tests that they have these days. The insurer will assess all that information. The insurer will issue the policy. You'll pay the first premium. And then the policy's in force. I will note that the insurer will give you the option of paying premiums monthly via bank draft or quarterly or semi-annually or annually.

And I've found that almost always the cheapest way to do it is paying annually because the effective interest rate is often about 10% if you want to pay monthly. A typical question on the forum, a lot of folks ask, "How much term insurance should I buy when I do buy it and for how long?" There's no single answer for that.

In a partial list of considerations to think about, for how long will someone be dependent on my income? If I got a newly born kid and I'm expecting more kids, it may very well be the 20 or 25 or 30-year term makes sense for me. But if I'm buying insurance or increasing insurance now and my kids are 10 or 12 or 15, I might just need 10-year term insurance.

How much income replacement should I provide for? And along with the fourth question, are my assets large enough that I can partially or fully self-insure? If you've got a $100 million net worth, then you probably don't need term life insurance. And so it may be that you can reduce the amount that any equation might have just based on the assets that you have.

Further, the third point that I have there, are your survivors eligible for Social Security, which can be a very valuable thing, especially for dependent children until they're, I believe, 18. If they can get income from that, that'll mitigate the amount of life insurance you need to have. Another important question is, should you buy insurance on a stay-at-home spouse?

You know, the stay-at-home spouse, on the one hand, is not bringing income into the household, so there's no cash loss from that source if a stay-at-home spouse were to pass away. But there is a loss, a financial loss, if you have increased child care or things like that. So it's frequent that people will say, "I should put $100,000 or $250,000 or $500,000 on my stay-at-home spouse," even if they're not earning an income outside the house.

There was a historic rule of thumb, "10 times earnings until kids leave the nest." I wouldn't say that's accurate, but you could at least use that as a guide point. There are many online calculators. If you want to go ahead and Google, "How much insurance should I buy?" You can get a lot of opinions from various places where you put in certain information, and they'll spit out a recommendation as to how much term insurance to buy.

One thing frequently mentioned in the forum is laddering policies. Let's say that I determine that I have a $2 million need for term life insurance, and I could buy that for a 20-year period, 2 million, 20-year term, done. But if I expect that my assets will be increasing over the next 10 years, I might buy $2 million in two separate policies, $1 million of 10-year term, and $1 million of 20-year term.

And that way, for the first 10 years, I will have both policies in force, so a total of $2 million of death benefit, and that'll reduce to $1 million of death benefit when I get past that 10th year. And if I choose to, when that 10th year is over, I can consider buying more insurance at that point if I need it.

Finally, the last slide in this part of the presentation is changing away from individual term life insurance to group term life insurance. Now, many employers, most employers probably, offer some amount of life insurance as an employee benefit. This is a part of their regular benefits package. Usually, some part of that is free.

It's frequent that you'll be given one-time salary or two-time salary as a free amount with no cost to you. You might get $50,000. The reason for that $50,000 number is that, it's my belief under the federal tax code, that's an amount that an employer can give in life insurance without having taxable income imputed to the employee.

So you might get some free amount. Then they might also give you the option of having additional amounts of life insurance on top of that that you'll pay for by yourself as opposed to the employer paying for it, but you'll get it through your work relationship. One benefit to group term life insurance is that typically no evidence of insurability is needed.

You won't have to give blood or saliva. You won't have to have any kind of a medical exam or credit report or anything else. Just because you're employed, you'll be able to get life insurance except for high amounts. If you're applying for excess amounts on yourself, it might require evidence of insurability.

But just the fact that you're employed is enough evidence that the group life insurer will need to put insurance on you. Now, the bad thing about group term life is that coverage ceases when you leave your job. And with the number of job changes that many people make these days, it's really not a sound financial thing to do to have your life insurance tied to your employment.

Because you can go through periods of unemployment. You might have a new employer that doesn't offer term life insurance. And if you have a real need for term life insurance, you should be buying individual life insurance that will stay with you whether you're employed with employer A or employer B or not employed at all.

And the only option that you have when you leave your employer is you can convert your term life policy to an extremely high cost conversion permanent life policy. Again, that would be a last ditch effort. But that would be not the optimal solution. The consensus on the Vogelhead Forum seems to be that a person should take the free coverage that is offered by your employer and decline any excess amount.

Buy the insurance you need through the individual market. So with that, I've gone for about half an hour now. And we'll see if there's any questions to have based on the first part of the presentation here. >> Okay. Does anybody have any questions that you wish to raise your hand for?

I have one question, Wayne. On the laddering of the term policies, is there any downside to, for example, buying, let's say, a 10-year term policy when you're very, very young? You're just starting out. You're married. And then maybe five years later, you buy another 10-year term policy. Let's say you first buy a half a million one.

Then you buy another half a million one when you have your first child. Then you start having more children, and you just keep buying half a million dollar policies every five years until when the kids are, let's say, in high school. And it's really very expensive, high school and college, to raise a big family, and your life insurance has increased during that time.

And then gradually, the terms disappear, and your life insurance winds down as your big family winds down. Well, that could make some sense. And the only negative to that that I would see is that there are kind of volume discounts for life insurance. The larger face amounts, you end up with a lower cost per thousand, and there's usually a flat cost or a policy fee for a policy.

And therefore, almost always, a $1 million policy is cheaper than two $500,000 policies. Well, $1 million is cheaper than two $500,000? Yes. OK. Almost always that's the case, because basically, it's volume discounts. And it's economies of scale by the insurance company. Plus, the mortality on million dollar policies is slightly better for the insurance company than the mortality on half a million dollar policies.

But yes, I mean, the idea of buying insurance as you need it makes some sense, and laddering policies make sense. But I wouldn't want to have four or five term life insurance policies in place. A couple might be fine, but going much more than that, you ought to probably think about combining some policies that you have into one larger policy.

All right. Good question. Thank you. OK. Lady Geek, did you have a question? It's an observation. When Wayne was talking about annual versus monthly premiums, he used the word "effective rate." And to me, that triggered a keyword when you're talking about investments, because you mentioned 10%. And I don't think people understand the difference between monthly and annual rates, called APR and APY, when you talk about investments.

So when someone's selling you something and saying it's only 10% per month, that will equate to a much larger percentage of premium per year. And so you're talking backwards. So I want to make sure that you're using the term "effective rate" to mean annual-- effective versus nominal, which is monthly.

You're talking about the Excel formulas? Well, a typical-- I'm going back-- a typical factor for a-- if I have $100 annual premium, it'd be typical I'd have a $9 monthly premium. And that $9 monthly premium times 12 is $108 per year. So I can pay $100 one time, or I can pay $108 over the course of 12 months.

And that works out to an interest rate of over 10%, if you kind of work it all through. It's not big dollars, typically. But it is-- I'm saving a little bit of money, but at an interest rate that ends up being 10% or higher for paying $100 up front instead of $9 a month.

Yeah, that's what I say. It's the mathematical-- it's the concept of this effective versus annual. Paying per month, it's going to cost you more if it's because of the compounding. That's absolutely right. It's because of the compounding effect, and people need to understand. And the Wiki has some examples on investments, how they sell you loans and mortgages using this.

And so I'll leave it at that. Yeah, if an insurance company would sell you $100 annual premium versus an $8.33 monthly premium, that'd be the same thing. They don't do that. It's going to be a $9 monthly premium, and that works out to an interest rate of over 10% per year.

It ain't big dollars, but it is something that is there. On credit cards, it's a very big deal when they're 20% interest rates. Oh, yeah. On the credit cards, there's no doubt. The insurance companies sneak it in. You never see it. You've got to be a mathematician to figure out that they're screwing you.

Yeah, yeah. They say the Wiki will show how you demystify some of that. OK, I'm done. OK, thank you. Thank you. Alan? Yes, Wayne, I'm just curious, the difference if you just let a policy-- you want to end your policy, you said you just can let it lapse, whereas you could also just call the insurer and say you want to cancel the policy.

Other than getting dunning notices for lack of payment and during the grace period, is there any difference between letting it lapse versus calling them and canceling it? Well, let's say that I have a policy that I want to have-- that I come to the conclusion on January 1st that I don't want this policy anymore, and I'm on a monthly mode.

If I call them up and say cancel, they'll cancel my insurance effective January 1st, and so I have no more insurance. If I simply don't pay a premium, then I'll have two more months of coverage. So if I'm unfortunate enough to die in the next two months, my beneficiaries will get their million-dollar benefit.

That's the only effective difference. There's a required grace period, and the insurance does stay in force without payment of premiums for that typically two-month grace period. OK, very useful. One more. Are you going to address the possibility of selling a policy with viatical settlements? I don't know if you're going to address that at all.

And what the situation might be that warrants that consideration. I'll touch on that now, and then we can come back to that after I finish everything here. The viatical company is making-- they're going to be looking at your in-force policy as an investment that they'll make. And so they're going to do an underwriting, kind of reverse underwriting on you.

They're going to see how likely it is that you'll be dying at a certain time. And the sicker, the better, to be honest. And they'll want to see that you have a policy that's almost certainly a permanent policy. They don't want a term policy that might stay in force beyond the 20-year period and jack the premiums way up.

They don't want to pay those high premiums. So selling a policy to a party other than the insurance company by surrendering, selling it to a third party can make sense financially for a buyer if the insured is old, if the policy is fairly large, $100,000 or more, and if there's premiums that are likely to be lowish going forward.

I mean, they're trying to take advantage of the fact that you have higher mortality. Let's say that if you're really sick with cancer and likely to die in five years, you might be able to get an attractive price relative to what the insurance company would give you on a cash surrender by selling the policy.

On the other hand, if you're going to hold on for that five years, your beneficiaries will get a lot more, because that biotical investor is going to ask for a rate of return of 10%, 15%, 20% on his money. He's not going to let that go cheap on you.

So it's better, probably, than surrendering the policy, but not as good as letting it just mature into a regular death benefit. That almost never works on term insurance. So that's one reason I would not have mentioned it here, because term insurance is sold to young people who, as a class, are healthy.

And the terms usually don't go out past age 50, 60, 70. And there are, unfortunately, deaths in that range. But there's many, many folks that are well, well beyond age 60 or age 70. It makes sense. Thanks. Yeah, and we can come back to that if there's more questions when we're done.

OK, Sonny, did you have a question? I shall ask that after the next section. OK, thank you. OK, Wayne, anything from the chat? OK, Wayne, you're on. OK, we'll go on to permanent life insurance. You remember I divided the insurance between term and permanent. Term is the insurance that is meant for less-than-lifetime protection.

Permanent can be used for lifetime protection, with premiums that are usually paid for your entire lifetime. The premiums are much higher than term life insurance, because the insurance coverage extends to older ages. Remember I said earlier that the chance of your death goes up every year as you age.

Well, it's a heck of a lot higher when you're 75 or 80 years old than when you're 30 years old. And when you're paying a premium that's going to be leveled for your whole life to cover your entire lifetime, you've got to pay a lot more when you're 30 or 40 or 50 to cover those deaths in your 80s and 90s.

So premiums are much, much higher than for term life insurance. And notably, most permanent life insurance policies have a savings element called surrender value or cash value, which grows on a tax-deferred basis that can be accessed through loans or withdrawals. And I'll talk more about that a little bit later.

The forms of permanent life insurance. There are basically these divisions. Whole life insurance, which is the original. There are several forms of universal life, which all vary. They're all kind of basically the same, except for how the cash value is invested. There's traditional universal life, index universal life, and variable universal life.

And note that all of the above types of insurance, whole life and all the universal lives, they do combine insurance and saving. There's one special kind of permanent life insurance, secondary guaranteed universal life, that does provide lifetime protection with minimal cash value buildup. And I'll get to that on a later slide.

Let's talk about whole life first. Whole life dates back well more than 100 years, well into the middle 1800s. Some of the earliest insurance companies in the US were selling whole life insurance. It's got fixed and level premiums, usually for the insurer's entire life. You're paying an annual or a monthly premium every month from when the policy is issued until you die.

That cash value grows over time because of the level premiums. If you think about it, if you're paying a level premium for an unlevel death benefit, the risk of death goes up year by year by year. So you're having to pre-fund some of those higher death benefit costs in the later policy years.

And so you're building up a cash value inside the policy that funds those higher, later death benefits. Because it's a permanent policy, it's often used for estate planning. Whole life also pays policy dividends that are usually used to buy additional paid-off units of insurance or reduce out-of-pocket premiums. It's not counted as taxable income to you.

It's not real dividends. It's called by the IRS a refund of excess premium. Whole life, if the policy is surrendered and it has a positive cash value, the cash value is paid out to the owner at the time of policy surrender. You can also get a policy loan. You can get a loan against the security of your policy.

If you have a $10,000 cash value, you can get a loan from the life insurance company and get that $10,000 out. The policy cash value remains in place, but you're paying a loan charge, an interest charge to the insurance company for the use of that $10,000. And you have the right to go and pay back that policy loan if you want.

If you don't pay it back, the insurance company will just net that out of the death benefit when you die. Notably, most whole life policies are issued by mutual life insurance companies. And two of the best are Northwestern Mutual, which is frequently mentioned on the forum, New York Life, also MassMutual, Guardian, Penn Mutual.

Those are all mutual life insurance companies owned by the policyholders, not stockholders. They pay policy dividends out of the surplus of the company. And they are big riders of whole life insurance. Now to universal life. Universal life is a much more recent innovation. I actually was around in the early 1980s working in the insurance company when my company first introduced universal life.

So the product itself is less than 50 years old. The best analogy I can give for a universal life policy is a money market fund plus a term life rider. So let me give you an example. The money market fund is really called an account value. So when you start off a universal life policy, you might pay a monthly or an annual premium.

And there might be a percent of premium charge. But once that's paid, it goes into an account value. And that account value is credited with interest every month by the insurance company or some increase in value, usually interest. And then every month, the insurance company will deduct the cost of insurance for that month.

There will be a schedule of cost of insurance charges. And they'll reduce the money market fund or the account value by the cost of insurance and also any rider fees or extra expenses or whatever. And so that really is a very solid analogy for universal life. A money market fund plus a term life rider and bundled together into one product.

And it's got flexible premiums. If you choose to pay more, there's more money in the account value. The account value will earn more money, more interest. The policy will grow faster. If you choose to skip a few months or skip a few years, the policy will grow more slowly, but it'll stay in force.

And it only lapses typically if that account value declines to zero. So you can skip premiums for a while, but eventually that account value is going to decline to zero. And so the policy is by no means guaranteed to stay in force for your entire life. You've got to pay the premiums to keep that account value positive and hopefully keep the account value growing so the interest earned can be on the account value can be a bigger and bigger factor in your overall policy.

The account value is also available for policy surrenders and loans, very much like on whole life. And there will be explicit surrender charges in the early policy years that offset that to recover the cost of commissions and other acquisition expenses. So there are really three kinds of universal life that we'll talk about.

The first version, which goes back to the early 1980s, is traditional universal life. And these three kinds of universal life vary primarily based upon how interest is credited to the account value. With traditional universal life, there's a declared interest rate by the insurance company, be it 3% or 4% or 5%, whatever it is.

Many policies have guaranteed minimum rates of 2.5% and 3% per year, and many insurance companies reduced their credited rates to that guaranteed level during the last 10 years when interest rates were so low and they just kept them there. The interest rate can be changed by the insurer subject to policy guaranteed minimums.

Some old policies issued in the '80s might have guaranteed rates as high as 5% or 6%, but those are a very rare commodity. And typically, policies issued these days are 2%, 2.5%, or 3% guarantees. But there's a declared interest by the insurance company every year, and the insurance company in its sole discretion can change those interest rates.

I'll compare that to indexed universal life, which is a more recent innovation. With indexed universal life, there will be an external index like the S&P 500. And some part of that index return in a certain year will be credited to your account value. And almost always with an index policy, there will be a floor of zero.

You can't have negative index performance that impacts negatively on your cash value. So let's say that the cap that the insurance company placed for this current policy year was 4%. If the S&P returned 10% this year, your policy would be credited 4%. If the S&P earned 4%, you'd make 4%.

If the S&P earned 2%, you'd make 2%. But if the S&P lost 20%, you wouldn't lose anything. You'd be floored at zero. So you're giving up the upside of the possible interest rates in exchange for a downside guarantee where you won't have a negative interest credit or a reduction in your account value due to bad performance on the S&P 500.

And the insurer has sole discretion to set the caps and the floors, the participation rates, everything else, except the floor is going to be floored at zero. So that's the way indexed universal life works with the same account value, money market fund, term rider type scheme that I described earlier in the last slide.

The third kind of universal life is going to be variable universal life. Variable universal life, instead of the account value being invested by the insurer, it's really invested in mutual funds. And the mutual funds have fluctuating performance. They can grow, they can decline in value. And the policy order bears all the investment risk.

You really is using that universal life policy as a pass through to get to the mutual funds and earning performance based on the performance of the mutual funds. And then you have the term insurance rider coming off of that. But that's the way the account value works on a variable universal life policy.

So those three UL policies, all very similar in construction, but different ways that the account value can be increased by interest or equity credits. General comments on whole life and universal life. It's much more expensive than term life insurance. It's 10 to 20 times the cost of a term life insurance policy.

It's not reasonable for my 30 year old breadwinner to buy the necessary amount of life insurance if it's all permanent life insurance. The premium is just too cotton, big and hot. They can't afford it. And so it's not, I don't know that many agents would try and sell a universal life insurance to sell a young family entirely on permanent life insurance.

Another thing that it does, it provides insurance beyond the time that many families need coverage. If you think about that typical lifetime, you probably don't need to support your dependent children beyond their age 20 or 25. So you don't need to have life insurance. Typically, once you retire, once you've ceased having work where you're making money, once you've ceased providing explicit daily support to children, then you probably don't need life insurance anymore, or most folks don't need life insurance, but permanent life insurance continues on for your whole life.

So it provides coverage for probably longer than you need. I'll also note that permanent life insurance is not a good short-term investment. The surrender value is less than the paid premium for many years. It'll often take between five and 10 years to break out where your cash value in a whole life or a universal life policy will even equal the premiums paid, much less be a return on your investment.

So much of the early premiums you're paying are being consumed by commissions, by issue costs and other costs. And it is not a good short-term investment at all for a person because you'll be in the hole for many, many years after you buy that policy. Therefore, many bogleheads, and again, based on what I sense on the forum is consensus, many bogleheads believe that newly purchased whole life and universal life policies are attractive for only a very small subset of consumers.

Permanent life insurance combines insurance and savings into one policy, and in my view, doesn't do either one very well. We don't buy auto insurance with a savings element. We don't buy home insurance with the savings element. We're buying pure protection. So it kind of alludes me as to why we should buy a whole life policy or a universal life policy combining insurance and investment.

I, for one, would much rather have term life insurance and then save my money elsewhere. Now, what if I own a permanent policy that is 10, 20, or more years old? First, you could consider surrendering the policy if the insurance is no longer needed. That's always a possibility. But if you're looking at it as a possible investment, there are distinctly different situations based upon what kind of policy you have.

We've seen a number of threads on the forum where somebody will have an old policy, often from Northwestern Mutual, that is 20 years old, and it's making a 4% return or so per year on the cash value. You can do a simple calculation if you have one of those old season whole life policies.

What's my increase in cash value in a certain year? Reduce that increase in cash value by how much I paid into the policy and divide that answer by what my opening cash value was, and that'll give me a rate of return. How much did I make on my cash value?

And often, these policies, after 20 years or so, are producing 4-ish percent per year returns. And on a fixed income asset that doesn't fluctuate in value at all, that's available for a loan or surrender, that's not a bad rate of return. And so there are many people that see those policies as a decent fixed income asset if they happen to have a 20-year-old policy.

I would never recommend somebody buy a whole life policy and wait till 20 years to get that 4%, but if somebody bought one 20 years ago, has a 20-year-old policy right now, it's worth considering keeping it if it's a good 20-year-old from Northwestern Mutual or a similar company. However, universal life is a different situation.

If you don't need the universal life insurance, I'd certainly suggest that you cancel it. Because what happens with universal life policies is that the cost of insurance goes up and up and up as you get older, and many policies have not performed as they were originally projected. I mean, back in the '80s and '90s, we would project interest rates of 8% or 6% or whatever on universal life.

And interest rates have come down along since that time. And those policies have not performed and built the cash drive that was projected. So many of these universal life policies require additional premiums now. And if you don't need the insurance, why do you keep them? So I think it's a serious question.

If you don't need the insurance anymore, why keep a universal life policy that's enforced? Because it's probably not a good investment when you consider all the costs and everything else. Now to a special kind of universal life called secondary guaranteed universal life. It's got various names. It's called guaranteed universal life, no lapsed universal life.

It's a very specialized form of universal life. The primary characteristic of this is it builds very minimal cash values or no cash values at all. There are special actuarial tricks and things that happen in the policy that allow it to give you term-- instead of 20-year term or 30-year term, it can give you term to age 100, term-like coverage with no cash value to age 100, and a very nominal premium, much lower premium typically than for a fully funded whole life policy or universal life policy.

It's very delicate. You need to be paying all the premiums when they're due or that no lapse guarantee might cease and might not be available for reinstatement. But it is the cheapest way. If you have a true lifelong insurance need, it's the cheapest way for you to get permanent life insurance coverage.

I got a private message yesterday from someone who was thinking about buying a second to die policy for he and his wife to provide for their children after they both pass away. While I might not agree necessarily that that's a great thing to do, if the person wants to buy life insurance, I'd tell them to strongly consider a secondary guarantee, second to die universal life policy.

That's probably the cheapest way of buying their half million or million dollars or whatever of coverage, cheaper than a whole life, cheaper than universal life. So it's called secondary guarantee or guaranteed universal life or no lapse universal life. Now I'm changing topics really entirely to two specialized forms of insurance, juvenile life insurance, and then final expense.

Juvenile, I mean, many years ago, I had children. And back then I was deluged with offers from Globe Life and Gerber Life and companies like that to sell me $10,000 or $25,000 of coverage on my young child. Those two companies, Gerber Life and Globe Life, particularly target this juvenile life market for $10,000 to $25,000 policies.

And they might also give some options for buying more insurance as a child gets older. If you look at the forum, many BOGO heads would argue against juvenile insurance. Being totally candid and blunt, no one's depending on the income of a child for their daily living. I mean, the child does not have income.

A child's an expense item. And if you have enough money set aside to bury a child, there's really no financial loss if a child were to pass away. There's tremendous emotional loss, but there's not a financial loss except with the cost of the funeral. So I'd argue that the money is probably better spent instead of putting it into a whole life policy by doing a 529 plan or some other type of savings vehicle like that for the child.

Also, the purchasing power of $10,000 to $25,000 will be eroded over time by inflation. That'll mean nothing to the child by the time that child is 20 or 30 or 40 years old in terms of the overall portfolio. So I would not be in favor of buying juvenile life insurance, which is solicited by a lot of these companies shortly after your child's born.

Similarly, for final expense life insurance, final expense, you'll often see on daytime TV ads for guaranteed issue whole life. You can buy this amount and the premiums will never go up. They're guaranteed. Your coverage can't be canceled. Those are really just small base amount whole life policies issued to older folks ages 40 to 70 or older.

There's a limited or no health questions. That's one thing that might be attractive to some people and a way that the insurance company can make out if there are limited health questions is that if the insured dies in the first two years, typically the death benefit is only the premium paid.

It's not the full $10,000 or $25,000 base amount. It's just going to be the premiums that are paid. Many Vogelheads argue against final expense insurance. Also, the premiums are high because the people are old and the underwriting is very limited. Vogelheads have a general bias against whole life and arguably people are better off just investing the premiums in something else like just a simple mutual fund or maybe even a savings account.

They'll be better off putting it into final expense insurance. Taxation of life insurance. Death benefits are free from income tax. It's just a wonderful thing that not only can this young breadwinner who passes away, if the spouse can get a million dollar death benefit, but the death benefit is income tax free.

Now, if a person is in a very high asset position and estate taxes are going to come into play, an insurance policy might be part of the estate, but for the vast majority of term life policy holders, that's not the situation and death benefits are income tax free. Another factor about life insurance, the buildup of cash value inside of life insurance policy is not reported as taxable income in the current year.

Sales people for permanent life insurance will always be stressing that point, that there's no taxation on the internal buildup of the life insurance. Now, if the permanent life insurance policy surrendered, there can be a tax bill depending on what the relationship is of your surrender value to your premiums.

For example, you've got a $40,000 premium you paid over the years. Your surrender value is $50,000, that'll be a $10,000 taxable income in the year that you surrender, and you can defer that income by doing a 1035 exchange into an annuity. I won't go into the details of that.

You could private message or ring it up for questions, but you can defer the reporting of that income or postpone it by doing an exchange into an annuity. Finally, how are life insurance policy holders protected? Life insurance is not... Life insurers are not covered by any kind of a federal insurance guarantee.

There's no FDIC or something like that for life insurance. Now, if you look at your state guarantee fund rules, many states will cover $300,000 of death benefit and $250,000 of surrender value. The coverage does vary by state. When I did the similar presentation on annuities a few months ago, guarantee fund limits are a big deal for annuities because in many states, that $250,000 limitation on surrender value is a big deal.

But here in practice, for life insurance, there have been very few problems with life insurance policies issued by insolvent insurers. The fact is that if I'm an actuary looking at an in-force block of policies, that in-force block of policies where all the acquisition costs and commissions have already been paid, and if I can take over those policies, which is a transfer of what the policy reserves are, then there is profits in that business going forward.

It's a profitable thing for me to take over. Instead of the guarantee fund having to step in and provide funding, another insurer will actually pay the insolvent company to take over their life insurance block, move it onto their paper, and provide the policyholders full benefits. In fact, life insurance policies almost never lose in an insolvency.

The guarantee fund doesn't have to come into play at all. So it's a different situation here. I had million-dollar policies with single insurers, even though my state guarantee fund limit is $300,000 of death benefit. I have no concerns at all about that, and it's just entirely different for life insurance death benefits than it is for annuity cash surrenders.

So that fairly well covers the things I wanted to talk about. There are three Boglehead Wiki articles on life insurance. I think I dealt already with the question about viaticals or about selling your life insurance policy, but I'll talk again here for just a minute. If I have a permanent life insurance policy, that's really the only kind of policy that could be sold to a third party.

Third parties don't want term life insurance policies. They simply don't. They want a permanent life policy. And if I'm a policyholder who's sick, I can surrender my policy, get the cash surrender value from the company. I can wait out the death benefit or keep on paying premiums until I die and the death benefit can come in.

If I want to get more cash than the insurance company will give me, I might search out a firm that will buy it from me. And for them to see a good deal in buying it from me, I've got to be sick enough that I'm going to die fairly soon and they can predict that with some certainty.

It's got to be a large enough policy to make it worth their while and they've got to get a good rate of return on their investment that they have in taking over the policy and paying premiums on that policy until I die. So it's certainly possible to sell your life insurance policy, but unless it's a permanent life insurance policy for over $100,000 and you're sick and you're fairly old, it's not going to be worth anything beyond the cash surrender value.

So with that, questions. Thank you, Stinky. Do we have any questions from the chat? Anybody would like to raise their hand with a question? Sonny. Hi, yes, thank you for your presentation. I had a question. Someone was pitching me, and I agree with you also, the same way term and that's the difference.

But someone was pitching me on an IUL, specifically Kaizen. I don't know if you've heard of Kaizen. They use leverage. It's like three or five times the leverage and then you make yearly payments for five years and then because of the leverage, you get larger payouts after 15 years that are tax free.

I'm just wondering your thoughts on that. What was that word you used? Kaizen is the name of the product. A-A-I-Z-E-N. Can you spell that? K-A-I-Z-E-N, yep. Kaizen, okay. It's an IUL, but leveraged IUL is my understanding. Okay. I've heard of it, and my snap judgment would be two things I don't like, index universal life and leverage.

They're trying to lever the tax code, I guess. But if you're taking a product you don't like and then further increasing your risk by leveraging it there, I'd just look carefully at your downside. If you wanted to, for example, to get some illustrations and send them to me, private message, we could talk.

I'd be concerned about that. I'm sure they can show you some pretty fancy numbers with that. Because of leverage, with leverage is risk. That's all I can say about that. What if the IUL doesn't perform? I'm going to rant here something more about indexed universal life. This is not about the indices, about some abusive practices that are going on right now.

I should have thought of this before. This came up from a person who posted in the last couple of days about an index annuity. The issue was on the indexing was that the company was showing a 20-year return on some pokey made-up index that was 5.5% or 6%. It looked like a really attractive return they've gotten on that index.

But in the small print, they noted that this is a 20-year return they're showing to 2023. But in the small print, they said this index was not conceived or put together until 2021. And so all the years from 2003 to 2021 were made up. They did as best they could to go back.

If we'd had the foresight to have this index, what would it perform like during 2004 and 2005 and 2006? And I think insurance companies often work with financial providers of some type to conjure up indices that on backtesting, that's called backtesting. That on backtesting look good. They conform to what happened in the past.

It's kind of looking at the results of a horse race in retrospect and saying, I bet on that horse. But the fact is that there's no guarantee that that's going to perform well going forward. But that's the way that they can get these ridiculous illustrated rates of 5% or 6% or 7%.

I'd be very leery in your Kaizen example if you had an accredited rate of 5%, 6%, 7% assumed on your IUL. I'd look to see on that. I'd ask them to run it. What happens if it makes 4%? What if it makes 3.5%? Does the whole thing collapse? Does your leverage collapse in on you?

Because I'd be very concerned. And there are games being played in the insurance industry right now on these indices where companies are doing things that I think are just destructive to their behavior. There's been lawsuits flying around when policies don't perform as they're illustrated. And I'd be looking very hard to see in your Kaizen illustration, what is the interest rate being assumed?

What's the basis of the index that they're using for it? If it's the S&P 500, then that's been around forever. But if it's something that was just made up in the last two years and backcatched for 20 years, I'd be extremely leery of that. And that's a current example that has come up in an indexed annuity question on the forum in the last two days.

Sunny, what kind of person tried to sell you this? Was it for investments or life insurance? Yeah, he's a life insurance agent and a friend of mine. But yeah, yeah. Gotta watch out for those grants. I wasn't going for it, but these are complicated investments. And when it gets too complicated, there's a lot of things, moving pieces that a great individual is not going to get.

But I just wanted to get a better understanding from Wayne. I wasn't moving forward anyways with it. But I kind of wanted to get a better understanding, just because he makes a good argument, of course, because sales reps, that's what they do, their job. Yeah. I'd really look at that credited rate.

I'd be concerned that the policy would collapse in a heap if they used a realistic credited rate. Yeah. Thank you. Wayne, we have a-- Would you be able to put your email address in the chat? BirminghamBogleheads@gmail.com. And we can put that out. Maybe I can put that-- we'll figure out how to communicate that.

But I'm the coordinator for a local chapter. And so I use BirminghamBogleheads@gmail.com is the email address that will get to me. Or you can private message me through the forum at Stinky, and we can communicate that way. OK. Thank you. Thank you. OK. Wayne, we have a comment in the chat from the Arctic Pineapple Corporation.

Oh, my. And Arctic Pineapple said, "Also, with indexed annuities, they show you returns compared to the S&P 500 without dividends to make their rates look better than the S&P." Yeah. That's another issue with the term index. When they say S&P 500, people might reflexively think of the total return on the S&P 500.

And the total return includes both price appreciation and dividends. But I'm unaware of any indexed annuities or universal life that pass on the dividends. But there may be one indexed annuity. But they are very far and few between. And the vast majority of these products do not include dividends in their return calculations.

And so, that's exactly right. OK. Any other questions? Wayne, you want to turn off your screen? Or do you want to leave it on for any reason? That's fine. OK. Alan? Yes, Wayne. This is a peripheral area that you may or may not be familiar with. But I'm curious, nowadays, with the advent of genetic testing, people may have done 23andMe or other genetic tests.

And my understanding, I heard peripherally that now there's some state or federal regulations that ensure that that data cannot be passed along and used for medical underwriting for insurance. Do you know anything about that? Are there any fears or concerns one must consider before getting such genetic testing? I'm a numbers guy.

And I was never involved in underwriting. The people on the forum, I certainly note the people in the forum who seem knowledgeable about certain topics. And there are two posters I'll mention that I believe are both active insurance agents or insurance brokers. Chardo is one, C-H-A-R-D-O. And Brewdude, B-R-U-D-U-D-E.

I know he's an insurance agent from some posts that he's made. And both those folks, in my view, follow kind of boglehead principles. They really are bogleheads. And I would pose questions like that to them because they're in the business of writing insurance and I'm not. I'd be guessing.

But they would know from being on the ground and writing insurance. I respect both of those guys or girls, whatever, very much. All right. Thank you. In the chat, let me see. Great presentation. Thanks, Wayne. Well, thank you. The Arctic Pineapple Corporation. We owned a V-U-L and we own a G-U-L.

We own both. And our V-U-L, the Variable Universal Life, was an interesting life insurance. We bought it years ago. My husband bought it. And it is invested-- there was what they called a subaccount, which had mutual funds in it. And we would select the mutual funds. And we selected five mutual funds or four mutual funds.

And it had a premium that could go up if it had to. But our premium never went up. And over about 10 years, we decided to have it evaluated to see whether or not this was-- because we had heard they were terrible products. So we sent it to a fellow who specialized in evaluating life insurance policies.

And he told us that he knew it was coming. I had emailed him that it was coming. And he said to us, when he talked to us on the phone, he said, "I was just waiting to get your policy to see how terrible it was." And when he opened up the mail and he read it, he realized it was actually not a bad policy.

But it was a rare policy, because it was sold to people who were not likely to pass away quickly. And he said they don't sell them anymore. It was a Lincoln Life policy. And it was interesting, because I would follow it along. He warned us to look for the cost of insurance.

Like you said, my husband was getting older and older and older, and not younger. And the cost of insurance was going up. And I believe it went up on the anniversary of the policy. And when it went up, you could see that the insurance company was dipping into the mutual fund sub-account to pay for what our premiums didn't cover on the cost of insurance.

You were dipping into-- I mean, they were supposed to. They dipped into there. And so fortunately, the mutual funds we had covered it, were able to keep the policy going and cover the cost of insurance, even during the recession, which was interesting. Now, I did notice that it went way, way down.

And I was worried that the policy was going to-- we were going to have to increase our premiums. We never had to. It lasted for 20 years. And then I could see, and we got a notice from them, the cost of insurance is too high. Your husband is too old.

And therefore, you need to increase your premiums. But it lasted 20 years. It was an interesting-- it was interesting for us. And of course, we did not increase the premiums, because we didn't need the insurance anymore. Actually, we probably should have got rid of it earlier than that. A couple of comments about variable universal life.

Yes, if you have good performance on your underlying assets, and you're appropriately aggressive on those underlying assets, and the stock market performs well, you can do OK with those. Where people get into problems with their universal life policies is that they skip some premiums, or the market doesn't do very well.

And all of a sudden, those cost of insurance charges are chewing up more and more, and the cash value is not building. But on a VUL, if you can get a good head of steam going on those investments, then you can reduce the net amount of risk, the net amount of insurance that you have, reducing the charges there, and you can make a go of it.

One of the things that I'll mention about variable universal life, quite often, those policies will have much higher expense charges on their mutual funds than what you might see outside the policy. So you might, for example, see a S&P 500 fund that you can get from Vanguard for four basis points, four 100s of 1%, that's being charged 60 basis points, or 1% or whatever within the variable universal life policy.

You can't swap in your own mutual funds. You've got to work with only the panel of mutual funds provided by the insurance company. That being said, I'm glad that you had a good experience. And it sounds like a lot of it was due to the fact that you got into a policy at a time when the investment wins were behind you, and you made some decent money on your assets.

Yeah. Good for you. Another thing we noticed was for a while there, maybe two years, we put it on a note, what they call a no bill. Yeah. A no bill means they didn't charge us for it. They simply dipped into the mutual fund account, the sub account to pay the premiums.

If we had not done that, it would have lasted a little longer. But still, it would not have lasted at the same premium for too much longer. After a while, you have to increase your premiums, and it's just not worth it unless you, for some reason, really need the life insurance.

In which case, your point is that the GUL is a better way to go. We also have a GUL, and that is a level life insurance till age 120. Yeah. With a policy like VUL or regular traditional UL or IUL, you really have two separate concepts going on there.

One is the amount of premiums that you pay into the policy on a monthly or quarterly or annual basis, and that's flexible. You can pay in what you want, when you want, subject to the account value running out of gaps. On the other hand, you've got the cost of insurance charges being deducted from that account value, and that's going to happen every month.

And the cost of insurance charges will be more as you get older, and they'll be more if your investments have not performed, and they've got a larger amount they have to be charging insurance premiums on. But there's really two separate concepts, the premiums you pay into the mutual fund or into the account value, and then the charges from the account value to pay the insurance company for its cost of insurance.

Yeah. Okay, we have a question from the chat from Frank. Can you touch on how insurance is used for wealth transfer? I'm not so familiar with that. Frank wants to unmute and join in and provide more clarity. I can say that you're really not going to transfer wealth with a term life policy, because the vast majority of term life policies never pay out of the death benefit, because the lapse in the person's 50 or 60, and there's really not wealth, that's income replacement.

So by definition, we'd have to have some kind of a permanent life insurance policy. And I guess I would just ask back to Frank, what are we trying to accomplish here? Um, you know, yes, I guess, if I wanted to buy a $5 million policy on myself right now, then I could pay a premium of whatever per year and build up.

And then I'd have a $5 million death benefit for my children or my estate or whatever. But I might not, you know, you know, equal or better situation. If I just take those annual premiums I would have paid into that insurance policy and put that into equity mutual funds or some mix of stocks and bonds.

You know, I don't know if the question is deeper than that, but it's got to be permanent life insurance. And I'm just wondering if it's more efficient and lower cost and not involving an insurance company, just to invest the money yourself into a broadly diversified portfolio. Frank, do you want to weigh in?

- Okay, our next question was, I'm sorry, I had, yes, Wayne? What did you say? I'm sorry, I missed that. - Nothing. - Frank is on, sorry, can you hear me now? Sorry. - Oh, Frank, okay, hi. - No, I think you had it at one of your last slides.

You just kind of put a link to it. That is a wiki discussion. I think it was transferring wealth. I guess there's some Bucklehead posts on that. And I've heard some stories about different types of, you know, obviously if you have a lot of assets or, you know, you have a lot of cash or whatever, and they want to try to pass it on to generational wealth, I guess is what they're calling it, you know, two years or something, you utilize a insurance vehicle to do that.

- And that's probably going to be insurance for kind of the 1%, or the 1/10 of 1%. You know, I was really intending this to be more about the term insurance that is more useful. If we were to have a three-hour presentation, I'd probably become better versed on exactly how the extremely high-level, you know, high-wealth, high-asset market works.

But I'm just not so deep on that. - Good, thank you. I wasn't expecting it. I just thought if you had it, you could just touch on it. But Doug, thank you, appreciate it. I'll look more into it. - And I appreciate your question. - Okay, we have a comment that my example is the perfect complicated insurance product that adds sequence of return risk as another variable.

- Oh, your variable universal life policy has sequence of return? - Yeah, yeah. - And that is right. Yeah, if you had some crappy years early in your policy, you'd end up with a policy that's not performed very well in those early premiums. - Yeah, exactly. - And therefore your cost of insurance is higher and the policy starts to kind of consume itself.

- Yeah, exactly. That's exactly right. Okay, we have a question from Ben. Any thoughts on specialty products like Coliboli, C-O-L-I-B-O-L-I or PPVUL? - Well, Coli is a corporate owned life insurance, B is bank owned life insurance. Those are not purchased by individuals or by most folks in Boglehead Nation.

Coli would be often purchased on all the employees of a corporation by the corporation itself. And the corporation, because of the tax-free nature of life insurance buildup, the corporation can insure its employees or the bank can insure its own employees using an insurance vehicle and make a four or 5% return on their insurance policies.

But it's not a product that would be bought by an individual. It'd be a product that would be bought by a corporation or a bank. And the point of view of the corporation or the bank, the treasurer or CFO or whatever would need to see if he has the funds to invest in this kind of a thing and if it's an attractive thing for the corporation or the bank to invest in with its funds.

So that'd be my comment on Coli and Boli. My former employer writes both Coli and Boli and my former employer also bought a Coli policy on employees, including me. So I'm familiar with it from that point of view, but I've never priced it out and it's not a thing that an individual would buy.

I'm not familiar with PPVUL. So two out of three. - Okay, are there any more questions, any discussion? Does anybody have any life insurance policies that they want to talk about, complain about? I will say that we were not too bright and that we did not buy more term life.

We did not buy more term life policies when we were younger. And by that, I mean the laddering of the term life policies. - Well, I'm a big believer in term life. My employer, my former employer was a huge rider of term life for many, many years. And I mean, hearing the agents talk about it, it's not very frequent that somebody in their 30s or 40s will die.

But being able to deliver that million dollar or $2 million check to the grieving spouse is just an absolute blessing. And there's no other financial product that can do that. Nothing else can provide that kind of a benefit by term life. And don't be cheap. Term life is so cotton picking cheap.

When in doubt, round up, because it's inexpensive and because inflation will degrade the value of the policy. There's one negative here. It's my million dollar policy that I'm buying today. The purchasing power of that million dollars will be less as time goes on. And therefore, if it's a question of buying 750 or a million, I'd suggest a million.

If it's a million or a million and a half, I'd buy the million and a half. It's not that much more money. And you won't, I doubt that your spouse will turn down the larger check if you were to die. Frank wrote in the chat, understanding every person's situation is different.

Is there a sweet spot to buy like age by term life? Well, I'd say that it's not so much based on your age. It's based on your family obligations. I'd say that a 40-year-old with no dependents who's not married has no need for life insurance. I mean, they can choose to buy life insurance if they want, but there's no financial need for that 40-year-old to buy life insurance.

But a 22-year-old who has a kid and a spouse has a need for life insurance. That person may not have a very big amount of assets, but they have a need for life insurance. And so I'd say it's more based upon, you should be buying that when you have a need for it.

And that need is because others are dependent on your income or reasonably likely to become dependent on your income. If you're trying to have a child as a couple, that's not a bad time to do it. You don't need to wait till your spouse is nine months in labor.

You don't need to wait on that. That's a sweet spot, is buying it when you need it. Alan? Yes. Wayne, I'm curious if somebody has a pre-existing medical condition that may make them rated higher risk and higher premium, is there a benefit to look at to other options rather than buying an individual policy, look at a policy through an affinity group or a trade organization, professional organization?

Is there typically some additional safeguards to help you get coverage that route without paying the highest possible premium? Yes, certainly. Every comparison should be, what are my alternatives that I have here? If you could get insurance coverage from your employer a good bit cheaper than you can get it through the individual route because the employer is not requesting evidence of insurability, by all means, go ahead and take up the employer.

If you were uninsurable, absolutely take any amount of insurance from your employer that you can get without evidence of insurability. You know, that's just the rational thing for you to do. Typically, it's cheaper to buy when you're providing your own evidence of insurability, presuming that you're in reasonable health.

And a good 95% or more of the people are able to do that. But there is a small number of people for whom individual insurance is either unavailable or insanely expensive. And those folks seeking out association coverage, seeking out employer group coverage, that can make a lot of sense.

It's unfortunate when we'll see sometimes posts in the forum with somebody who's had a bad health condition and just can't get insurance. Again, I've never worked in underwriting and I don't know the progression of things. It certainly is my impression that as time goes on, if you were rated at a higher level, if you had an unfavorable health condition and that's improved, for example, you have lost or are losing a bunch of weight, you had a cancer diagnosis and the cancer is in remission or it's gone and you're just waiting for the passage of time, that your rates, you might look better to an insurance company a few years out and you might be able to get a reduction in rates.

And so having a qualified, competent life insurance agent to help you out at that point, if you're navigating situations like that, is really, really useful. - Yes, on the forum, BrewDude has often posted how there are different insurance companies that look at people differently and that you might be able to get a rate, a better rate from a different insurance company if you're searching around.

And then also that you can wait a certain number of years and like you said, they are then more likely to be able to purchase life insurance at a more reasonable rate. - That's absolutely correct. The underwriters have well-refined skills based on actual experience as to how those things play out for the insurance company, yes.

- Okay, more questions. Okay, Wayne, this was a very nice presentation. Thank you. Thank you, Helen, for coming and joining. Helen is here, our real estate agent. Let me, no more questions for Wayne. - Can I ask, can you recommend good books about this topic? Recommended books to read?

- I don't really have any books that I'd read. I'd say that if you have questions about your situation, posting on the forum, send a message to me or post on the forum and just explain your situation. I mean, the questions you would have would be things like, how much insurance do I need?

When do I need to have the insurance? How long should the term of the insurance be? What's a good insurance company? How can I choose between company A and company B? And those are the kinds of, I'm not familiar with any book that would really tell you in a Boglehead way.

I think that there's enough folks on the forum that are knowledgeable about life insurance that I see posting. I think your best way of educating yourself is to form some basic questions like that and then come back to the forum and ask questions. You'll get some answers. I really don't have any source books to offer you there about kind of the basics of life insurance.

Sorry. How about a life insurance for dummies? Is there such a book? I don't know. I would imagine. I would imagine. If there's no book, you should write it. Yeah, there's an idea for your retirement. Yeah. One more project. Thank you. Wayne, you know anybody named Matt? Yes, that might be my son.

He says good info, dad. Good info. As they said in the forum, one of the little stinkers, huh? Well, he doesn't call himself that. I'll put it that way. I am the only stinky. Okay. So if we don't have any more questions, I will close this. But before you leave, first, a big thank you to Wayne for this presentation.

First, we had annuities. Now we have life insurance. Wayne, what else do you know a lot about? You've hit the end of the internet, I'm afraid, with me. Okay. We, our next meeting, Vogelhead's meeting, that the life stages are going to run, will be in December. And we are going to feature the finance book, Harry Sitt.

And he posts on the forum as TFB. He's a long-standing Vogelhead. He's been on the Vogelhead since the old days, since the Vanguard Diehards days. And he did speak this year at the Vogelhead's conference. Harry is going to speak about selecting your retirement home, the place where you retire, the area you retire, what kind of home you are going to get, how are you going to downsize.

And he's going to do it from personal experience that he and his wife had, where I think it was like in three years, they had five homes until they finally got it right. And he's going to explain his thinking, his thought process, and what made, what was important to them, whether the money, the location, everything, how he analyzed it.

It's a very interesting presentation that will be in December. The exact date is not yet set. So we'll post it on the forum.