Biglawyers: Did you fall for the whole life insurance scam?
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Date: January 15th, 2015 12:16 PM Author: odious chrome ceo stag film
Was pitched on this last week. Nearly committed to do it after an hour and a half long sales pitch.
Luckily did my own research after the pitch. I consider myself pretty savy financially and can't come to any other conclusion after running numbers other than that this is a scam preying on the risk aversion of biglawyers. Was curious if others have done this or if I am off base.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122231) |
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Date: January 15th, 2015 1:11 PM Author: razzmatazz orchestra pit hunting ground
Yeah, and obviously it works. Looking back, their pitch was amusingly devious- "oh, you want to set up a meeting in one of our conference rooms? I guess this is what I do now, set up meetings with my financial advisors, because I'm a big shot and too busy to handle all this money I'm making! Sure, they won't make very much with my investment now, but when I get BREAKFAST we'll have a relationship and I'll trust them!" Later, "uh, you want me to buy life insurance on monthly installments nearly as high as my student loans?"
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122442) |
Date: January 15th, 2015 1:20 PM Author: lascivious smoky dingle berry dysfunction
whole life is pure fraud + lies.
single = no need for life insurance.
married = term policy
married + mortgage = larger term policy
married + kids = largest term policy (or additional term policy)
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122487) |
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Date: January 15th, 2015 2:15 PM Author: Exhilarant bat-shit-crazy stead codepig
as a concept, whole life is fine.
in practice, whole life is highly loaded, i.e. lots of sales commission.
if whole life were NOT highly loaded, it would be a decent long-term bond substitute because it's a tax shelter. it's possible to design such a lower-load whole life policy by incrementally purchasing low-load additions to a policy, but that's never the way that it's presented to biglaw associates.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122799) |
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Date: January 15th, 2015 8:47 PM Author: Exhilarant bat-shit-crazy stead codepig
It's too bad because the premise behind whole life is actually pretty elegant, and I actually like it when it's designed to maximize cash accrual.
Makes me wonder if whole life mutuals operate like credit companies -- screwing over a large set of people and subsidizing the use of credit cards for consumers who are never late on payments
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27124903)
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Date: January 15th, 2015 4:08 PM Author: crystalline nursing home puppy
even this is generous. it applies if, and only if,
1. (married) married with debt your spouse can't handle if you die.
2. (married + mortgage) married with mortgage your spouse can't afford while she sells the house and downsizes.
term life if you have kids and haven't built up enough family wealth for spouse to do well. that one makes sense. however, if you are married to a hot, they end up getting remarried pretty easily, even with kids
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27123399) |
Date: January 15th, 2015 1:23 PM Author: Fiercely-loyal Bossy Temple
When I was a first year, another first year chick was truly horrible with money. Went out and spent like 4K on a custom couch, and locked herself into an expensive apartment.
Sure enough, like 4 months in, she proudly told everyone that she was getting blood drawn and having a physical done for a life insurance policy she was purchasing "as an investment". Not sure if she went through with it, but she probably did.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122497) |
Date: January 15th, 2015 1:56 PM Author: Deranged Generalized Bond
i don't know know what you guys are being offered but if it is a "dividend" type policy or something by Northwestern mutual, i think that is probably not the best.
but the concept of investing tax free inside an insurance wrapper is a sophisticated tax avoidance scheme used by the wealthy:
http://www.nytimes.com/2011/02/10/business/10PRIVATE.html
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122676) |
Date: January 15th, 2015 2:02 PM Author: Exhilarant bat-shit-crazy stead codepig
a good whole life policy should be blended and accrue around 75% cash value within the first year, and break even before year 5
of course, insurance salesmen rarely (never?) pitch such policies to us, because they would rather pocket the cash value and write you a policy that accrues no cash value within the first year, and breaks even after 10 years
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122710) |
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Date: January 15th, 2015 11:01 PM Author: Trip station becky
Without doing any math, I can tell you that your intuition isn't better at derivatives pricing than the actuaries and investment managers at the insurance company. If they are selling you downside protection, they are clipping a fee that has a profit margin.
For instance, you might think that you would be fine capping your upside at 5 percent. But you actually need the 20 percent year to make up for the 0 and 2 percent years and average out to long term equity returns, and you are paying the insurance company 15 percent of principal in the up year to feel clever when the market is down 5 percent some other year and you are flat. Obviously it's more complicated in reality, but I assure you that the insurance company has run the numbers. You will do better at Vanguard unless you have very high wealth, income and negotiating ability (and even there you are not profiting at the expense of the insurance company, but at the expense of our terrible tax law and cutting back the insurer's margins).
If you are really conservative in this market, your expected real returns are zero or negative. You can't afford to pay fat fees out of those returns because you feel like your mental math can outperform the work of a company that literally has no business other than writing negative EV contracts for you.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27125865) |
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Date: February 16th, 2015 11:44 AM Author: Exhilarant bat-shit-crazy stead codepig
While there is some truth to the pricing critique, I think it is not as bad as one might expect if (1) the company is a mutual and is obligated to distribute its surplus or profit margins to policyholders anyway; and (2) economies of scale in purchasing options + tax deferral means that the insurance company can do this more efficiently than you can yourself.
In my view one of the problems with IULs is more that you're taking on a more risk then with straight whole life for a little more yield. Although this is true of virtually all straight universal life policies, most of those policies are based on fixed income so that it's safe to assume that the cash value will accrue fast enough to offset the increases in costs of insurance as you get older. However, with IUL, if there is a string of years where the market is down, even though you may not lose money directly, you will still have low/zero increase in cash value while the cost of insurance increases. So, you could lose money that way. This is particularly true if you take out policy loans, meaning that you'll be hit with a large negative spread between the interest rate fixed by the insurance company, plus the cost of insurance increase. (Of course, you could argue that if the market increases, you can gain a lot by taking out a policy loan, investing the loan proceeds in equities, and then obtaining a positive spread between the loan interest rate and teh cash value, plus gains in equities outside the policy).
Another risk is that the insurance company typically has the contractual right to change the caps on yield and the guaranteed floor. IIRC that has happened with a few IUL insurers.
All in all it is not too bad, not as dangerous as VUL but not as safe as straight whole life or UL. I would think that the yields would be slightly better then whole life over a long term but it may not be better as a liquidity reservoir due to lack of guarantees.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27326162)
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Date: January 15th, 2015 2:43 PM Author: Exhilarant bat-shit-crazy stead codepig
So this is the way that a good blended whole life policy should behave (of course, dividends/returns are going to be much lower now due to current low interest rates). If ur "financial advisor" pitches u something substantially different, then u know that something's up.
Year Premium Total_Prem Dividend Cash Value
1992 8,951 8,951 9.25% 8,688
1993 8,951 17,902 9.25% 18,173
1994 8,951 26,853 8.50% 28,338
1995 8,951 35,804 8.50% 39,351
1996 8,951 44,755 8.50% 51,286
1997 8,951 53,706 8.50% 64,213
1998 8,951 62,657 8.80% 78,423
1999 8,951 71,608 8.80% 93,872
2000 8,951 80,559 8.80% 110,662
2001 8,951 89,510 8.80% 128,933
2002 8,951 98,461 8.60% 148,525
2003 8,951 107,412 8.20% 169,159
2004 8,951 116,363 7.70% 190,584
2005 8,951 125,314 7.50% 213,237
2006 8,951 134,265 7.50% 237,553
2007 8,951 143,216 7.50% 263,645
2008 8,951 152,167 7.50% 291,632
2009 8,951 161,118 6.50% 318,661
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27122960) |
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Date: February 17th, 2015 1:59 PM Author: glassy striped hyena
A long, long time ago, when I was a junior associate, one of these guys show up under the guise of a financial adviser. I grew up poor so I took his meeting thinking maybe he can help me out a bit.
He shows up and quickly goes off on these stupid fucking tangents about whole life. I didn't even know where to begin in asking him questions. Anyway, I ask him what his commissions were. He said something like, "I'll be honest with you. I do get a commission. But it's only fair that a man gets paid for his work, am I right? Anyway, let's talk about your potential upside here." I responded like, "Well, I'm paying your commission one or or another, right, and I don't care if you get paid; I just want to know how much it costs me."
I kept on asking him about his commission, and kept on dodging, and then I said, "Well, I don't think we can do business" and showed him the door. He was acting like I was an asshole for asking how much he made.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27334323) |
Date: January 15th, 2015 10:08 PM Author: haunting ocher filthpig lettuce
I bought one. It is okay and properly designed, but not really a home run. I never cared for it before I had kids because I was always like wait, I gotta borrow the money out of the policy for me to able to use it before I die and then suffer a negative carry on that.
Now that I have kids, I actually assign value to the death benefit and it is part of my vehicle to get all my assets off my taxable balance sheet.
There are some that are market participating (limit your upside but cap your downside so if S&P does 20, you'll get 12, but if S&P is negative, you just get 0 and don't lose)/ that seem interesting - I think those are better.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27125455) |
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Date: January 16th, 2015 1:25 AM Author: Exhilarant bat-shit-crazy stead codepig
I believe they need to be licensed, but those licenses certainly aren't preventing them from making material misrepresentations. Maybe the life insurance agency and regulatory system needs a certain amount of outright fraud to function.
My favorite part was that I asked this particular agent to change the proposed policy by blending it with term and paid-up additions to accelerate the cash accrual. He responded by blending half of it (which would in fact cut his commissions in half), but then DOUBLING the premiums (which would double his commissions). Lol . . .
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27126569)
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Date: January 16th, 2015 1:31 AM Author: wine legend
God damn. When I was a first year we had a wealthy old senile client that was taken by a fraudster with some bullshit finance scheme for $600,000. The client had been a hell of a businessman when he was sane, and he was a great client, so we kept taking his cases. It was my job to pitch this fraud to the local prosecutors (AG, DA, USAO), and I thought it would be easy. This was textbook fraud. The DA wouldn't even answer my phone call, my friend at the USAO got me in, and they were like we'll think about it, we've got a backlog, and the when I was talking to the AG's office, their fucking eyes glazed over. It was clear that they get this exact same complaint every day, several times a day. It's like 75% of the finance industry is committing fraud and there's nothing anyone can do about it.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27126595) |
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Date: January 16th, 2015 1:19 AM Author: odious chrome ceo stag film
My guy also said things that in my research I found to be demonstrably false after the research.
Cant blame these people. There is no high income group of people with as little financial savy as lawyers. Literally 90% of lawyers I know couldn't tell you the difference between and active or passive managed fund.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27126552)
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Date: January 17th, 2015 8:14 AM Author: sienna crawly clown gaming laptop
When I started at my current firm, I had a Northwestern Mutual guy after me for a year and a half and he came in to give me several sales pitches. I ultimately passed but did buy some term life from him once I knew we were having a babby. Wife and I each had $500k term policies, so I just bought an additional $500k on her and an additional $1 mil on myself. I'm sure he's going to be after me in the future to "upgrade" to whole life, but fuck that.
A couple partners in my office have whole life policies with him, and I assumed that was why he hit me up. Didn't realize these dudes swoop in when a new associate starts and pushes this shit.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27133198) |
Date: January 23rd, 2015 3:15 AM Author: odious chrome ceo stag film
I told my Northwestern Mutual guy I was not interested in the product and cancelled the second appointment. Guy literally still showed up at the reception of my law firm and asked to see me and emailed me saying he understood I was not interested but had to show me how amazing the projections were.
Told receptionist to show him out the door. What a fucking joke.
I think anytime a sales pitch gets that aggressive, I'll just assume it's a scam going forward.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27169591) |
Date: January 23rd, 2015 3:51 AM Author: Deranged Generalized Bond
hey anyone have an opinion on this product:
https://us.axa.com/life-insurance/universal/variable/incentive-life-optimizer-II.html#tabName_ResponsiveTab3
the pitch is that you pick some basic index funds and your money grows tax free in the insurance vehicle. The salesman said you can withdraw the cash value without any taxation too but i need to dig deeper because i'm not sure the documentation confirms that.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27169647) |
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Date: January 23rd, 2015 3:56 AM Author: brilliant spot
basically, anything but the most simple insurance contracts are either scams or estate-planning tools for the rich.
the average insurance purchaser is dumb and ignorant, so the insurance companies use their superior knowledge to shove unfavorable terms into their products. the more moving parts in a contract, the more the insurance companies and their salesmen can fuck you.
simple products, on the other hand, are kept honest because they're easy to compare and mostly informed people are buying them.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27169656) |
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Date: January 23rd, 2015 3:44 PM Author: Exhilarant bat-shit-crazy stead codepig
there are a number of potential issues with that policy.
first, it's unclear how much sales commission ur salesman will take away. for example, say ur premiums are 10K per year. if indexed variable insurance has a commission structure similar to whole life, then ur salesman could walk away with nearly all of ur first year's commission plus even more down the road. take a look at the accumulated cash value in the first year -- if it's significantly less than ur premiums, that's not a good sign.
second, the fees on the index funds offered within the policy are much higher than those charged for low-load index funds w/vanguard, TIAA-CREF, etc. for example, the lowest-load fund on the AXA policy appears to have a load of .70%; most of them are > 1% load. that is VERY unfavorable when compared to vanguard's load of .05% for, say, VTI.
just glancing over the policy terms, it looks like the insurance wrapper will cost u at least 1% annually for the first ten years, too. there are also other misc. charges that will add up too.
so i wouldn't be surprised if there is a a drag of at least 2% on ur investments on top of the very substantial cash accrual problems.
there also appears to be a surrender fee so if u want to get out of the policy, u will incur additional costs.
so the Q is whether taking the initial cash accrual hit (let's say that u lose 10K the first year, plus 1K for the next nine years), plus a 2% drag on ur investments, is worth the tax deferral. i think the answer is very likely "no" especially if u're investing in tax-efficient ETFs but u'd have to crunch the numbers to confirm.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27172375) |
Date: February 16th, 2015 2:57 PM Author: Exhilarant bat-shit-crazy stead codepig
Not to beat a dead horse, but for any of u biglaw ladies and gents out there, keep in mind that the whole point of these VUL/UL/whole life policies is to gain a fraction of the benefits of a Roth IRA. The only benefit that Whole life and UL have over a Roth IRA + term insurance is that Whole Life and UL have greater liquidity over gains and slightly better options w/ur death benefit.
That's not to say that whole life and UL are bad (actually I think optimized policies are quite good), but this shows how powerful Roth IRAs are. If u aren't doing a backdoor Roth IRAs every year (and u don't have a trad IRA that could fuck up the conversion) u are throwing away a huge opportunity.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27327044) |
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Date: February 17th, 2015 12:35 PM Author: Exhilarant bat-shit-crazy stead codepig
some key questions for him assuming that he is pitching whole life insurance (i don't necessarily know the answers to these, but i would be interested to know NWM's stance):
(1) what is his total sales commission, not just for the first year;
(2) if he doesn't suggest blending with term, suggest it; also ask if you can use term outside the policy which can accomplish the same objective of raising the MEC limit and may be cheaper than cash inside;
(3) why has NML's dividend consistently trended down (around 5%, iirc) so that it is lower than Penn Mutual (6%) and Mass Mutual (8%, though this may not be the net figure);
(4) how will NML react to the persistent low-interest rate environment, and what will happen if interest rates suddenly rise;
(5) what is the spread between NML's interest rates on policy loans and the dividends; is this fixed by contract or does it float; why is NML's interest rate so high at 8%
(6) what is the breakeven point in CSV (should be around year 5-6)
(7) what is the ultimate distributable CSV as time goes on (that is, even if ur policy accumulates lots of cash, not all of it may be distributed, which is important for retirement planning)
(8) are there any surrender charges
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27333832) |
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Date: February 17th, 2015 1:24 PM Author: Exhilarant bat-shit-crazy stead codepig
Below is a telling excerpt from the Hunt consumer report. Note that on a pure WL product (the one that's usually pitched), commission and sales charges are > 85% of the first year's premium and up to 7.5% of the premiums for the next ten years. In other words, if you're paying in 10K per year, you just LOST 8.5K in the first year alone, and another 7.5K over the next 10 years just to sales commissions and taxes.
Alternatively, you can minimize the proportion of WL and use term to fill in the missing death benefit. Over time, you use your dividends and riders to add "paid up additions", which are the same thing as pure WL, but cost way less (~5% fees, most of which are taxes). Say your yearly premium is 10K, but only 2.5K of that is WL. That means that you only lose about 2.5K (2.1K + ~$400) in the first year's premium to sales. And over the next ten years, you only lose 5.6K to sales fees/taxes.
Over a long time, you end up with pretty much the same policy, since the paid-up additions (the tiny whole life policies) gradually replace the entire term portion. But, the yield on a blended policy is >>> the yield on pure whole life. Equally important, the blended policy starts accumulating cash value immediately, which means you can start using this cash right away via policy loans.
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Blending can be very effective for a proposed buyer of a cash value policy. Most conventional whole life sales illustrations show a zero or near-zero first year surrender value. (Universal Life and Variable Universal Life operate with explicit surrender charges while Whole Life has implicit surrender charges. Thus with WL one sees a zero cash value in the illustration but UL and VUL show two columns of cash values, one with several names, depending on the life insurer’s choice of terminology: Cash Value, Account Value, or Policy Value. Each of these is before application of any surrender charge; each represents the cash value that is invested. The column with the lower values, whatever its name, is the surrender value. The two columns converge in the year when surrender charge is zero.) If WL, you are probably looking at a unitary contract: one premium and one policy form, say a $500,000 face amount with $20,000 premiums. Commissions and sales charges on a garden variety WL like this might consume up to 85% of the first year’s premium and up to 7.5% of premiums for years 2 to 10, and, of course, the life insurer has its own costs of the medical evaluation and other administrative expenses. Note that, roughly speaking, in year one, this WL insurer’s ―amount at risk‖ is not $500,000 but $500,000 less some fraction of the first premium that’s left over, perhaps zero. (Note also that with reinvestment of dividends in paid-up additional insurance (PUAs), death benefits will rise in future.) If a cash value develops in year two, the insurer’s amount at risk will be reduced by the cash value, and so forth in subsequent policy years. We could, if we wished, call these reducing amounts at risk ―term insurance.
Using the $500,000 example, there are normally three components of a blended policy, which the author refers to as a WL hybrid: (a) a base WL policy of, say, $100,000, paying full commissions; (b) a one-year term (OYT) rider with different names for $400,000, also producing full commissions but on the much lower dollar component of the total premium; and (c) a paid-up additions (PUA) rider in a premium amount that can be $20,000 less the premium for (a) less that for (b). The PUA rider goes into the policy
at a premium deduction of, say, 8%, with commissions of a bit less than half that to the agent; the savings come from component (c). For purposes of comparing the resulting blended or hybrid illustration to the original illustration, the premium should be kept the same, $20,000; one matches the premium, then compares resulting death benefits and cash surrender values. Normally, this hybrid produces a level death benefit while a conventional WL proposal shows a rising benefit from PUAs; in this event, we suggest increasing the OYT rider such that the total death benefit is higher than the rising death benefit for about 12 or 13 years, roughly matching the full commission policy’s death benefits over 20 years.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27334070) |
Date: February 18th, 2015 7:52 PM Author: Exhilarant bat-shit-crazy stead codepig
One of the objections to whole life is that you have to pay large premiums over a long period of time or the policy will lapse. But, this is largely addressed by blending the policy with term and using paid-up additions. Besides accruing cash value much faster and generating much better internal rates of return, blended whole life also gives you much more flexibility in terms of paying the premium.
All blended policies still require you to pay the whole-life portion of the premium for the policy to stay in force (or, alternatively, pay that portion from dividends or the cash value). However, if your policy is blended at 2500 whole life/7500 paid-up additions, some policies will permit you to pay just 2500.
Of course, if that happens, your whole life policy will behave like a pure whole life policy for that year, i.e. have crappier cash accumulation that year. But, it won't lapse. This effectively gives you much of the flexibility of a UL policy.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27344550) |
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Date: February 18th, 2015 8:17 PM Author: Exhilarant bat-shit-crazy stead codepig
that's pretty smart, you can build up a lot of credibility with your clients by lifting the veil.
i have seen a bunch of biglaw lawyers get trapped into high-load VULs and the like. which is not to that all insurance products are bad, but when they're bad, it's sort of mind-boggling just how bad they are. morally speaking, pitching these policies seems to be on the level of white-collar crime.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27344797)
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Date: February 18th, 2015 9:00 PM Author: lascivious smoky dingle berry dysfunction
yeah, we have some people who are in decent and fairly complicated life insurance plans... so i know they can be used if you know what you're doing. i'm learning bit by bit how to set these up, which is why i'm interested in the thread.
the secretaries call call me 'the cynic' because anytime a transaction or a sales pitch comes up (whether for the firm or a client or just in conversation) my first reaction is usually "that's a scam." but you know what? it usually is a fucking scam, it just depends HOW badly you're getting scammed vs. the alternatives.
i checked out a book on great grifters and scam artists from the library a while back but i never finished it. i think i'm gonna go check that thing out again.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27345223) |
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Date: February 20th, 2015 4:34 PM Author: Exhilarant bat-shit-crazy stead codepig
I think what's really interesting about the whole-life policies is that the agents have two ways of talking to you about it
if u have no experience with cash value insurance they will pitch u some absurd policy that nobody in their right mind would buy
if u have some experience with how a cash value policy should behave, they actually start designing stuff in a way that's quite helpful
i find the entire thing fascinating because whole life is simultaneously a scam and a great product and your experience with ur agent will largely be driven by how much reading u've done about it
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27357729) |
Date: February 20th, 2015 4:25 PM Author: Exhilarant bat-shit-crazy stead codepig
Just met with a totally different NML agent. I had requested a 1:999 whole life to insurance blend. He ran a 1:4 blend instead (not intentionally, something probably got lost in translation) and gave me an illustration with an IRR of 1.86% after 10 years and 3.27% after 15 years.
During the meeting, I requested an illustration with the maximum amount of blending permitted, which was 1:20 on a slightly different product with a much lower death benefit. He re-ran the projections, which gave an IRR of 2.58% and 3.77% after 15 years.
Anyway, the point is that even within the same insurance carrier, the design of a whole-life policy can yield very different results. Here, the first design would have been more appropriate for someone who had children due to the markedly higher death benefit. But, the second design would have dominated from the standpoint of accruing cash earlier (in fact, it broke even at year 3), and both short-term and mid-term IRR.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27357663) |
Date: February 21st, 2015 5:10 PM Author: Exhilarant bat-shit-crazy stead codepig
So let's compare several Northwestern Mutual illustrations to show how the stark difference between a scam and (in my view) a reasonable savings vehicle.
First, let's look at a "bad" pure whole life policy from Northwestern Mutual that was pitched to me. That policy would require me to pay about 16K per year into the policy. During the first year, only $1,770 makes it safely into the policy. At year 5, the cash value surrender value of the policy is only $54,301. At year 10, the cash surrender value of the policy is only $143,026. Pretty crappy, considering that you put in 160K of premiums into it and are still about 17K in the hole.
Now let's look at "better" blended whole life policy (blended 1:4) from Northwestern Mutual, which also requires me to pay 16K in yearly premiums. That policy accumulates $11,256 of cash surrender value during the first year, $74,868 at year during the fifth year, and $177,296 at year 10. So, you made about 17K relative to what you put in.
And, the second one isn't really a heavily-optimized policy. There are probably substantially better ones out there. But, the fact is that if you went with option #1 vs option #2, you would have lost about $34K over a 10-year time period. Over time, this difference will grow substantially so it option #1 just gets worse and worse.
Worse, due to the slow buildup of cash in option #1, it would be effectively an illiquid asset. Option #2, on the other hand, would allow you to take policy loans with a slight negative spread between the loan interest rate (about .5% per year, simple interest) and the dividend accrual, and invest in more lucrative options.
You do get a slightly higher death benefit with option #1 (1.15 mil over 1 mil for option #2) but unless you're planning to die soon that doesn't really make a big difference, you could easily buy term to supplement, and the death benefit for option #2 will eventually catch up to and dominate option #1 over time.
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27364032)
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Date: February 21st, 2015 6:38 PM Author: Exhilarant bat-shit-crazy stead codepig
some of my PE friends have been pitched
but in general it seems like it would be a crap idea to pitch poor-yielding investments schemes to a guy whose profession is to value stuff and maximize yields
lawyers, on the other hand, have no point of reference. most associates have no idea how much the historical annual return on the stock or bond markets are. so when they see something like 3% IRR over 25 years on a bad whole life policy, they have no way of knowing, off the top of their head, that this is a pretty crap place to put their money even given the safe profile of the asset class
this is not even getting into VULs or the myriad other even more complex instruments that get pitched every other week
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27364647)
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Date: February 27th, 2015 4:11 PM Author: Exhilarant bat-shit-crazy stead codepig
Putting aside all the numbers, here are two common-sense questions that u should ask ur agent when he's pitching you a whole life OR term policy:
(1) Does your insurance agent own the same policy with the same design? Only two of the insurance brokers I worked with owned the actual policies with the same design that they were selling, and they were also by far the most knowledgeable about the products. Keep in mind that, as shown above, the fact that an agent owns a policy issued by company X does not mean u should buy a policy issued by company X -- the design of the policy can totally change the commission structure and performance of policies issued by the same company.
(2) In New York, insurance agents and brokers are required, by law, to disclose their compensation, but only if you ask for that disclosure. See http://www.dfs.ny.gov/insurance/faqs/faqs-reg194.htm If your broker or agent is designing the policy correctly, they shouldn't be afraid of disclosing the fee. I'll probably end up paying about 3K up front to my broker in commissions and another 3K over the life of my whole life policy, and his advice was worth every cent.
But, in the words of the former CEO of NY Life, many agents are not so keen to disclose the truth:
CEO: The life sale is a very difficult sale. People have to talk about their mortality, about how much money they really need. It's very complicated. If right in the middle of this discussion, you throw in: 'And by the way, there's a 55% commission,'...You won't get the sale. You've now created enough of a hurdle to kill that form of distribution, and that's the only form that's proven successful in getting life insurance really out. Plus, you're going to create the potential for rebating, which is against the law in most states. There would be pressure for rebates. And once you do that, then you start affecting the income of these agents. Most of them don't even make it. The industry is lucky to keep 20% after four years. If all of a sudden rebating takes place, and their effective commission is cut back because they're trying to compete on commissions, you get rid of the career agency system...and many fewer people would have life insurance."
Sy Sternberg, CEO of New York Life Insurance Co., quoted in Best's Review, February 2005
(http://www.autoadmit.com/thread.php?thread_id=2783240&forum_id=2#27401768) |
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