All Forum Posts by: David Lewis

@Albert Bui said: Thats Incorrect...

My reply: No it's not. The context of the discussion was whole life. All whole life works the same (basic) way....the way I described. I'm very familiar with ULs. Just for background: I studied this for 10 years. And, when I say study, I don't mean I read a few consumer-grade books. I mean I take 40 credit hours of continuing education on this every year. :)

@Bill Melancon - awesome. I'm glad you found it helpful. 

You said: "Talk to one of their agents; it sells itself."

My reply: Yeah, they do, don't they? :) 

I think as long as someone is willing to read, listen, and think about what's really going on with a cash value policy, it makes complete sense. You often hear critics make off-point or factual, but irrelevant, arguments against it. And, if you hear enough red herrings, you start to wonder what's up. 

Over the last 10 years, I have heard everything. But, it usually boils down to one of two things: "It's too complicated" - my policy contract is 86 pages and written in plain English. Most of the contract is tabular values. That's like reading a novella. If you can't read something that short you probably shouldn't be buying ANY financial product. 

Or...

"It's too expensive/not a good deal/poor returns" - I started reverse engineering policies to prove that that wasn't true. They're actually much cheaper than I had originally guessed.

@Steve Vaughan. No problem. My goal is to make things more clear and not less :)

If you die with a policy that has a death benefit of $300,000 and a cash value of $80,000, your family gets $300,000. The $80,000 CV is a reserve against the death benefit (much of your premiums was set aside for this purpose), so you're not paid twice on the DB, just once. 

The common mistake I see over and over is that people think the cash value is separate from the death benefit, and they're confused as to why they don't get both. You have to think of a whole life policy as a death benefit, with a reserve that builds up against it until it equals it at age 100 (I think most policies stretch out to age 120 now). Additional paid up insurance adds to the death benefit/cash value.

 Sorry, typo on the term payout: < 1%. 

You're right. you will probably lose money on whole life if you don't commit to consistent premium payments. That is the "catch" with insurance. Insurers guarantee the cash value and death benefit by hedging and making sure that premiums plus interest, less costs, equal total benefits. There is even a whole profession built around this. It's called actuarial science. 

There is no magic, only magicians. :)

 This is sort of a misnomer. The cash value is a reserve against the death benefit, much in the same way that investment earnings are a reserve against your self-insurance total death benefit. 

In a whole life policy, the insurer "keeps" the cash value, but they also turn around and pay out the total death benefit, which includes the cash value. Money is fungible, so they're actually paying out at a net loss. 

With BTID, it's true you could hypothetically get savings and your term death benefit. Statistically, this is a rare occurrence (>1%). The way to get both your death benefit and savings under BTID is to buy a term to age 100. Otherwise, you're playing the actuarial game where the insurer usually wins. 

Sorry, I do want to chime in here. While it is unusual to see costs of whole life broken out, it's not impossible. If you know the dividend interest rate, the premium paid, and the CV, you can reverse-engineer the costs.

Another thing that's interesting is that the term + investing does have a negative total CV for the first few years that most people on that side of the fence don't want to talk about because they don't want to include the cost of term premiums in the total outlay for BTID like they do with whole life/UL. 100% of the term premiums earn 0% interest. 

Add that in, and your IRR on BTID drops quite substantially. Most of the time, I'm seeing between -5% and -20% IRR for the first couple of years.

And, if you're not comparing all inputs and outputs, you're not really in a place to say "term is better than whole life." 

But again, I'm just a life insurance salesman, so what do I know? :)

Don said: Solomon Huebner? He retired from teaching in 1953!

Look @Don Konipol, you keep pounding those personal attacks into the ground and making non-sequiturs. When you have something of substance to say, you let me know. 

For the rest of you with normal comprehension skills: Let me respond to something Don said, even though I probably shouldn't. 

Don said: "60 plus years ago any analysis of the comparative advantages or disadvantages of whole life would have included none of the tax deferred competition available today."

Fortunately, more recent analysis has been done, multiple times, by several different people both in and outside of the industry. Now, it was 10 years ago, so it might not be good enough for Don because knowledge automagically becomes invalid after a certain point apparently. But, I took it one step further and recently did an expanded analysis on whole life vs term (weird, right? I mean, I'm "just a life insurance salesman." How did I do that?).

What I discovered was that investing in a 401(k) will produce roughly the same results as buying a whole life insurance policy, net of taxes, fees (I used the 401(k) averages book as a benchmark), and adjusting for the RMD withdrawals which must start at age 701/2 in the 401(k)/IRA option. I reverse-engineered the cost assumptions, and converted them to a cost-per-thousand, which could then be compared to any term + whatever investment I want to compare it to, since term insurance costs are already expressed as a cost per $1,000. I also calculated the PV of the annual stream of costs across 86 years of my policy.

Bonus: by doing this you can also deduce which company is (probably) relying heavily on lapse-supported pricing and where the company's underwriting "sweet spot" is.

I think even insurance salesmen would be surprised by the results.

But, they shouldn't because it makes sense if you think about it. If you've sat for your insurance license, you've taken the "life and health" introductory course or at least did the self-study. You know that life insurance is built on the same chassis, uses the same mortality tables, yada yada. What changes is how the expenses are loaded and distributed (which should make a difference, but doesn't have the effect you would think).

It gets me how anyone who should have this knowledge down pat thinks one is better than the other. 

Now, I realize I'm "just an insurance salesman," but I think the math on this is pretty fascinating. Intuitively, I kinda expected term and invest the difference to come out ahead (I would have still been OK allocating part of my money to whole life premiums), especially since the cost per $1,000 rises over time in whole life and universal life. But it didn't. 

I did this analysis for several clients. Same results. I ran mock analyses on hypothetical policies. Always the same result. It gave me a newfound respect for what actuaries do and how they price these things. 

I'm not here to promote myself or business or even a life insurance strategy (not really) so I won't post the link publicly, but if you're *really* super interested, PM me for the link and I'll try to get back to you in a reasonable amount of time. 

As for the whole "infinite banking"/Bank on yo-self/circle of monies/whatever, you can just boil it down to this: the time value of money. 

TVM is a valid concept. Time has a cost. That cost is expressed as interest. If you want to compensate yourself for the use of that time, that is a good thing. So, if you want to employ it in your real estate business, do it. It's going to make you more monies. If you want the guarantees, death benefit, and added interest crediting of whole life, do it. It will make you even more monies. 

If you don't want any of that, do whatever you're doing. You won't make as much monies, but you will still make some and some is better than none, right? :)

Jason,

You said: I probably shouldn't be surprised to find a thread about this topic here, but it does line up pretty well to my experience with this 'Concept' in the past: the only people who recommend it are the ones who will make money directly from it (and it's usually not the person buying it.)

My reply: This is not only not true, it's not really an argument for or against it. You've taken your life and health 101 course (having had an insurance license). You know (or should know) the chassis for both term and whole life are the same. And, reverse-engineering a policy is a simple way to demonstrate this (looking at the PV of future annual stream of costs).

I've spoken with actuaries and financial analysts who recommend this sort of thing. They don't make a dime if you do or don't buy whole life, ULs, etc. 

Solomon Huebner also encouraged the use of whole life. He was an Emeritus Professor of Insurance at the Wharton School of the University of Pennsylvania, wrote extensively on life insurance, specifically about the economics of life insurance (and the concept of human life value). He didn't make a dime if people purchased whole life either. 

Kenneth Black was another professor who did a very good job explaining the benefits of whole life...

I realize it's popular to rail against it these days. But, this isn't a popularity contest. Real estate investors are looking for sound advice, not sound bites. And, there is plenty of good, solid, educational material out there that explains all of this in excruciating detail, written by actuaries, professional educators, and financial analysts.

@Chad Barbir - To answer your questions:

1) Is it better getting whole life at a younger age or blended and converting the blended term/whole to permanent? (I understand the age relative to premium, older you get, higher you pay for policy per month)

Age does matter, but probably not in the way you're thinking. Age increases the cost per thousand but it can also decrease the total annual costs due to the net amount at risk dropping significantly in older ages. 

2) What is the difference between Cash Flow Banking and Infinite Banking?

Not much. These are all marketing names (gimmicks). These all rely on the basic banking principle of the time value of money - namely that time has a value, and this value is expressed as an interest rate function. What these goo-roos are pitching is the idea of compensating yourself (quantitatively) for your time. You already do this when you take out a loan with a bank (you have no choice in the matter in that regard). When you withdraw cash from a savings account, the repayment is optional, but the time value of money isn't. 

3) Would you recommend going outside of a well known mutual insurance company to buy a whole life policy? Why or why not? 

I wouldn't. There's no real reason to because they are well-capitalized and do the job just fine. Some people do like IULs, I do not because the risks are inherently greater (anyone who tells you this isn't being straight up with you). That's not to say IULs or any UL contract is a bad contract, it's just more risky than any whole life policy. It's designed that way (that's why the potential is slightly higher). 

IULs do not suffer the same problems as the old interest sensitive contracts, and you're unlikely to lose a lot of money in them (if any), but they do have their weaknesses. I believe Pacific Life has been the most transparent about this in its FAQ on IULs. Mostly, IULs are extremely sensitive to index option pricing, which is sensitive to dividends and interest rates, along with how the insurer chooses to hedge those risks (which the insurer is contractually able to change at any time). This is part of the reason risk-sharing in a UL is not really the greatest thing for the policyholder if you're looking for strong guarantees. 

Even under the fixed-interest option, ULs aren't risk-free because stock companies tend not to have the same profit models built into their business than mutuals do. In other words, IULs aren't designed to run on the fixed-interest rate. No one buys them for that rate. They buy them for the index crediting. 

If interest rates keep compressing, there won't be anywhere for IUL holders to go. If they rise, it still won't guarantee that those fixed interest rates in IULs will rise substantially (because insurers still have to cover the costs embedded in the contract).

Whole life will never have this problem because it doesn't use the hedging ULs do. 

I get what you mean. And, maybe IULs will fine long-term. I have my doubts about the cap rates, but no one should really be losing a lot of money in these things. Even the policies from the 80s I've had to fix (I didn't sell the original. It was like that when I got there)...it was like the policyowner just forgot about it and let the cash values decay without doing anything. And you know...it takes years for those cash values to drain out of a UL. You can see it coming from a mile away.

Anyway, I'm not sure I follow you on the OPM strategy. 

You're saying real estate investors should use mortgages before their insurance cash values? Wouldn't that hurt their DTI if they became "fully leveraged" (bank loans + all available policy values)? Or, am I missing something?