HNW Individuals & Life Insurance

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Aug 14, 2007 3:32 am

I'm choosing between entering fin. svcs. with a mutual life co. such as NYL, etc. vs. entering with an investment firm such as AGE.

I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject. And, yes, there is a TON of great knowledge and wisdom available and I will continue to to think it over. I do find much of it persuasive. I can tell you that I have made a good income as a B2B sales person but all I own is term and I wish I owned at least some WL. (I'm in my 50's) I know in a sense I answer my own question but I am not in the HNW classification. I want to understand how they - HNW'ers - think on the subject of life insurance.

I'm wondering if the way I've been thinking is just programming from friends and family who are...essentially broke... no retirement funds to any extent... little equity in their homes... all because as one forum member stated, it's just too easy to get at most money and people have little to no self-discipline.

My questions below are just restatements of the basic issue:

From the perspective primarily of people who are with a wirehouse can you say whether or not there is a significant portion of HNW individuals who do not/have not "bought" the view point of owning large face amounts of WL? Did the HNW individuals buy term and invest the rest? Did they buy life insurance at all? Do they wish that they owned more WL?
Are HNW individuals so focused on building their own businesses or investment portfolios that they even think about life insurance? Do they consider WL throwing money away?
I do know from research that some famous HNW's such as Donald Trump & Jerry Jones are big consumers of WL. I'm more interested in garden variety HNW people.
For anyone who chooses to respond to my question(s) I would be interested in knowing if you are with a wirehouse, life co., or an indy?

Aug 14, 2007 6:52 am

To get good information on this subject, go to top gun producers dot com.


Whole Life policies are not understood by the "Buy Term and Invest the Difference" crowd.  I'll give you a few quick reasons:


1) Over a long period of time, term insurance is actually more expensive than whole life.


2) The money that goes into whole life insurance is not money that should otherwise be invested.  It is money that should be saved.  The better comparison is Buy Term and SAVE the Difference.


3)Too often, what is compared is the cash value.  What should be compared is the after tax death benefit.


4)Owning whole life insurance, or any long term savings vehicle, allows one to safely take more risk with their investment portfolio during their accumulation phase.


5)Owning whole life insurance, or any long term savings vehicle, allows one to safely  take more risk with their investment portfolio during their distribution phase and take out a higher % for retirement.


6)Wealthy people tend to buy lots of whole life insurance.  A very large % of the ones who don't would have been better off financially had they bought it.


7)It's a huge myth that one's life insurance needs decrease as they get older.  To a large extent, one's life insurance needs increase as they age during their working life time.  If you don't believe me, ask any 50 year old if he has more life insurance than he had as a 30 year old. 


8) Many of the arguments in favor of term insurance focus on "needs".  Insurance isn't about "needs".  It is about "wants".   Many people want to leave as much money behind at death (family, charity, etc.) as possible, regardless of age at death.


9) Wirehouse guys tend to ignore the subject because their comp on the sale is only about 25% what other people make on the same sale.


10) People who are struggling should only buy term insurance.


11) The vast number of people who we come into contact with professionally would be best served by owning a combination of term insurance and whole life insurance.


12) Universal Life/Variable Universal Life/Equity Indexed Universal Life should never be confused with whole life.  If you understand these products, you'll see that they are fancy variations of annually renewable term insurance.

Aug 14, 2007 8:49 am

You would be surprised at how many HNW individuals do not have life whole life or an estate plan.  A lot of them (especially the ones who are newly rich) just never thought about it.  The big difference I've noticed is that when presented with the option to buy insurance, they are much more likely to say yes.  The money isn't as much of an issue for them.


I work in a wirehouse, so your experience may vary at NYL or another mutual.  They might have many more HNW individuals who have a ton of life insurance.  But here, it's shocking how wealthy some people are who have no life insurance at all.


If you want to focus on insurance, don't join a wirehouse.  Insurance is a nightmare to get through compliance especially for larger policies or any type of complex case.  And as anon said, we don't get paid all that well on it.  At an insurance company, I think you get 90% of your first year commission.  Here we get 70% gross which is then run through the grid, so it does end up around 25% total.  It also takes much longer to get paid on it so many of us don't focus on it.  Many times I refer in a life agent I know.  He's been doing it much longer than me, and since he's not securities licensed, he sends me nice referrals.


spintofish:

I'm choosing between entering fin. svcs. with a mutual life co. such as NYL, etc. vs. entering with an investment firm such as AGE.

I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject. And, yes, there is a TON of great knowledge and wisdom available and I will continue to to think it over. I do find much of it persuasive. I can tell you that I have made a good income as a B2B sales person but all I own is term and I wish I owned at least some WL. (I'm in my 50's) I know in a sense I answer my own question but I am not in the HNW classification. I want to understand how they - HNW'ers - think on the subject of life insurance.

I'm wondering if the way I've been thinking is just programming from friends and family who are...essentially broke... no retirement funds to any extent... little equity in their homes... all because as one forum member stated, it's just too easy to get at most money and people have little to no self-discipline.

My questions below are just restatements of the basic issue:

From the perspective primarily of people who are with a wirehouse can you say whether or not there is a significant portion of HNW individuals who do not/have not "bought" the view point of owning large face amounts of WL? Did the HNW individuals buy term and invest the rest? Did they buy life insurance at all? Do they wish that they owned more WL?
Are HNW individuals so focused on building their own businesses or investment portfolios that they even think about life insurance? Do they consider WL throwing money away?
I do know from research that some famous HNW's such as Donald Trump & Jerry Jones are big consumers of WL. I'm more interested in garden variety HNW people.
For anyone who chooses to respond to my question(s) I would be interested in knowing if you are with a wirehouse, life co., or an indy?

Aug 14, 2007 5:55 pm

My experience with the HNW people is usually about leverage.  They are sitting on a large amount of money, much of which will never be used/spent.  They can take a small fraction of their portfolio and return a great deal to their family.  I do not do a ton of traditional Whole Life.  It is usually a guaranteed UL product.  Most of my clients right now are more concerned with the death benefit guarantee than they are the cash accumulation in the life contract.  They generally have all the "savings" or investments they need.  Now they just want to protect it for their family or charity or make sure it is not eaten up by taxes.



And shadow is right.  Insurance is a mess at wirehouses to get approved by compliance.  Many more hoops to jump through.  A $10,000 "commission" or target at a wirehouse will pay $2800 generally.  At an insurance company you are looking at $5000, and indy it will be roughly $8000-$9000.  Both places will limit exactly who you can write as well.

Aug 14, 2007 9:47 pm

IronHorse echoes my experience. HNW indivudals (generally) use UL

policies to leverage up their assets for tax-free transfer of assets to heirs.

It is not typically used for the traditional "death benefit" such as term or

whole life. However, whole life and UL (and VUL) have distinct

differences, so you should familiarize yourself with the products.



But every situation is different. A mid-lifer (35-50) might need term

insurance to cover their kids and/or spouse. However, someone younger

might actually benefit in the long run by buying something permanent

(after 15-20 years, term becomes more expensive, depending on the

returns of the UL/VUL/WL policy). In a good VUL policy, you could get

your money back, plus a return, on your policy after 20-25 years. Or,

you could utilize it as a retirement funding vehicle through earnings

withdrawals and structured loans. With term, you are pretty much only

using it for the death benefit (other than for other select purposes under

specific circumstances).



Simple term insurance is very easy at wirehouses, though you don't make

much. The more complex stuff is tough (as they said). However, I do

quite a bit of both (relative to others in investment firms), and I will say

that it adds to my bottom line.

Aug 14, 2007 11:14 pm
Broker24:

IronHorse echoes my experience. HNW indivudals (generally) use UL
policies to leverage up their assets for tax-free transfer of assets to heirs.
It is not typically used for the traditional "death benefit" such as term or
whole life. However, whole life and UL (and VUL) have distinct
differences, so you should familiarize yourself with the products.

But every situation is different. A mid-lifer (35-50) might need term
insurance to cover their kids and/or spouse. However, someone younger
might actually benefit in the long run by buying something permanent
(after 15-20 years, term becomes more expensive, depending on the
returns of the UL/VUL/WL policy). In a good VUL policy, you could get
your money back, plus a return, on your policy after 20-25 years.
Or,
you could utilize it as a retirement funding vehicle through earnings
withdrawals and structured loans. With term, you are pretty much only
using it for the death benefit (other than for other select purposes under
specific circumstances).

Simple term insurance is very easy at wirehouses, though you don't make
much. The more complex stuff is tough (as they said). However, I do
quite a bit of both (relative to others in investment firms), and I will say
that it adds to my bottom line.


There's no such thing as a good VUL policy.  It's the worst kind of buy term/invest the difference.  It combines expensive annual renewable term and expensive investments.  Under very rare circumstances is a VUL ever appropriate (esoteric defined benefit plans for example).  I've never seen where a VUL for a retail client is appropriate.

Aug 14, 2007 11:26 pm

Deekay, you are 100% correct.


Theironhorse, Even if we are talking about purely a death benefit sale, I'd go with WL over GUL unless the client is older.   GUL puts the client into a position where they must pay an out of pocket premium forever or else lose the policy.   Ultimately, a participating WL policy is much cheaper than a GUL policy (unless the client is old).

Aug 14, 2007 11:30 pm

Thanks, Anonymous.  You may have noticed I've picked up a thing or two from your insurance knowledge. 

Aug 15, 2007 12:23 am
spintofish:



I'm still struggling with being programmed to think that WL policies are a rip-off when term premiums are so much smaller. The buy term & invest the difference argument. Yes, I've searched and read much of the volumes of postings on the subject.


Do some more reserach and tell us how many term policies actually are paid out, then tell me how many whole life policies pay.  That should be your answer, I'll give you a hint one pays 100% and any decent policy is going to pay out more than was put in.

Aug 15, 2007 12:38 am
deekay:
Broker24:

IronHorse echoes my experience. HNW indivudals (generally) use UL
policies to leverage up their assets for tax-free transfer of assets to heirs.
It is not typically used for the traditional "death benefit" such as term or
whole life. However, whole life and UL (and VUL) have distinct
differences, so you should familiarize yourself with the products.

But every situation is different. A mid-lifer (35-50) might need term
insurance to cover their kids and/or spouse. However, someone younger
might actually benefit in the long run by buying something permanent
(after 15-20 years, term becomes more expensive, depending on the
returns of the UL/VUL/WL policy). In a good VUL policy, you could get
your money back, plus a return, on your policy after 20-25 years.
Or,
you could utilize it as a retirement funding vehicle through earnings
withdrawals and structured loans. With term, you are pretty much only
using it for the death benefit (other than for other select purposes under
specific circumstances).

Simple term insurance is very easy at wirehouses, though you don't make
much. The more complex stuff is tough (as they said). However, I do
quite a bit of both (relative to others in investment firms), and I will say
that it adds to my bottom line.


There's no such thing as a good VUL policy.  It's the worst kind of buy term/invest the difference.  It combines expensive annual renewable term and expensive investments.  Under very rare circumstances is a VUL ever appropriate (esoteric defined benefit plans for example).  I've never seen where a VUL for a retail client is appropriate.



I understand why you would feel that way about VUL, given the complexity of the product, the annually increasing insurance costs, and the negative outlook that some other boards have towards VUL.

I also think that it is a product that is oversold by certain firms(such as Ameriprise and WFG) that have a reputation for not training their folks overly well in terms of product knowledge or managing client expectations.

Today, I sat with the "VUL Expert" from a local GA to discuss a case.  I came to get a shot at this one because several years ago the client told me he had set this "VUL investment program" up with a guy he golfed with at his club.  I told him then that is wasn't the greatest product and in general it wasn't a good idea to expect good investment performance from an insurance product.

So flash forward a few years and he calls me a few weeks ago and tells me that the guy has left his club and left the business as well, and he's not happy with the "performance" on his VUL policies.

So we get in-force illustrations for the VUL policies and I review them on my own and with the "VUL expert" as well.  It's a product on a chassis from a reputable company with some solid subaccounts-from American Funds.

Ultimately, I concluded that the reason my client has not been happy with the performance is that the rookie agent buddy of his 1.) didn't manage expectations well, and 2.) didn't encourage my client to fund the policy sufficiently relative to the face value and the COI.  The COI does increase year to year, but from what I understand it is not affected by the amount you invest. Too, the "fund" shares you buy are free of load and 12b-1 fees.

Many of you know that American Funds have pretty low expenses and good performance over the last few years.  Ultimately it was pretty clear to me that the reason the "performance" for the client wasn't so good on these policies was because he didn't fund them sufficiently in excess of the COI to take advantage of the tax advantages and the leverage of inexpensive subaccounts for dollars OVER the COI.  In other words-the agent didn't service the policy effectively, to his detriment and that of the client.

Truthfully I probably wouldn't have recommended this course of action to the client in the first place, because of the constantly increasing costs due to ART pricing and the difficulty of servicing the product.  Having said that, the clients' disappointing experience was due to failures of the agent, in general, not the client.

Plain english...if the COI is a grand a year and you fund these suckers at 100 bucks a month like a DCA plan for a mutual fund, it isn't going to work.  It will probaly blow up in the future.  Your client will most likely be disappointed.  If, OTOH, you fund it heavily in excess of COI(say up towards the MEC limit), and if you have some half-decent investments in there, they can work out pretty good.  That's why they are often used for certain NQDC plans.

Just my 2 cents.  Hope that's helpful.

Aug 15, 2007 12:48 am

anonymous-most all of my policies are for ages 70-75.  I will admit I do not look much at a whole life, but I will touch on it again.  I have been so "trained" to use the GAUL that I have not revisited it recently.


Aug 15, 2007 6:21 am

GUL is the better product for age 70 and above.  Just make sure to look at WL for your other cases.   Use a mutual company for WL.

Aug 15, 2007 7:51 am

Joe,


A little knowledge is a dangerous thing.  Let me try to help you out a little bit.


I understand why you would feel that way about VUL, given the complexity of the product,


It's really not complex.


the annually increasing insurance costs,


It's overpriced annually increasing insurance costs that can't be dropped without causing all gains to be taxed as income.


and the negative outlook that some other boards have towards VUL.


It's tough to not be negative if the product is understood.


So we get in-force illustrations for the VUL policies and I review them on my own and with the "VUL expert" as well. 


To understand the policy, looking at the illustration is not good enough.  You must know what the COI is at older ages.  What is the COI at age 80?  Age 81?  Age 82?  etc.  How much of each premium is disappearing as load of some sort?


Too, the "fund" shares you buy are free of load and 12b-1 fees.


Yes, the fund shares may be load free, but the investor is still paying a load.  What's the difference?  If someone buys an "A" share MF with a 5% load and invests $100, $95 gets invested.  A VUL has a premium expense charge that it levies.  It is often 5%.  Therefore, when one invests $100 more than the cost of the insurance related expenses, $5 goes to the insurance company and $95 gets invested.  The only difference is that the insurance company is charging a load instead of the fund company and  there are no breakpoints.

 If, OTOH, you fund it heavily in excess of COI(say up towards the MEC limit), and if you have some half-decent investments in there, they can work out pretty good.  


Have you ever seen one work out pretty good?  Me neither.  For it to work out pretty good, you are describing exactly what needs to happen.  Additionally, the client can't take money out of the policy, and if they do, the market needs to go up and not down.


VUL is nothing more than "Buy Term and Invest the Difference" in one policy with the following differences:


1)The term insurance is overpriced
2)The investments are overpriced (think "A" shares with no breakpoints)
3)The insurance can't be dropped without the investments being taxed as income (ie. One is forced to own term insurance at old ages
4)Much more monitoring is needed, but the lack of compensation for the agent doesn't allow for this to happen 


Joe, look at the actual costs involved at older ages and you'll see that the odds are very stacked against a VUL staying in force for someone who lives beyond life expectancy.  Can you give me a single realistic example where VUL would be better than BTID?


(I also don't believe in BTID.  When comparing term to WL, the comparison should be Buy Term and Save the Difference.)
 

Aug 15, 2007 8:49 am

Anon thanks for the thoughts.  This is the very reason I posted my opinion, to get some perspective on where I might be wrong.

Aug 15, 2007 9:07 am

I refer to VUL as a "laboratory product".  I say this because it might work under very controlled conditions, but it certainly doesn't work in the real world.  I have a bigger problem with the "U" than the "V".  However, combing the "U" and the "V" just makes for a bad combination.


Aug 15, 2007 3:03 pm

VUL's can be very effective tax-free retirement vehicles.  We typically use some as death benefit in the early years (primarily for people over the ROTH income limits, or who want to exceed contr. limits), and begin over-funding in the early years.  Using just a 7% assumption, the IRR is pretty good compared to funding after-tax/taxable investments.  I agree, it is not the best product for pure death benefit, and it is not the best investment vehicle (although with the right sub-accounts it is pretty competitive).  But if someone either needs death benefit beyond 20 years, or a tax-efficient retirement vehicle (long-term), it is a good option.

Aug 15, 2007 3:04 pm
anonymous:

I refer to VUL as a "laboratory product".  I say this because it might work under very controlled conditions, but it certainly doesn't work in the real world.  I have a bigger problem with the "U" than the "V".  However, combing the "U" and the "V" just makes for a bad combination.




This speaks to one of the previous posts, in that this needs to be managed.  You can't just set the premiums and investment mix and forget about it.

Aug 15, 2007 3:08 pm

Broker24, please use real numbers to show that it is better than BTID.  


You will only be able to do so if you assume that you can get to the cash tax free.  One can't get to the cash tax free, because it will very likely lead to the policy ultimately lapsing causing the gain to be taxable as income.

Aug 15, 2007 3:16 pm

This speaks to one of the previous posts, in that this needs to be managed.  You can't just set the premiums and investment mix and forget about it.


This is very true, but it is precisely what happens.  I'll give you the benefit of the doubt that you are a great guy and you give wonderful service even if you aren't getting compensated for it.  You sell a VUL policy to a 40 year old and service it for the next 20 years.  20 years from now, you retire.  It makes no financial sense for anybody to properly service this client.


How often do you run across someone who has a VUL policy that is getting proper service?  We know that the answer is not very often if it isn't a fairly new policy and never if the original agent isn't still around.

Aug 15, 2007 4:46 pm
Broker24:

VUL's can be very effective tax-free retirement vehicles.  We typically use some as death benefit in the early years (primarily for people over the ROTH income limits, or who want to exceed contr. limits), and begin over-funding in the early years.  Using just a 7% assumption, the IRR is pretty good compared to funding after-tax/taxable investments.  I agree, it is not the best product for pure death benefit, and it is not the best investment vehicle (although with the right sub-accounts it is pretty competitive).  But if someone either needs death benefit beyond 20 years, or a tax-efficient retirement vehicle (long-term), it is a good option.


Don't confuse money with math.  You're assuming a straight-line 7% ROR which does not happen in real life.  For example an $10000 investment grows by 30%.  Investment value = $13000.  Second year, investment goes down by 15%.  New account value is $11,050.  Third year up 30%, new balance is $14,365.  Fourth year, down 15%, balance is $12,231.  Now, your average rate of return is 30+30-15-15/4, or 7.5%.  Hell, I even gave you 50 bps!  But $10,000 at 7.5% should've grown to $13,355. 


Now, this may not seem like much, but consider this is only over 4 years.  Combine that with the fact that your COI has gone up every year.  One of two things will happen.  Either the CSV will be eaten into (assuming you even have any after 4 years) or the client will have to add additional premium dollars to keep it afloat.  Either way, not a good situation.  Like anon said, VUL works great in a vacuum and nowhere else for the common investor.