Thursday, January 23, 2014

Funding Retirement With Life Insurance

I found Dan Moisand's September 6th column “ Funding retirement with life insurance? Be wary” lacking in understanding and veracity. It is sad to see advisers being called experts yet still dealing with insurance products as though we are in the 1950's.

First, while different advisers say different things depending on their own education, experiences and biases, there is one thing a client can always count on. The math. Math never lies. Whenever an adviser makes a recommendation, checking the math and the assumptions behind the math will show the truth.

Regarding Mr. Moisand's assertion that if you take loans from an insurance policy there is a massive tax trap waiting for you; this is just not true for a properly designed Equity Indexed Universal Life Insurance policy. This is the type of policy designed for and most often recommend for the retirement plan the questioner was asking about. These policies come with over loan provisions that by contract make sure the policy always stays in force and prevents the policy from ever being over loaned. Therefore, the tax issue Mr. Moisand warned of does not exist.

Mr. Moisand's second point is that the policy is too expensive. The question should be “too expensive as compared to what?” Mr Moisand makes allusions. Let me use some math facts. Yes, there are insurance costs and premium loads and a policy fee but what about the costs of alternative investments? Let use a large Cap stock Mutual fund compared to a EIUL with a return based on the S&P 500 index without dividends. Other indexes are also available.

First, what are the fund expenses? Morning Star reports the the average fund expenses are 3.09 %. A recent Kiplinger's article had an average stock fund fee at 1.19% and the unseen trading costs at 1.44%. That gets us 2.63% then you have to add taxes and of course the adviser's annual management fee. That would be 1 to 1.5%... No matter how you slice it, 3% in total annual costs is very fair. Now let's assume $12,000 a year invested for 20 years.
If we look at the last 20 years ending December 2012 using 3% expenses the mutual fund would be worth $295,700 while the EIUL cash value would be $483,000 net after all expenses. Why? EUILs do not have losing years. When the market goes down an insured index product does not lose money. Also, the insured indexed product locks in gains so once you have money credited to your account you can't lose it in a market downturn. As to expenses, insurance is front loaded while mutual funds are back loaded. By that I mean that as your mutual fund value grows over time your annual fee costs also grow. On $10,000 your costs are $300 but on $100,000 your costs are $3,000. EIUL works in an opposite fashion; the main costs are paid up front. In a properly designed product, by the 20th year your costs may be down to .30 basis points. Much better than 300 basis points.

What about the future and the problems with projections. Was Mr Moisand or any other financial planner in 1999 showing clients a 1.5% return? Yet, that was the return on the S&P from 1999 to 2012. An indexed product would have returned over 6% during the same period.

Does this mean that EUIL is for everyone? No. It is a long term product, and not right for everyone. Are all products the same? No. There are only 5 companies that have a product I would recommend. However to dismiss it as ”unlikely to be a good deal” is flippant and a disservice to those looking for sound advice. The math tells the truth and that truth is that based on historical market returns a properly designed EIUL from a good company can be a very good deal.

Friday, January 17, 2014

Term Life Insurance Explained

What is Term Insurance?
Term insurance ( ) is life insurance protection for a specific period of time, usually from 1 to 30 years. It is typically the least expensive type of life insurance and it ends if you outlive the period of time you select, unless you renew coverage. Term insurance simply provides death benefit protection – meaning, that it pays a death benefit to your beneficiary if you die within the term period.

Who should consider term insurance?
  • Young families and individuals, who can’t afford the higher expense of permanent insurance or who are unsure about their long term goals, and who want something affordable today with the opportunity to change their minds tomorrow.
  • Individuals who need coverage for specific needs that will disappear in time, such as a car loan or a mortgage.
  • Small businesses who need protection in case a key employee dies or who need coverage for business loans.
  • Couples who need income replacement in the event of a spouse's death.
  • Term insurance provides affordable life insurance protection for those on a limited income.
  • Term insurance provides a good way to cover or even supplement other coverage when you have added financial responsibilities for a specified period of time (i.e. mortgage, loans).
  • Term insurance premiums are generally lower than those for permanent insurance. This is often beneficial for younger individuals and couples as it allows them to buy higher levels of coverage when the need for protection is often times the greatest.
  • Term insurance may have a re-qualification option that enables the insured to obtain a new term policy.

The Life insurance Application Process

There are a few things that you should consider when applying for life insurance. They are:

When do you need the insurance to become effective?
The application/underwriting process can take several weeks.  Please allow for this processing time when planning your purchase.  This is especially important when coordinating a new purchase with the replacement or expiry of an existing coverage.

How close are you to an age change?
Most companies charge premiums based on which birthday you are nearest.  When planning for your purchase, you need to also factor in the possibility of your age changing for premium purposes.  In order to save your last age, most companies must have received your signed insurance application in our office within 6 months of your last birthday.

What risk class are you?
During the online or telephone interview, most companies will ask you specific information on your situation for quotation purposes.  Most companies make every attempt to be as accurate as possible in their premium quotations based on the information you provide. The most favorable risk class they can quote is super preferred non-smoker.  The most common ratings are preferred and standard.

How accessible are you?
To provide you the best service possible, it is critical that insurance companies can successfully communicate with you. Any way they may be able to contact you is helpful during the application and underwriting process.  If you are accessible by phone, e-mail, fax, or mail, you should give the insurer that information.

How can you help expedite the application process?
The most time consuming portion of the application process involves the satisfaction of medical requirements.  Medical requirements vary by insurance company, by applicant age, and by amount of insurance purchased.  The insurance company needs all the required information before the underwriting process can begin.  Whether it is the completion of a brief paramedical exam or requiring medical information from your doctor, your assistance in ensuring that these requirements are satisfied will dramatically affect the processing of your application.

Term Life Insurance FAQ

What are the general guidelines that determine preferred non-smoker rates?
  • No tobacco usage of any kind in the last 3 years
  • No history of, or current treatment for, high blood pressure, cancer, diabetes, mental or nervous disorders, or disorders of the heart, lungs, liver, or kidneys
  • No incidence prior to age 60 of cardiovascular disease in immediate family (parents, siblings)
  • All values should be favorable, including cholesterol, triglycerides, and lipids
  • No abnormal findings in urinalysis; presence of nicotine may disqualify you for preferred class
  • Height and weight must comply with established underwriting guidelines
  • No convictions for reckless driving or driving under the influence of alcohol or drugs in the past 5 years
  • No participation in hazardous activities or avocations that require rating
  • Private pilots may be preferred but may have flat extra premium or exclusion
  • No residence outside U.S. or Canada

What is the "guarantee period"?
Rate guarantees vary by product and by company.  The guarantee period indicates the number of years the premiums are guaranteed not to change.

What does "age basis" mean?
Age basis indicates how your age will be determined for premium calculations. Nearest indicates that either your next or last birth date will be used based on which you are nearest to.  Last indicates that only your last birth date is used.

What does "renewable" mean?
The right, for a specified period of time, to renew your insurance coverage without providing medical information.

What does "convertible" mean?
The right, for a specified period of time, to exchange your insurance coverage to a permanent form of insurance, regardless of health or insurability.

What are the financial ratings by rating service?

A.M. Best Duff & Phelps Moody's Standard & Poor's
1. A++ AAA Aaa AAA/BBBq
2. A+ AA+ Aa1 AA+/BBq
3. A AA Aa2 AA/Bq
4. A- AA- Aa3 AA-
5. B++ A+ A1 A+