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Inappropriate Whole Life Policy of the Week

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  • Avatar ajm184 
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    @ Rex,  Thank you for the suggestion and information with respect to learning about Universal Insurance policy.  In reading though about this type of policy, though some of the structural elements are similar, other differ from my experience to the product I am familiar with.

    a.       The product I know overall appears to be very similar to a universal policy.  It is permanent insurance, whereby premiums are due/paid quarterly.  A person pays the annual premium (1/4 of annual each quarter) associated with their age/health risks per the insurance underwriting, therefore all thing being equal, the premium will rise as a person ages.  In this case the premiums for each year are stated upfront for the life of product.

    b.       You make the most important point about the product; uncertainty of sequential returns (both borrowing costs and investment returns) over the potential life of the product.  Especially as it relates to insurance companies that tend to be more risk adverse relative to other asset manager types, partially due to mortality and regulatory requirements.  It is also the essence of the premium financing risk; if the returns don’t come to fruition, the policyholder will have to make up the difference in premium relative to the investment return credited to the policyholder.  My guess is that a person facing this situation for a year plus will be doing some soul searching to determine if they truly need ‘permanent life insurance’.

    c.       For the product I know/dealt with, I am unaware of any insurance stated ‘guaranteed returns’.  By borrowing/leveraging the amount of invested amount pay future premiums, there are assumptions made with respect to expected returns over time. 

    d.       Where we diverge a bit is around the premium financing aspect of the product.  You mention paying quarterly is a bad idea.  The product I know didn’t charge an additional finance charge, rather the annual premium was divided into four equal payments without a stated finance charge.  If a charge was built into the annual premium itself, that is certainly possible.   My guess is the quarterly approach was chosen to match cashflows between the premium and receipt of investment returns (be it bond payments or dividends).

    e.       With a premium/leverage financing approach utilized, a bank on an unaged policy would charge L+50bps, ideally at the 90 day rate to match/calculate the cost easier.  On the other side, the insurance company is investing the proceeds to generate an investment return and those returns are deducted from borrowing cost.  Over a year plus period, though the interest costs are not fully known, they are based on the insurance company risk versus that of the individual.  Over a longer time-frame (though not potential multi-decade policy timeframe), there are a couple of ways the premium financing costs can be fixed; 5-year MTN’s, floating/fixed swaps.  Any approach used to ‘fix’ will make the financing portion more expensive under a normal yield curve.

    f.        You also mention a policyholder having to payback a premium policy loan.  The product I know would have never allowed a policyholder to be in this position.  That is because investment assets dedicated to the policy is undercollateralized against the insurance company, and would not be tolerated at all by the bank.  The collateral position (insurance investment portfolio) was audited at least once during the first year.  In addition, covenants were put into place to insure/limit level 3 asset valuations.

    #55545 Reply
    Doctor Money Matters Doctor Money Matters 
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    Seriously is there ever a situation where this type of policy is good for the average physician? It just seems like the policies are less bad to worse.

     

    I have one from my parents which is over 20 years old and still barely gained 30% over the tax basis. I keep it know because the taxes on it are not worth me taking it out yet. I will in a year which taxes or my income go down. Unfortunately my wife got targeted by her friend’s husband (before I had met her). She put in a larger amount. We have not contributed to these over the last 8 years. Every year when I get charged the insurance fee and the separate admin fees, it kills me. Also the ridiculous 0.5-0.75% fees on their index investments just make me cringe. I always debate whether I should convert to variable annuity to avoid the taxes but Im not sure if this the right thing to do so I just hang on till tax rates come down.

    Doctor Money Matters. A financial podcast for physicians. iTunes/Google Play
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    #55560 Reply
    Avatar ajm184 
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    Not to be too rude but you again don’t know what you are talking about.  You can’t even name the product but some how have too good to be true details.  Also you aren’t insurance industry associated…

     

    all permanent insurance currently available is either a version of whole life or a version of universal life period.   You won’t be able to name one that isn’t.

    It is highly likely a universal.  All universal except guaranteed UL has an illustrated and maximum insurance cost.  gUL would NOT be used for this bc the costs are much higher for this specific guarantee.  It is used to create a permanent death benefit but little to no cash value.  The cost for the premium takes into consideration guaranteed costs of insurance and interest credit.  So yes the illustrated costs you have seen in the past are not the guaranteed or maximum insurance charges.  And yes they have guaranteed interest rates.  That’s why it’s legal to label it insurance.  Only ULs which don’t are VULs.

    They don’t label the finance charge.  You will find though that yearly would be a cheaper premium.

    Some how you think the leveraging with insurance is “special “.  It isn’t.

     

    If if you can’t name the product then it really says something.

    Click to expand…

    I can name the product; my choice is not to do so because I have a very high aversion to life insurance outside of term or x year level term premium which is about a plain vanilla as it get.

    What ‘Too good to be true’ details do you feel I have?

    I have been very upfront potential issues with the product from a cost/benefit standpoint.  I would have to be the worst salesperson in the world if I discussed the product in this way and believed in it like the folks at Northwest Mutual believe in whole life insurance.  No I don’t work, nor have I ever worked in the insurance industry.

    The ‘leverage’ is not special, it is a tool, that has potential benefits and drawbacks.  The question for an individual (who has a permanent need for life insurance, a much small population than those who actually have these type of policies unfortunately) is; Is the structure/risk associated with product more or less valuable than the benefit of reducing or potentially eliminating the premium cost related to permanent insurance?

    Fully understanding the product is the way to answer that question.  I realize you want answers for which I don’t have/understand from an insurance perspective.  As such, I have mailed to you the ‘product’, the website of the company, and the person with whom to speak (by the way the name is not on the website at all, which should tell you something) so that you can better understand the product to point out its shortfalls in more detail than I on this board if you so choose.

    #55565 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4601
    Joined: 05/13/2011

    Seriously is there ever a situation where this type of policy is good for the average physician? It just seems like the policies are less bad to worse.

     

    I have one from my parents which is over 20 years old and still barely gained 30% over the tax basis. I keep it know because the taxes on it are not worth me taking it out yet. I will in a year which taxes or my income go down. Unfortunately my wife got targeted by her friend’s husband (before I had met her). She put in a larger amount. We have not contributed to these over the last 8 years. Every year when I get charged the insurance fee and the separate admin fees, it kills me. Also the ridiculous 0.5-0.75% fees on their index investments just make me cringe. I always debate whether I should convert to variable annuity to avoid the taxes but Im not sure if this the right thing to do so I just hang on till tax rates come down.

    Click to expand…

    Appropriate Uses of Permanent Life Insurance

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #55589 Reply
    The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

    This week’s edition:

    I have 2 Northwestern Mutual Adjustable Whole Life policies (1M paid for 8 years and 1.65M paid for 6 years). Currently they are worth about 20% less than the premiums I put in. After all the reading on WCI and elsewhere, I have serious regrets about these policies. I do max out my 401K, have a good amount in taxable accounts, and put money away for 529s. But if I didn’t have the whole life premiums, I would pay off student loans and mortgage faster, as well as put more away for 529 and backdoor Roth. So… I talked to our UBS financial advisor to see about converting to Variable Annuity (still trying to figure out what that is). They, however, are recommending exchanging the NWM policy for a 1.8M paid up VUL policy from Lincoln and purchasing term insurance. Is a paid up VUL + term better than VA + term? They seem to think so. This whole thing is confusing as heck! Thanks so much for your help!

    20% loss after 6-8 years. Sold while he still had student loans. Now getting pitched VUL for another commission. Classic stuff this.

    Where are the defenders of NML WL policies now? What say you to this obvious “financial advisor” malpractice?

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #56411 Reply
    Liked by Drsan1, ITEngineer
    The White Coat Investor The White Coat Investor 
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    Today’s edition of this fine thread:

    Trying to bail out my sister. Has a NWM Adjustable CompLife policy from 2011. 330k death benefit. To date, has a cash value around $6,700 and a cost basis of $10,500. Annual premium is about $1,800.

    I’m trying to help her understand this, but I’m struggling as well. Not sure what ‘Adjustable CompLife’ is, but probably some proprietary mumbo jumbo.

    The fine print though mentions “total death benefit includes $70k WL, plus adjustable term protection of $210,500 term and $19,500 paid up life additions.” Below the ‘premiums paid’ part, it also shows that part of the premium is for each of those ( the WL component and the adjustable term protection). So maybe it’s not a traditional bad WL policy?

    Regardless, is it worth it here for her to cut her losses and cash out? 

    So…. a policy she doesn’t understand with a cumulative return of – 1/3 after 6 years with no apparent need for a permanent policy.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #61610 Reply
    Liked by Drsan1
    Avatar treesrock 
    Participant
    Status: Physician
    Posts: 350
    Joined: 08/14/2017

    Today’s edition of this fine thread:

    Trying to bail out my sister. Has a NWM Adjustable CompLife policy from 2011. 330k death benefit. To date, has a cash value around $6,700 and a cost basis of $10,500. Annual premium is about $1,800.

    I’m trying to help her understand this, but I’m struggling as well. Not sure what ‘Adjustable CompLife’ is, but probably some proprietary mumbo jumbo.

    The fine print though mentions “total death benefit includes $70k WL, plus adjustable term protection of $210,500 term and $19,500 paid up life additions.” Below the ‘premiums paid’ part, it also shows that part of the premium is for each of those ( the WL component and the adjustable term protection). So maybe it’s not a traditional bad WL policy?

    Regardless, is it worth it here for her to cut her losses and cash out? 

    So…. a policy she doesn’t understand with a cumulative return of – 1/3 after 6 years with no apparent need for a permanent policy.

    Click to expand…

    Yikes…

    #61725 Reply
    Avatar ITEngineer 
    Participant
    Status: Other Professional
    Posts: 324
    Joined: 05/09/2017

    The newest black eye though to the industry is this though…..

    http://ifn.insurance-forums.net/life-insurance/universal-life/coverage-for-life-provided-you-dont-live-past-one-hundred/

    Permanent isn’t even permanent if you do pay all the premiums.

    Click to expand…

    Wow – I’m interested to see what this ruling is.

    My gut says…..he loses? Just like your unlimited phone plan isn’t unlimited, the contract clearly states that his policy terminates at age 100.

    If I’m reading it right (I can’t get to the WSJ article due to the paywall) He’s going to get about half (or more) of the $3.2M policy (the cash value) and will have to pay taxes on any money above $1.5M (his cost basis). They never tell us what the cash value is (I’m guessing it’s $2.5M or higher, but that’s just a WAG) so he’ll have a big tax bill that his heirs otherwise wouldn’t get…..O.U.C.H. And this might cause some Estate tax issues if he passes after the policy terminates.

    #61739 Reply
    Avatar Biff Cremaster 
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    Status: Physician
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    Joined: 03/03/2017

    Not an expert or in the business at all, so may not have the facts right here, but I was under the impression that the “permanent” policies that pay out at some particular age such as 100 do so because that is the age at which the policy is set to “endow,” I.e. When the cash value grows to be the same as the death benefit.

    If that is in fact the case, then the guaranteed UL’s probably won’t ever endow as they don’t accumulate much cash value. If on the other hand, the guaranteed UL’s are set up to be able to expire without endowing, or if there is some mechanism by which the death benefit resets to something like the cash value beyond a certain age, then Rex’s proposed motivation on the part of the insurers would make a lot of (devious) sense.

    #61825 Reply
    The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

    I think the NML WL policy I had years ago went to age 121. Don’t see many of those guys around.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #61858 Reply
    Avatar Biff Cremaster 
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    Status: Physician
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    Joined: 03/03/2017

    According to the link listed below (from a very reputable source) most recent policies are set to endow at 121; this issue should only come up with older policies.

    https://www.kitces.com/blog/outliving-the-end-of-life-insurance-mortality-tables-the-age-100-tax-problem-when-life-insurance-expires/

    #61906 Reply
    Hank Hank 
    Moderator
    Status: Attorney
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    Joined: 03/27/2017

    If advances in healthcare mean that people start running into trouble with the age 121 termination for whole life, then it would be a little like having to pay federal estate tax. It’s a bit of a problem, but better than the alternative.

    #62374 Reply
    Avatar Biff Cremaster 
    Participant
    Status: Physician
    Posts: 14
    Joined: 03/03/2017

    I looked a little bit more into the GUL question raised by Rex.

    It appears that endowment in UL is not the same as for WL, in that cash value is not necessarily the same as face value; it looks like the cash value is paid out. (I believe he suggested as much in one of his posts.)

    Cash value would be not much for most GUL’s.

    Definitely something to remember if you are going to be purchasing a GUL and have a choice of what age to guarantee until. Definitely would want to pick an unrealistically high age if the goal is to have the benefit payable at death.

    #62514 Reply
    The White Coat Investor The White Coat Investor 
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    Joined: 05/13/2011

    Today’s edition:

    I’m a dermatology resident who started an Adjustable CompLife Insurance plan with NWM just before starting residency. My premium is $18,300 per year, and insurance started at 2 million. I am now 2.75 years into the policy, have paid $50,000 in premiums, and my cash surrender value is $23,900, which is even lower than “guaranteed” cash surrender value (which should have been $24,400). If I pay one more quarterly payment, I will have paid $54,900, and the cash value jumps up to $37,000, which is a little better (a loss of $18K vs $25K)

    Unfortunately, I read your book when it was too late for me, but then I justified keeping this whole life policy based on the “projected” cash surrender value. After 2.75 years, I’ve noticed my plan isn’t even keeping up with the “guaranteed” cash surrender value, so now there is no way in hell I can justify keeping this policy. It would take me 22 years just to break even! And that’s IF my plan keeps up with the “guaranteed” column, and so far, it has not.

    $50K in….as a resident. How does this agent sleep at night? It’s beyond me how anyone with even a shred of ethics can work at this company.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #62691 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
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    I’m a dermatology resident who started an Adjustable CompLife Insurance plan with NWM just before starting residency. My premium is $18,300 per year

    Click to expand…

    I could barely scrape together $1,800 a year as a resident, let alone $18,000.

    The salesman who sold this policy is clearly a predator, but the buyer has some level of culpability. Somehow, he or she agreed to start forking over $18,000 a year. I can’t imagine making such a pledge to fork over a substantial portion of my upcoming resident salary as an indebted medical student.

    Unreal.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #62696 Reply
    Liked by Vagabond MD

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