Life Insurance: What to Buy

My last post about life insurance was on how to buy life insurance. This time I’m going to talk about what to buy.

1. Permanent vs. Term. The best approach on the permanent aka cash value vs. term discussion is tuning out. Just buy term. Very few people have permanent need for life insurance. The vast majority of people are better off buying term. So don’t even worry about the other kinds of life insurance. Some agents and web sites will try to steer you into permanent insurance. They put up all kinds of false arguments like “permanent is like owning; term is like renting.” Just ignore them. For entertainment value or if you’d like immunize yourself from the false arguments, you can see how an insurance salesperson twisted the logic and how the members on the Bogleheads forum rebutted.

2. Level Premium Term or Annually Renewable Term. Level Premium Term guarantees fixed premium for the entire term. You pick how many years you want to insure for. The premium stays the same throughout the entire term. Because the odds of a person dying increases with age, the cost of insurance also increases with age. So while your premium stays the same, you will be paying more than the cost in the earlier years and less than the cost in the later years. Annually Renewable Term is pay as you go. Your premium is lower in the earlier years and higher in the later years. See sample premiums for a $500,000 policy for a 35-year old in the chart below:

I chose Level Premium Term for myself because I like the certainty of knowing my premium won’t change. I also think it’s more economical. More companies offer Level Premium Term than Annually Renewable Term. More competition drives down the cost.

3. For how long? With Level Premium Term, you choose a number of years you’d like to have the premium fixed. The longer the period, the higher the premium because the higher cost of insurance for the later years has to be averaged out to the earlier years. People usually choose to buy coverage through the year when their kids are out of college, when their mortgage is paid off, or when they retire. I chose 15 years for myself. That’s when my mortgage will be paid off.

With annually renewable term, you don’t have to pick a specific term up front. When you don’t need insurance any more, just stop paying.

4. For how much? This will involve a bit of math. This post is already getting long. I will cover it in the next post. Stay tuned.

This is the 2nd post in a mini series on life insurance. Other posts in this series are:

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  1. Adam says

    Thanks for the article. I think that each choice basically comes down to the situation of the individual. A. one might want to budget and with term life insurance you are set to know what you are are paying on your premium each year. In other words it doesnt change. With whole, you are basically setting a investment in something that will change in value and will change in what you pay.

  2. Benefit Consultant "Gordon" says

    A really good article. I agree about buying term vs permanent. I was just about sold permanent back around age 28 and even today at 56 the payment was MORE!!! And I can see the need for coverage mostly disappearing in the next 5-10 years. Long before it would have made a difference.

  3. Jonathan says

    [Note from Editor: Jonathan sells life insurance. See previous comment.]

    have you looked at the price of term at the age you will be at the time your 20 or 30 yr term runs out? and will you be insurable at that point? maybee you wont need insurance at that point. most family less people wont have a beneficiary but most of us have kids we want to leave a lot of money to not just cover funeral expenses. also shouldnt we pay back the kids that are going to use their money to take care of us when we get to old. we are living longer about 20 years. I think that term is self ish how much can I save, how about your wife the person that wrote the article above pobabliy lives alone in a closet and doesnt care about his family or his future grand kids.

    i hope he lives long but last week a good friend had a heart attack at 40 and died. what then? what about his kids all 4 of them ? wow he saved 20$ a month and didnt have any time to save anything. if you cant make time you better buy it.


  4. David says

    I normally enjoy reading your posts TFB, even if I don’t always agree with them. But, I think I’m disappointed with this one. I do not disagree with your point number 1. But, I disagree wholly with your evaluation of the facts. Your need for insurance does decrease with age, and this is what permanent insurance does for you. I think a better question is “does it do a good job of insuring your life or is there a better way?” That’s an entirely different analysis.

    I don’t think the question should have ever been “term vs. permanent” because…well…they’re both term policies. People perhaps don’t know or have forgotten that whole life was originally called “term to age 100” and universal life is simply “buy term and invest the difference” since it is literally an annual renewable term policy with a cash reserve account.

  5. David says

    …I should probably also add that most life insurance agents don’t get a very good education or seem to forget the basic stuff that was contained in their pre-licensing exam and study materials.

    1) Term and permanent insurance cost the same–if by cost you mean cost per $1,000 of death benefit, since the mortality tables used for term and permanent are the same. You don’t suddenly pay more just because buy a different kind of contract. So, like insurance agents who come up with weak or poorly constructed arguments for buying whole life, I’d say avoid the people who say that permanent insurance is “more expensive” than term…because they really have absolutely no idea what they are talking about.

    2) Saying all universal life or whole life policies are good, bad, ugly, awesome is just like saying all mutual funds suck, perform well, are expensive. Again, I’d say, don’t trust people who make sweeping generalizations like that. I don’t personally like most mutual funds, but I’m willing to admit there are funds that do an incredible job and keep costs low and could actually be good investments depending on when you buy into them.

  6. Harry Sit says

    @David – Just because the mortality table is the same, it doesn’t mean different companies charge the same rate for life insurance or the same company charges the same rate (cost per $1,000) in different products. You must have access to these quotes. Please show us the cost of insurance in a whole life policy, a universal policy, a variable universal policy, a level term policy, and an annually renewable term policy for the same age, gender, and health category. Thank you.

  7. David says

    @TFB – I should have qualified my statement by saying “assuming all other factors are equal.” My mistake.

    >>>Just because the mortality table is the same, it doesn’t mean different companies charge the same rate for life insurance or the same company charges the same rate (cost per $1,000) in different products.<<<

    On the first part you are correct, but probably not for the reasons you think (which I'm inferring from your other posts on life insurance). For the latter, I personally think you are mistaken. Death doesn't care whether you buy a term policy or a whole life policy. Your probability of death is the same whether you buy a term policy, a whole life or you don't buy any insurance at all. Maybe I should be speaking in terms of mortality costs, though I don't know if that would make things any clearer.

    All life insurance policies, regardless of the company, are designed the same. They are all based on mortality, interest, and expense. Within the same company, the mortality tables used for life products determine the cost to pay out a death benefit at any given age. Actuaries say to the life insurance company "for a 42 yr old man, in such and such health, it will cost you this much to give him $1,000 if he dies this year, this much if he dies this same day next year, that much if he dies same day 2 years from now, etc.." Then the actuary says, you can design a policy on a "pay as you go" system (annual renewable term policies) or a cash reserve system (some term life policies and all permanent policies).

    Now, what changes from company to company is the mortality experience of the insurer. Insurers with lower death claims might charge lower premiums.

    But, I made a mistake in my previous post. If we assumed all things being equal between the policies, then the costs should be the same. But, in a sense, all things won't be equal. I'm going to simplify the discussion by just speaking to whole life for a moment.

    Whole life costs actually get cheaper over time, but not because the cost per thousand gets cheaper. So, calculating the cost, as it were, is time specific. The reason is this: the cash value is a cash reserve that is set aside to pay the future death benefit (this is why the cash value equals the death benefit at age 100 and insurer gives you a check for the death benefit when you turn 100 if you live that long). The difference between the cash reserve and the death benefit is called the "net amount at risk." This net amount at risk is actuarially designed to decrease each year, so you're really buying less insurance over time. But, I cannot reason why the cost to pay out $1,000 would be different depending on policy type. How this cost is paid for I can see being different, but I don't see how the mortality function changes. Also, the probability of paying out the death benefit is different between a term policy and a permanent policy–that I would say is true, but that's an entirely different issue.

    Also, I think where a lot of people get tripped up is when they compare the cost of mortality for 5, 10, 15, or 30 years to the mortality cost of a permanent policy which stretches out to age 100. If you buy a 5 year term policy at age 30 and a whole life at age 30, the mortality figured into the term policy only goes on for 5 years while the whole life continues out to age 100. You see the premium higher on a whole life and you assume (erroneously) the cost of a whole life is higher. If the whole life policy never built a cash reserve, you'd see the costs for the death benefit be the same.

    But, whole life does build cash value (at least, in the U.S. it does). The term policy never builds a reserve that is more than enough to cover expected insurance charges for the term of the policy. It also never attempts to reduce the net amount at risk.

    So, going back to the whole life policy, eventually that cost will be zero on the whole life, assuming you live to age 100. Even if you don't, your mortality costs should be quite low in your old age since there's not much actual life insurance left. Ironically, if you want the cheapest policy, you'll want to buy a whole life policy even though the mortality charges keep rising and the premiums are higher than a term policy, at least in the beginning.

    I think the reason people perceive the cost of term to be lower is because they look at premiums they are paying out of pocket, assume that the premium constitutes the cost (it doesn't) and they dump the term policy before they ever realize the full effect of a pay as you go policy. They don't figure the "investing the difference" portion of their buy term and invest the difference insurance/investment plan as a cost while they do figure it as a cost when it's called "whole life."

    The reality is that, actuarially, the policies with the highest premiums will always be annual renewable policies, because they're a full-on pay as you go policy.

    The level term policy uses level term funding, similar to how a whole life policy works, but without trying to reduce the net amount at risk. The insurer inflates the premium over the pure cost of the annual renewable premium and invests the excess (which is why it baffles me when people say that investing and insurance shouldn't be mixed–if they really believe that, then those people ought to be buying annual renewable policies or learn to be more technically accurate in what they say and stop misinforming the public).

    It's a lot easier if a person learns this stuff inductively, but they never do. Everyone just defaults and says "term is cheap, whole life is expensive." It's factually incorrect. If you start with an annual renewable policy and then look at how policy designs evolve from there, and what actuaries do to fund the death benefit, it's pretty clear that they are all basically built off of the same or similar chassis.

    Regardless, actuarially, you're better off with a whole life than with a term policy. Now, mixing this in with a discussion on investment philosophy is a whole 'nuther matter. Whether you think a person should buy whole life or buy term and invest the difference is posing the question "is it more efficient to self-insure using a bundled insurance and investment plan (i.e. whole life) or should I try to unbundle some or all of the mortality function of my insurance plan from my investment plan (i.e. universal life–which is technically "buy term and invest the difference" albeit within the same contract, or buy a term policy and invest in something outside of the insurer's investment options)?" A lot of that depends on your philosophy of financial planning as an individual, your financial goals, your knowledge of investing, risk tolerance, etc.

    I'm not going to bother posting quotes for policies, because I think it's irrelevant to the discussion. Posting costs of insurance (COI) for permanent policies is also somewhat misleading. For example, if i post up the COI for a universal life policy (UL) I can play with the funding levels to increase or reduce the COI. I hope you can see, based on my previous explanation of how cash reserves reduce the net amount at risk, why this would be so. For whole life, the calculation is done through a surrender cost index, net cost index, or both. That's nice because it takes into account the time value of money. For my whole life, that cost is ridiculous in the early years, but at year 20, it's N/A (there is none).

  8. Harry Sit says

    @David – Thank you for the education. I want to believe you. That’s why I’m asking for some empirical evidence. I don’t quite care about the theoretical cost of insurance. Rather I care about the cost of insurance deducted from the policy premium, as experienced by the consumer. If I’m a 35-year old male in Preferred health category and I buy a $250k policy in different types, what is the cost of insurance in the first year, per $1,000 at risk, deducted from my policy premium? And in the 10th year? It’s a simple question. I’m looking for a simple, matter-of-fact answer. Pick any random company. Show the cost per $1,000 at risk. That’s all. Thanks.

  9. David says

    @TFB–I am not trying to side-step your question. But, if you aren’t interested at all in the theory, the best thing to do is to give up and worry about something else. I’m not saying that to be harsh or rude, but I really and truly think the theory here has to be understood, or you won’t understand what the numbers I will tell you mean.

    The costs, in terms of mortality, are the same for all insurance policies from the same company. Also, all policies are term policies, and as I said before they all function off of the same mortality tables (whole life is “term to age 100”, actually it’s “decreasing term to age 100” much to the dismay of term advocates–if you don’t believe me, pick up a book on actuarial science. You won’t see a discussion of how “whole life is more expensive than term life”. Instead, you’ll see a discussion of the decreasing term in a whole life policy in relation to its cash reserve. It’s the marketing arm of the life insurance company that tells you there are two “types” of insurance, one being “expensive” and the other being “cheap”. There’s a good reason for this: they make more money off of “cheap” term policies than they do “expensive” whole life policies, all other things being equal).

    How the insurer deals with the net amount at risk is different according to the contract. The policyholder either does a “pay as you go” for the death benefit (annual renewable term), the insurer builds a cash reserve to keep the costs stable/same (level term), or they simply eliminate it (whole life). But, those mortality costs are the same regardless of what you buy.

    Dig out your term policy. What you see in your policy is probably a net payment or surrender cost index, similar to mine. This is the insurer’s inflation adjusted cost per thousand of death benefit. With a level term policy, the insurer will show the cost index staying level for 20 years, even as the actual mortality costs are rising. This goes back to the fact that excess premium over the pure cost of insurance has been collected and is being invested to hold down future, rising, costs of insurance–though those costs are not eliminated, they are just being staved off by the insurer’s investment of your premiums.

    So, at 35, (assuming a 20 year term policy) your cost is probably $0.60-$0.80 per thousand in the first year (roughly, I’m taking an educated guess). In a whole life policy, your cost is paid in advance to help build the reserve, so you see a cost of maybe $30 in year one. At year 10, you see the same cost in your term, but you see a cost of about $20 in the whole life. Then, at year 20 you see the same cost in your term and a cost of $0 or “N/A” in the whole life (it’s normally not linear, and the starting cost and drop off rate depends on your policy type; I’m assuming my policy design for the whole life–other policies will be different in how fast the cost goes down, and some will show a lower initial cost and have it decrease over a longer period of time thereby stretching out the cost for a longer period of time). After year 20, things get fun. Your term policy cost per thousand skyrockets or you buy another level term at a significantly increased cost per thousand. The whole life will show N/A or a decreasing cost for the rest of the policy until it finally hits that N/A or $0. Now, if you had compared these policies to an annual renewable term, what you would see is a starting cost of maybe $0.30 and then it would increase every year for as long as you held the policy. I think what happens is that it’s easy to see different numbers and assume the cost of insurance is different across all different policies. But, it’s not. You look at total costs of a policy over the same period of time. When you compare term policies to whole life, you have to keep in mind that whole life stretches out the term function to age 100 so comparing it on one year intervals is somewhat meaningless, even though the lifetime policy costs of mortality are the same. In actuality, the year to year mortality is the same, but the insurer cannot do a “pay as you go” or partial cash reserve plan with whole life or they’d be doing an annual renewable term or a level term plan, respectively.

    I hope that clarifies things. This is the best I think I can do for free 🙂

    If you want more info from a non-financial professional, the best source on the net from a consumer’s perspective is the visible policy:

    He doesn’t go into as much detail as I could, but he does a fairly good job of explaining how it all works based on his policy.

    But, let’s also do this: why don’t you tell me why you think the mortality costs would be different from policy to policy within the same company?

  10. Harry Sit says

    @David – Thanks again for the theory. I got it. I understand the decreasing amount at risk. That’s why I asked cost per $1,000 at risk. You say cost of insurance in whole life can’t be calculated in one year intervals. I accept that. You forgot about universal and variable universal, which have a delineation between cost of insurance and credit to cash value. I don’t just assume the mortality costs would be the same or different from policy to policy within the same company. That’s why I’m asking to see some real life examples, which you refuse to give. That’s fine. I will go ask someone else who know.

  11. David says

    @TFB–I have no idea what you’re talking about.

    I just gave you numbers from an illustration I pulled up on a theoretical 35 yr old. The reason I took an educated guess on the year one costs was because they aren’t listed. I also invited you to pull out your own policy and look at the cost index. Perhaps that was not clear.

    I didn’t forget to include ULs (variable UL is a UL contract so it functions the same in terms of cost structure). I purposely excluded them to keep the discussion more or less simple. ULs use a one year annual renewable term life policy. The way they account for mortality is different from other policies and I didn’t want to have a discussion of proscriptive vs prescriptive mortality.

    All of this doesn’t change that mortality is the same among policies. You asked for numbers. You got numbers. You even got an explanation of how they related to cost per thousand of death benefit. You didn’t like them. You’re going to go ask someone else who might give you the answers you want to hear. That’s fine.

  12. David says

    It appears there was an error in my illustration. According to the analyst I spoke to today, the N/A is supposed to be an actual number. Apparently, I’m the only one who caught it. The number would be either positive indicating an actual cost or negative indicating that you made money on a per thousand dollar basis. I also confirmed with him what I previously told you which is that all policies carry the same guaranteed mortality costs. If mortality experience is lower than expected, then the insurer has effectively overcharged you and subsequently refunds the difference in the permanent policy and adds it to any guaranteed cash value amounts in the policy. For policies with assumed costs (i.e. ULs), the insurer charges an amount lower than the guaranteed mortality costs, never overcharges you, so there’s nothing to refund. If costs are higher than expected, you simply pay the extra out of the cash value or out of pocket. But, either way, the guaranteed mortality costs and actual costs are the almost the same for all policy types. One thing I was potentially mistaken about was level term policies. This is where the difference in mortality costs would come into play. The insurer keeps any overage for term policies, since there are no non-forfeiture options on term, meaning you might end up overpaying for term, ironically, where that will never happen with whole life. 🙂 But, there’s not usually much overage, so I wouldn’t feel so bad about anything you don’t get back. He also mentioned that less than 1 percent of term policies ever pay out a death claim making it a pretty decent money maker for insurers (which didn’t surprise me). I guess that explains why lots of companies push term.

  13. Peter S. says

    TFB – I have been examining the investment component of equity indexed universal life (EIUL) insurance policies (within MEC limits) as an alternative or supplement to investing in more mutual funds within my 401K. Some insurance companies offer interest crediting formulas linked to 100% participation in the S&P 500 Price Index (dividends excluded), currently subject to a 12.5% cap and a 0% floor, as measured point-to-point, credited annually. In other words, whenever the Index rises during a measured year, the carrier credits the cash value account by the percentage increase of the Index, up to 12.5% (some carriers offer 15%). If the Index falls, the interest credited is 0% – regardless of the amount of the fall (some insurers offer a 1or 2% guaranteed floor). The interest so credited is compounded and is tax deferred.

    To “back test” the formula, I applied it to the published monthly historical change of the Index starting the first trading day of August, 2011 and going back 60 years. Assuming such a contract was always available and the cap and floor remained constant, the compounded annual crediting rate would have been 4.74% going back 3 years vs. 2.95% change in the Index. Corresponding figures for going back further are, 5 yrs – 5.27% vs. 2.1%, 10 yrs – 6.29% vs 0.34%, 15 yrs – 7.07% vs. 3.99%, 20 yrs – 7.49% vs. 5.59%, 30 yrs – 7.49% vs. 7.81%, 40 yrs – 7.13% vs. 6.37%, 50 yrs – 6.91% vs. 5.86%, and 60 yrs – 6.96% vs. 6.75%.

    I know such back tested past “performance” can be unrealistic and does not guarantee future returns, but it is indicative in some ways. I am reluctant to keep putting more into my 401K (now unmatched by my employer) and subject it to the continued risk of principal loss and the vagaries of the stock market (my net compounded in return in the 401K over the last 11 years was actually negative).

    Should I die, my family would collect the accumulated cash value, also tax free. I doubt that would be the case with my 401K. I can borrow against the cash value at a net cost less than 0.25% – also tax free as long as the policy is not a MEC (and without any obligation to pay it back while I am alive).

    Yes, I know I can't do this without paying for the cost of coverage under the death benefit component, but I do need and want permanent life insurance and the cost of that is acceptable. The principal risk I see is whether the carrier will still be around when I need them. I intend to bet on a large carrier that is among Weiss Ratings' admittedly thin A list – a group that has weathered many storms. The secondary risk is the insurer's ability to change the cap (up or down), albeit they have to do it consistently for all policy holders in the same risk class. The carriers I am considering have a good history in this regard, though not more than about 15 years.

    Does the concept and my logic make sense to you and your readers? Am I missing or ignoring some key element?
    Thank you for any insight!

  14. Harry Sit says

    @Peter – Excluding dividends is a big deal. Don’t under-estimate its effect, especially if the returns will be low as some pundits say (“new normal”). In a low return environment, dividends are a large contributor to the total return.

    Linking strictly to S&P 500 is also a problem. If you otherwise would invest in a diversified portfolio with small caps, emerging markets, commodities, etc., and those investments would do better than US large caps, you won’t be able to benefit from the higher returns.

    Comparing tax free loans and inheritance with 401k being taxable at the time of withdrawal is not taking into account the tax exclusion on 401k contributions. Suppose you stop contributing to your 401k now and start paying into this EIUL, you lose the exclusion and your taxes will go up. You are basically prepaying the taxes for your future tax free loans and inheritance. If I buy an EIUL, I would do it in addition to contributing the maximum to my 401k, not in lieu of.

    For many others, the cost of insurance is an extra cost. If they didn’t want the investment features of an EIUL, they don’t need and wouldn’t buy life insurance year after year into their 70s, 80s and 90s, which costs a lot of money. You are saying you want it anyway. Are you sure? If EIUL isn’t available, what and how much life insurance would you buy?

  15. Peter S. says

    @TFB – Thank you for your thoughtful suggestions. I have not found any carrier that does not exclude dividends from the S&P 500 index. I have confidence in the S&P 500 simply because of what it is. I have not back tested the 0% floor / 12.5% cap crediting formula against other indices to see if they beat the S&P. Have you or anyone else? What caught my attention about the EIUL was not its great upside potential (the cap limits it), but its APPARENT ability to very effectively protect against the downside AND STILL OUTPERFORM all indexed and most mutual funds. If my back test calculations are correct, for the past 10 and 15 years, I would have LOVED to take a 6.3% and 7% return, respectively, vs. what any fund did, except maybe Warren Buffet’s.
    If the latest Dalbar report is to be believed, the actual historic net return realized by individual investors for the past 20 years was a little over 3% vs. about 8% returned by the S&P 500 (including dividends) and about 7.5% under the EIUL crediting formula. I doubt Dalbar’s explanation of bad investor timing fully accounts for their shortfall, but, for whatever reason, the chances of my 401k even approaching the S&P 500 seems remote, at best. Except to the extent my company matches contributions with what amounts to additional salary, I am questioning the wisdom of putting more money into the 401k when (1) my principal is fully at risk, (2) I bear full volatility risk, (3) I risk increases in the tax rate as will be applied to deferred income, and (4) the historic net returns after all fees, commissions and yet unknown taxes don’t seem to adequately compensate for these very real and significant risks.
    I understand I am effectively prepaying taxes if I pay into an EIUL, but, a future (and in my opinion very likely) increase in tax rates could easily turn that into an advantage.
    As for the PURE life insurance component, at an assumed annual 6.5% crediting rate (120 bp under the back tested results for the formula), the internal rates of return (after all fees, charges and cost of insurance), seem reasonable even in the later years (I don’t expect to last past 85…):
    Age 55 $222K Death Benefit – IRR 13.1%
    Age 65 $717k Death Benefit – IRR 9.7%
    Age 75 $829k Death Benefit – IRR 6.4%
    Age 85 $779k Death Benefit – IRR 4.5%
    Age 90 $500k Death Benefit – IRR 2.8%
    The earlier I go, the higher the tax free IRR. The later I go, the lower the IRR, but I would continue to realize what seems like relatively high returns if I overfund the policy to build cash value. And if I die early the cash value from over-funding will be added to the death benefits, paid tax free to my family. Any holes in this thinking?
    Bottom line: a 4.5-5% tax free IRR on the DB at age 85 is not bad; and I don’t know how to beat a concurrent 6.5-7.7% tax free IRR on the overfunding.
    Based on past performance of different options, I don’t know what else to place money into for comparable returns without risking principal and, in my opinion, inevitable tax increases. Additionally, inflation will likely rise as the money supply is expanded to pay for debt, so outpacing inflation will be another major issue. Any suggestions?
    I especially value your opinion after having read just about all your posts – I am very impressed with your intelligence and unbiased, clear thinking.
    Thank you.

  16. Peter S. says

    Typo in my previous post: correct Death Benefit at age 55 is $622k, not $222k. The corresponding 13.1% IRR is correct.

  17. Harry Sit says

    @Peter – It doesn’t surprise me you would get a huge IRR with life insurance if you die early. I just prefer to live longer. 🙂

    If you are concerned about the tax rate increase you can use Roth 401k, Roth IRA and convert your Traditional accounts to Roth, although I’m not as concerned or a big fan of using Roth accounts.

    You are correct that all other options require risking the principal. I still think not getting the dividends is too big a cost for cutting off the down years. So is lack of diversification. If the US market becomes like Japan in the last 20 years, this EUIL will do poorly.

    Also, isn’t this pretty much an irrevocable deal? Once you start it, you will have to continue until you die. If your plan changes for whatever reason, the costs of insurance are gone and all credited earnings become taxable.

  18. Peter S. says

    @TFB – Well, we agree both we prefer to live longer than shorter! But, my point was, the death benefit component of an EIUL is not “expensive” – as measured by the IRR. In fact, the premiums are comparable to term policies of same duration (as they should be – the same mortality tables are used).

    We also agree, Roth style plans may address some of the tax rate risk, and we agree all other options require risking the principal. But, my point was, investments in 401k and Roth plans SIMPLY DO NOT PERFORM WELL ENOUGH for their participants, considering the risks taken. I don’t know of any principal-risking investment option within 401k/Roth style plans that ACTUALLY delivered returns exceeding the EIUL over the long term. The Dalbar‘s new QAIB 2011 study is quite revealing: long term investor returns suck. Seems to me, higher risks warrant higher returns. I was hoping you might point out a few alternate options? Otherwise, the EIUL seems like a wise choice for me (even if it doesn’t share in dividends), at least for some of my money.

    You raised lack of diversification. Ironic, because TOO MUCH diversification may be a major contributing cause of the dismal long term performance of funds in which 401Ks invest (wasteful fees and turnover are some others). The winners in those crowded funds simply do not have the impact they should – severely chopping off the upside, and disproportionately so. After all one can only lose 100%, but the upside can be 400,000% (Berkshire Hathaway).

    Yes, we agree that EIULs are intended for long term holding, but they are no more “irrevocable” than any other investment designed for holding. It is their long term nature that creates the advantages, not unlike those of bonds, CDs and even some mortgages. Of course, there is always a price for “early withdrawal”. But, that is not the issue, as I am prepared for long term holding.

    The unresolved question is, has any other investment vehicle, principal-risked or not, short term or long term structured, indexed or not, dividend sharing or not, taxable or not, diversified or not, performed as well or better than an EIUL with crediting formulas as I described – OVER THE LONG TERM – as measured by its annualized return or IRR. Thanks again!

  19. Harry Sit says

    @Peter – I don’t have anything else to add beyond what I already wrote. It sounds like you are already convinced that an equity indexed universal life insurance policy is the best fit for you. Go ahead then. It’s your money.

    I also want to commend you for being one of the most knowledgeable equity indexed universal life insurance prospects. Your agent should be very happy. Too bad I don’t have a life insurance license. Otherwise I would want you to be my client.

  20. Peter S. says

    @TFB – I had little choice but to spend a lot of time, effort and IQ trying to figure out how EIULs work because I was literally unable to find an agent that FULLY understood them. Even agents that sold EIULs since they were introduced some 15 years ago had huge holes in their understanding of even the basic concepts, let alone the contract fine points. To make matters even more challenging, I found carrier illustrations in many instances to be incomplete, materially misleading, or flat wrong. Doesn’t say much about regulators.

    If one doesn’t understand all the policy fine print (and how those provisions can affect performance), most illustrations are a minefield that can later tear off one’s financial limbs… Agents tend to lead one to believe carrier-issued illustrations are projections when, in reality they are nothing but a meaningless snap-shot of the present, mindlessly extended for as much as 100 years with NO changes to ANY variable during all that time!

    Adding to the due diligence burden is the fact that the actual amount of future fees and cost of insurance charged to the policy holder will be a function of the carrier’s actual and PROSPECTIVE investment returns, expenses, mortality rates and lapse rates. Similarly, future cap rates will be a function of market interest rates and the carrier’s hedging prowess. Lastly, the projected claims paying ability of the issuing carrier is a major risk factor that can’t be assessed without underwriting the company, relying on a rating agency, or both. Unfortunately, agents are almost useless in this endeavor.

    Having said all that, EIULs are really no more complex or “complicated” than any other investment, especially where principal is at risk. Things only seem complicated until the “Aha!” moment of understanding is reached. Then, the most complex financial instruments become really simple. Some good, some bad.

    Madoff’s regulators, investors, bankers, auditors and lawyers all thought he operated a proprietary, ultra-sophisticated, stunningly successful, complex investment scheme. Once understood, it magically morphed into a simple Ponzi scheme every 5th-grader can understand in five minutes. With due diligence, there are no shortcuts. One should never invest without ACTUALLY understanding. Meanwhile, assume all “facts” to be fairy tales until verified.

    Clearly, EIULs are a complex product, designed for a potentially lifetime commitment to the contract and the carrier – definitely not for everyone (not that any financial product is). Though EIULs passed my DD, It may not be for me IF there are alternatives to the cash value component that have historically been able to match or exceed EIUL crediting rates over the long term. That is the last, still missing part of my DD. I was hoping you might be able to provide some impartial, objective insight or point me in the right direction for further DD.
    Thanks again.

  21. Peter S. says

    @TFB – If you got your insurance license, I would not become your client until you satisfactorily answered my last question… 🙂

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