|
As the Wall Street Journal reports, universal policyholders are now facing premium increases of a couple hundred bucks per year to a couple hundred THOUSAND dollars per year — if they want to be able to collect their intended death benefit. This is no small matter for many consumers who relied on these life insurance policies as their primary estate planning tool. They now find themselves in the unenviable position of having to cough up a lot more money for protection that they already thought they had, or face the prospect of a drastically reduced payout upon their death.
All of this is of course the result of never ending QE policies that have driven more than 10 trillion dollars of sovereign debt to below zero yields. That’s starved investors of even the most miniscule return and turned all of the carefully researched actuarial calculations to mush.
|
|
| Is your life insurance at risk? |
The Future Isn’t the Past
The debacle in universal policy space made me think about the smug prognostications of most investment advisors about pension planning. The basic recommendation is that all of us should put a 60/40 equity/bond portfolio into some Vanguard ETFs and essentially keep on doing that for the next 30 years to build a comfortable nest egg. The implied bet is that the future will be much like the past. Stocks will average 6% per annum and bonds will keep volatility down to a reasonable rate.
But what if the past is not a prologue? What if we are all turning into Japan where the Nikkei hasn’t seen fresh highs in more than 40 years and may not see them for another 40 more? What if stocks only average 3% per year over the next two decades? And bonds lose half their value on just a 100-basis-point rise in yields? The very smug assurance of Wall Street investment planners may be just as misplaced as the soothing promises of the insurance industry in the 1990s.
Something we should all be thinking about as we try to plan for the future in this Alice in Wonderland economic world.
Happy trading,
Boris Schlossberg
|
When it comes to big phones, you don’t have to look much further that Samsung’s new Galaxy Note 7. This is a 5.7-inch behemoth of a handset and sports all the features big-phone people have come to expect: Elegant design, waterproof body, iris scanner and a new stylus (a writing gadget you use with the phone). The phone’s 2560 by1440 resolution screen uses Samsung’s Super AMOLED technology and HDR technology, which together produce an outstanding viewing experience. And even though at $849 the new Note 7 isn’t cheap, it’s worth a look — even if just to hold the beast in your hand.
Financial powerhouse Morgan Stanley just got a polite, but firm knock on the door: Activist investor ValueAct Capital Management LP has taken a whopping $1.1 billion stake in the bank. The $16 billion hedge fund is known for turn-around stories that focus on management and operations over a company’s financials. In fact, in a letter to investors, ValueAct CEO Jeffrey Ubben showed support for the bank’s plans to move away from risky operations like trading and move toward more reliable activities like wealth management. But don’t expect ValueAct’s move to go unnoticed: If the bank should fall short of targets, the fund will take a long look at bank management and push for changes if need be. Stay tuned.
As much as anyone, Darren Walker — head of the massive $12.6 billion Ford Foundation — loves the Olympics. But like most of us, he also sees the disparity: “As we have seen in our office in Rio, it’s a challenge. On the one hand, what’s happening there, we celebrate because there’s been significant new development … The challenge is that it has not shared the benefits of the Olympics broadly with Brazilian society.” The price tag for the Olympics will cost Brazil — a country with millions in poverty and a range of other social challenges — a staggering $4.6 billion. And the jury is still out as to how that investment will positively affect the Brazilian people that need it the most. But that doesn’t make Walker bearish on Brazil: “This is a country that, in many ways has overcome in the past challenges like politics and corruption. It’s a very resilient country with a resilient population of people who, I think are gonna be able to weather this storm.”
The Money and Markets team
{ 20 comments }
brazil, is and in many ways will remain a mess for many yrs to come, look at their neighbors there isnt one example of prosperity sustained in any of their neighbors , its a cultural phenomenon brought on many many yrs ago by the spanish and portuguese colonyes hard habit to break
Universal life is a life insurance product with a lousy investment. Universal Life insurance is SOLD as an investment you NEVER have to pay taxes on! That means, you have an Investment that NEVER makes MONEY! As soon as your investment in Universal Life makes money, the life insurance contract internally automatically increases the death benefit (the Insurance) at your NEW AGE! Usually up to 8% increase in death benefit and increased premium. Over the 8%, the gain on the investment is put into a SHUTTLE account internally in the universal Life policy to keep the policy non taxable. They pay interest on the shuttle account which is taxable and life insurance industry calls this Premium tax (it is not called that by CRA or IRA). As you get older, the cost of the insurance goes up and up. Universal life takes money out of your investment /shuttle account to pay for the insurance costs. Eventually, at age 60 -70, your investment goes to ZERO $$$$. Then Universal life insurance simply becomes Pure term life insurance and increases with age! To keep Universal Life insurance in force, you must pay the higher premiums. The fact that there are zero interest bonds or negative interest rates is a SMOKE SCREEN to cover the internal flaw of Universal life. Millions of people who were SOLD this as a retirement nest egg have bought very expensive life insurance. The answer IS, WAS, and ALWAYS will be BUY TERM AND INVEST THE DIFFERENCE!!! Build your retirement nest egg outside of Insurance and as you get older, get out of life Insurance. There is no SAVINGS plan attached to car insurance, home insurance, or health insurance! WHY would you attach savings/investment to your life insurance. Universal life is an INVESTMENT guaranteed NEVER to MAKE MONEY, so they say guarantee you never have to pay taxes! Your best option with Universal/Whole/Variable life insurance is to DIE while the policy is in force! But you should have bought TERM Life and invested savings outside of insurance!
Excellent, just excellent Allen
That’s right! No one ever lost investment money in the stock market! You must be Suzy Orman’s brother. Firstly, an Indexed UL guarantees a 0% floor and always has a declared rate of return. Second, it can have a rate of return based on the S&P capped at around 13%. It grows tax deferred and cash growth can be borrowed from the policy at a government required rate that is usually somewhere in the vicinity of the policy’s average rate of return. The whole hubbub here is that either the policy holders took out too much cash or the policies were underfunded – which IS the fault of any agent who may not have been too sharp. The New York Times article mentioned what, a dozen cases? Telephone games like this article are exaggerations that serve no one but the sainted knights of Wall Street.
Allen, is that to imply that there are only 2 places to put investment capital, Wall St and Life Insurance? What about Real Estate?
Maybe I totally missed your point.
indeed ! , thanks for the explanation , many people still believe they have to pay no taxes on certain things, you and I know if there arent any taxes there is no money. no matter hat. i,m just so sad for all people 30 /40 years ago that are now stuck paying or stuck with nothing.
Depends on policy I have one that does not play games, and has given me four percent tax free without stock market roller coaster ride. Try that at your bank. My death benefit was reduced with age but I knew that from beginning .I use my insurance policyto save some tax free money for my kids upon my demise, or if I need it for health reasons. In a crunch I can also borrow on it.
Exactly, Alan.
Universal Life policies have a variety of Cost Of Insurance (COI) options from level (no change for life) to yearly renewable term (YRT and ART) that are guaranteed in the contract. If you selected level COI your policy will continue as long as you pay at least the COI. Any extra amount will generate income based on the investment tools selected.
On the other hand, if you selected a variable COI or you thought the insurance premium will be fully paid from the investment value after x years, you are out of luck. You can only blame yourself for succumbing to the allure of the “tax free gains” in a universal life policy and sharing the interest risk with the insurance company – a bad bet in these times. A traditional whole life policy, where the rate and benefits are stipulated in the contract at purchase time, places the interest risk solely on the insurance company.
Never buy any kind of insurance marketed as an investment. It’s actually a liability in favor of the actuarial day you croak vs the likelihood you keep paying the premiums. Their “investments” of your money are total crap, and you never know were it goes until you find out how big your losses are, including commissions. They can jack up your premiums without notice to any amount they want (read your contract), so what’s the crisis?
Yours, because you are getting screwed, per contract.
In my youth (early 20’s) I was buying whole life policies. In my early 30’s I canceled all the whole life policies, bought term insurance, and began investing the savings. Now retired and have a nice investment portfolio. Best financial move I ever made.
My father,now gone,always believed in what he called “self-insurance”-other than his earned GM life insurance ,he secretly(that is to say,nobody knew)set up a cash account with both their names on it so it did not go through probate–NEVER trust that some slick Insurance Co. will actually be there when your spouse or children call them for the money you were counting on–set it aside for yourselves.
Alan,
You sound very knowledgeable–almost like a “financial adviser”. However there are many, manyways to structure a Universal Life policy that you fail to even touch on.
The best way to look at Universal Life is to structure the contract on a GUARANTEED basis to look like a term insurance policy with the option to allow the policy to stay in force to age 90,95,100 or even age 120 ! And neither the premiums or the face amount would increase. And that is a GUARANTEE. You also structure the contract so that it does not accumulate cash–just like a Term policy.
I think buy term and invest the difference is a good philosophy. However there are people who die after their term expires and their investments didn`t work out as planned thereby leaving little or no money for their survivors and meager retirement benefits for themselves.
Perhaps you should contact an insurance broker for more information on how to make a Universal Life contract work for you on a Guaranteed basis.
And what is the guarantee based on? Ans: The claims paying ability of the insurance company. Which with low to no interest is what the article is all about. How does the guarantee hold up when the company doesnt?
I now understand why I was told that life insurance was a poor investment. As stated all the acutuarial facts and figures are mush. No company can put together a program for your retirement in 30 or 40 years time anymore now or in the future as the future the new normal is here now to stay. These insurance companies and companies who ask you to turn over your life savings and buy an annuity have got to be hurting because there is nowhere to invest your money but in the risky stock market or gold. My obvious answer is the latter.
As with most retirement planning/savings/ investment vehicles, they are only income drivers for the companies/salespeople selling them. All the trailers and fee eat up most of the real growth and the madness of the markets suck up most of the rest. CPP & OAS will, in most cases, no matter how wealth managers pooh pooh them, will be the only thing separating retirees from poverty and a tiny bit of comfort.
Alan…your assumptions are just as bad as a poorly funded UL..UL has many positive features Iike quranteed death benefits till age 120. Check out GUL..guaranteed universal life policies. ..the are guaranteed you pay that target premium and they pay…you like term? Term expires and premiums get increased like the UL. Make your life insurance last period check out guaranteed universal life. Every person is different. Not everyone should buy term and invest the difference. Go to a professional to get really good quality advice.
my grand father and uncle worked for Prudential Life Insurance. I think each worked for 30 or 40 years. They were not great proponents of insurance …to them it was ” just a job.”..but they encouraged all of us to buy WHOLE LiFE…insurance. Whole life builds cash value with age and you can borrow on it or cash it out. When I was between jobs, I went to the local Prudential agent and even though he tried to talk me out of it , I cashed in my policy and we used the $800 to pay bills. I have since had term life insurance policies but when times got bad I had to stop paying the premiums. I now have a policy with the company I work for and it costs me nothing. It only is worth $13,000 but thats enough to bury me and have my wife move to a state where she can live on my SS. Now we are in NY where you can’t afford to live on SS, alone. MORAL to this story….buy WHOLE LIFE….and keep it till you die. Term is OK to protect any assets and or planned expenses ( house, kids college)…once you don’t need the term…cancel it and use the money to pay bills and keep out of debt. Insurance companies invest the premium money…and make a profit. That’s why insurance companies are good dividend payers, their business is always increasing….as people need insurance. Its not like cars or other products whose sales fluctuate with the economic times….insurance companies always make a profit.Don’t rely on insurance as an investment…its not…..Stay with whole life and or term…that’s it…
The early 1990s that’s nearly a quarter of a century ago, of course pension plans and the cost of life insurance is gonna rise in the meantime. There’s such a thing as inflation, the las Pere index and the papas he consumer price index.
I bought Term and now I have nothing, it ran it’s term and it expired. Yes it was inexpensive. But, I should have bought whole life too and built my cash value. Now, I have permanent whole Life structured to building a nice cash value earning 5% per year, no losses. Company has record of paying this for 100 years. Solid, no losses, no management fees like with mutual funds and stocks going down. Most of you don’t realize you can have more than one product at a time to maximize your return and safety. The Universal Life written about above was not structured properly because they were variable!