(they just don’t know it)

By Michael Fliegelman, CLU, ChFC, AEP, RFC

On some financial topics, people have become so conditioned to seeing things from a single perspective it makes them incapable of recognizing other – perhaps even better – ways of addressing these issues. The on-going fallout from the “meltdown/crisis/recession/ global-economic-funk” offers a striking example of an obvious solution that almost no one seems to see:

For one reason or another,

everyone wants whole life insurance.

Don’t believe it? The disbelief just further proves the point. Whole life insurance is so far outside the awareness of both average Americans and the mainstream financial press that collectively “advises” them, that they have become blind to what’s been there all along. Think about it. As various “better ideas” have fallen short of expectations or been unable to respond effectively to new economic realities, have you heard any experts, commentators, or consumers clamoring for whole life insurance as a viable answer?

And yet, the following news items and commentary make a compelling case for seeing whole life insurance for what is really is, and why everyone wants it – even if they won’t admit it.

Do Americans want a 401(k)…

or do they really want Whole Life Insurance?

Here are some excerpts from a January 8, 2009 Wall Street Journal article by Eleanor Laise titled “Big

Slide in 401(k)s Spurs Calls for Change.”

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information technology project manager in Longview, Washington, feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

When 401(k)s were first established in 1978, one of the selling points was the opportunity for individuals to participate in the uncertain (but historically profitable) market fluctuations. However, as Ms. Laise notes, “a market meltdown near the end of their working careers can …blow their savings to smithereens.” Quoting Alice Munnell, director of Boston College’s Center for Retirement Research:

“That seems like such a fundamental flaw. It’s so crazy to have a system where people can lose half their assets right before retirement.”

In response, Congress has begun looking at ways to overhaul the 401(k) system. How? Among the proposals: government-supervised universal retirement accounts offering a “guaranteed, but relatively low, rate of return.” Another idea is an index fund of stocks and bonds whose mix becomes more conservative as workers near retirement age.

But there’s more to the 401(k) issue than just guaranteeing a retirement balance. Ms. Laise shares the experiences of another individual:

Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass. didn’t contribute anything to her 401(k) last year. Instead, she’s been focusing on paying down credit-card debt and building up an emergency reserve in case the bad economic times turn worse. She’s also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car.

After reliving the dot-com market meltdown, which knocked $100,000 off her retirement savings, she moved her entire 401(k) from diversified stock and bond holdings into cash-like investments early last year.

“I’m not going to get rich on my 401(k),” she says, “but also don’t want to get poor because of it.” She had hoped to retire early, but now figures she won’t quit work before age 65.

In both Ms. Gardner’s and Ms. Kelley’s comments, 401(k)s seem to present a number of “either/or” financial decisions. Ms. Gardner sees her investment options as either a low-yielding money market account or “huge market risk.” In a roundabout way, Ms. Kelley agrees, seeing her choices as either not getting rich, but at least avoiding poverty by choosing lower-risk, lower-return financial instruments.

When it comes to extra funds, Ms. Kelley has to choose either pay down debt and build emergency funds, or contribute to the 401(k). And because of other financial needs, Ms. Kelley has already borrowed from her 401(k); like many Americans, she doesn’t have enough money to fund all the buckets (one for retirement, another for emergencies, big-ticket purchases, college funding, etc.) so filling one means stopping another.

If you were to summarize the comments from these two individuals, they could easily be considered representative of the accumulation issues of most Americans:

• They want some guarantees, yet want to achieve annual returns better than 1%.
• They have a need for accumulating liquid emergency funds.
• They want opportunities to access funds prior to retirement, either as loans or withdrawals.

Guess what? With some variation in the sentence structure, those very features will be mentioned in almost any insurance company’s brochure about whole life insurance! And these features aren’t either/or.

When you make deposits to a whole life insurance policy, you can address all of those issues simultaneously. Cash values can be accumulated for emergencies or retirement. The long-term rates of return on cash values are greater than the 1% low-risk options Ms. Gardner is aware of – and they include some guarantees.

In addition, many whole life policies will offer a Waiver of Premium rider; if the insured is disabled, the insurance company will pay premiums to ensure the future growth of the cash value. And in tragic situations of an early, unexpected death, the insurance benefit delivers significant tax-free dollars in a time of great need.

As a depository for tax-advantaged retirement savings, 401(k)s may fill the bill. But as more and more Americans are discovering, they want a financial multi-tool that can serve several different functions – before and after retirement. For many Americans, a custom-fit whole life insurance policy could be their ideal solution.

Do Americans want a “Medical Expense Fund”…

or do they really want Whole Life Insurance?

What is the cost of health care in retirement? Robert Powell, in March 14, 2006 MarketWatch column said:

“A 65-year-old couple retiring today will need on average a tidy $200,000 set aside to pay for medical costs in retirement, according to an annual Fidelity Investment study released this week.”

That was almost three years ago. Does anyone think medical costs have gone down since then? No? That means the need for a “tidy $200,000” is larger today.

Powell’s column elaborated on the Fidelity report, noting that Medicare B and D premiums accounted for $64,000 of the estimated costs, while cost-sharing co-pays ($72,000), and out-of-pocket costs ($64,000), comprised the rest. The $200,000 amount also didn’t include expenses from over-the-counter medicines, dental care and long-term care, and was based on an assumed life expectancy of 85. The estimate assumed the couple enjoyed reasonably good health. Add nursing home or other long-term care expenses to the list, and the total health-care cost in retirement could be staggering. To make matters worse, expenses have been increasing at a rate of 5.8% annually since Fidelity started conducting the surveys in 2002.

Now, even if you have a couple million accumulated for retirement, setting aside $200,000 in a safe, low-return financial instrument could result in a significant decrease in retirement income. It’s another one of the either/or, lose-lose decisions. Either you lose income because some assets can’t be invested in potentially high-profit, long-term opportunities, or you lose the security of having the liquidity to meet possible medical expenses.

Guess what? Whole life insurance might offer some unique solutions to medical expenses in retirement. The cash values can not only serve as a great reserve fund, but many life insurance companies offer riders that delineate terms under which a portion of the life insurance benefit can be distributed to pay costs resulting from a long-term care situation or a catastrophic terminal illness. Further, because of provisions in the 2006 Pension Protection Act, these benefits could be received on a tax-favored basis in many circumstances. In terminal situations, the amount paid could equal up to 80% of the life insurance face amount. In chronic situations, the amount paid usually varies with the age of the claimant – the older the policyholder, the higher the percentage.

These riders (sometimes referred to as Accelerated Death Benefit riders) are not intended to serve as a replacement for the stand-alone long-term care insurance (usually the whole life rider’s definitions of what constitutes an “LTC event” for which a claim can be made are not as generous or comprehensive as those in a long-term care contract). But these provisions give the insurance benefit – not just the cash values – a clearly defined financial value before death. And, Robert Lehmert explained in the June 2006 issue of the Life and Health Advisor: “Accelerated benefit riders do not require the negotiations associated with life settlements; the formula is predetermined and the entitlements can be taken at will.”

Even better, if the Accelerated Benefit option is not used, beneficiaries will receive the full insurance benefit tax-free. That’s a win-win, either/or decision.

Lehmert goes on to note: “in an era of dramatically increased longevity, permanent (whole) life insurance has the potential to play a critical role in helping individuals live out their days with enhanced financial security.”

Do Americans want “Yeah, buts…”

or do they really want Whole Life Insurance?

If whole life insurance is such a good product, why don’t more popular “financial experts” recommend it? And why don’t more people own it? It goes back to the opening comment: When someone is so invested in seeing things from one perspective, it can be difficult to see it differently, even if the alternative is supported by facts and logic. For these people, the answer to retirement is a 401(k), the answer to emergency funds is a savings account, the answer to college funding is a 529, and the answer to life insurance is term. Anything outside their framework doesn’t fit, and generates a dismissive “yeah, but…” response. For example:

“Yeah, but…” Hindsight Sees a Better Idea

By design, whole life insurance is conservative and predictable. It’s boring. Here’s what happens:

Someone looks at historical results and says “You could have done better if you had…invested in the tech stock…, speculated in beach-front condos…flipped houses… bought term insurance, etc.” Looking backward, it’s always possible for someone, somewhere, to construct a better outcome than the one you have. This is true for every financial decision, not just life insurance. In hindsight, you could have bought a nicer home on better terms, earned more with a different mutual fund, paid less for a car.

But while hindsight can always develop a better scenario for the past, hindsight insights cannot guarantee future outcomes. Two decades of historically superior returns were irrelevant when the S & P 500 dropped over 30% in 2008. So instead of looking backward to guess what might be most profitable in the future (and occasionally guessing wrong), take a look at this: the accumulation focus of whole life insurance policies is consistent, guaranteed, long-term cash value growth.

“Yeah, but….” The Costs Exceed the Benefits

No one really argues the benefits of whole life insurance; the issue is the perceived cost of obtaining them. When compared to term insurance, whole life insurance seems inordinately expensive. (Typical comment: “If I can get $500,000 of term insurance for $35/mo., why do I have to pay $750/mo. For $500,000 of whole life?”) But other than the life insurance benefit, whole life and term insurance are radically dissimilar products. In a different context, whole life isn’t over-priced.

Consider a household with take-home earnings of $100,000/yr. that is attempting to save 12% of their income (a percentage which, by the way, most “experts” say must be increased to ensure a comfortable retirement). Maybe some of that $12,000 goes to a retirement account, some to emergency savings, some to buy term insurance, and some to an after-tax college savings fund. Or instead, maybe a sizable chunk of it is applied to a whole life policy, because the whole life policy can provide cash values, which can be used for retirement supplement income, emergency reserves, money for college – and life insurance.

“Yeah but…” There’s Up-Front Commitment,

and Delayed Gratification!

Whole life insurance is a long-term financial instrument with a long-term funding commitment.

Although a whole life insurance program can be constructed in such a way that premiums can be paid for a limited period as opposed to one’s entire lifetime, the shortest paid-up period is usually seven years. A whole life insurance purchase is big-ticket purchase, paid for over time – like a car, a home, a college education. While there is some payment flexibility in most whole life policies after the first few years, whole life works best with regular funding.

Because whole life is designed with the intention of being in-force at death (unlike term insurance), the costs of providing the insurance benefit – whether death occurs tomorrow or 50 years from now – must be secured by the insurance company. Thus, in the first years of a whole life insurance policy, most of the scheduled premiums do not accumulate as cash value. For some short-term thinkers, these “start-up costs” are an insurmountable psychological barrier.

The diagram to the right doesn’t represent a specific numerical comparison. Rather, it illustrates the conceptual difference between whole life insurance and other non-guaranteed accumulation strategies. Plan A is a slow starting, well-planned financial path; if you stay on the path, the desired long-term results will be attained.

In contrast, Plan B, while having the potential to deliver better results than Plan A, offers no guarantees; ups may be followed by downs.

As many Baby Boomers are finding out, what happens at the end of the plan is arguably more important than what happens in the beginning or the middle. But even though the long-term benefits of a whole life insurance program will accrue at an ever-increasing rate over time (Plan A), and even though various Plan Bs offers little assurance of finishing strong, some people simply can’t handle the longer start-up curve that comes with whole life insurance.

“Yeah but…” Is Anything Really Secure in This Economy?

In light of recent events, there’s general skepticism about any financial promises. Considering the wide-spread turmoil at once-solid financial institutions, who can say that a similar meltdown might not also occur with life insurance companies? It’s a fair question.

If we experience a complete economic and social collapse that plunges the world into a new “Dark

Ages”, life insurance companies will probably go down the tubes, along with everything else. But if your  sense of pessimism is that high, you better start watching your “Mad Max” and “Waterworld” DVDs for survival tips in a post-apocalyptic world, because there is no safe place for your money or your financial future.

Otherwise, there are good reasons to think life insurance companies will remain viable financial institutions, even in tough times.

In a January 11, 2009 Palm Beach Daily News article by R. Marshall Jones, JD, CLU, ChFC titled “Life Insurance: An Additional Asset Class in Difficult Times,” the author makes the following observations about whole life (or permanent) insurance companies in the wake of the past year’s economic turmoil:

Fortunately, the life insurance industry has almost none of the problems of Wall Street… Until recently, permanent life insurance was arguably the financial industry’s most complex instrument. Fortunately, due to its complexity, life insurance is highly regulated to assure there are always sufficient, safe assets to honor its guarantees. This is referred to as statutory accounting. For more than 100 years, every life insurance death benefit has been paid.

All life insurance companies use statutory accounting. In addition, publicly traded insurance companies use GAAP accounting. It allows them to report the expected profitability of products that require reserves to back their contractual liabilities.

Jones doesn’t say life insurance companies can’t fail. But life insurance companies have a proven track record of stability. And while whole life insurance may be considered a complex financial instrument, it isn’t an untested new idea (like credit-default-swaps or other next-generation financial derivatives that were “virtually unsupervised,” according to Jones). Whole life insurance has been around, been regulated, been through good times and bad – and succeeded.

“Yeah but…” It’s Too Complex

and Too Boring for Media Sound Bites

Like Mr. Jones said in the previous paragraph, whole life insurance is a complex financial instrument. It takes time to explain it (even a slim “overview” article like this one takes over four pages!). And it takes even more time and personal attention to tailor a whole life program that fits an individual’s unique financial circumstances. There is no one-size-fits-all plan for whole life, and this is not a do-it-yourself project.

These characteristics are not ones that fit easily in column-length newspaper or magazine article, or a thirty-second analysis from a financial talking-head on a television program. And since whole life insurance is a long-term financial instrument, there’s not much demand for headline-grabbing topics like “Experts Pick Top 5 Life insurance Policies for 2009” or “Best Whole Life Plans to Implement Right Now!”

Instead, establishing a successful whole life insurance program requires several face-to-face consultations with a knowledgeable professional, and regular reviews. Yeah, it sounds more like going to the dentist than dinner and a movie. Whole life insurance may be serious, complex, boring – but it works.

Bottom Line: Everyone wants Whole Life Insurance

Consider these common “yeah buts…” concerning whole life insurance. Should any of them really stop someone from taking a closer look at how whole life insurance might fit in their financial situation?

No.

Does everyone need whole life insurance?

No.

Does everyone want whole life insurance?

The opinion here is yes.

Whole life insurance delivers a unique and flexible assortment of financial benefits. Properly situated in your financial program, having whole life insurance is better than not having it. And with the assistance of a skilled insurance professional, there are many ways to make whole life fit your plans.

Whole life insurance is a “financial classic.” Newer products and approaches may grab popular attention, but as a solid financial foundation for every stage of life, whole life continues to be in style.

It’s time to admit it…Everyone Wants Whole Life Insurance.

No one really argues the benefits of whole life insurance;

the issue is the perceived cost of obtaining them.

Almost 50 years ago Halsey Josephson wrote a book titled “The Tired Tirade” as an answer to the critics of life insurance, particularly those critical of whole life insurance. It was an outstanding piece of work, but unfortunately it did not stop the tirade. Financial writers like Jane Bryant Quinn and self-styled critics such as Norman Davey continued the tirade for years, and now we have Suzy Orman regurgitating the same old line.

Given the attention Suzy has gotten from the media and PBS, I thought perhaps she was on to something new and might be worth listening to. But I was wrong. When she said never, never buy anything but term insurance and that whole life was just a rip-off, realized she had nothing to offer but more of the tired tirade.

When she called whole life a “rip-off,” my mind was flooded with thoughts of people whose lives have been impacted by the whole life policies they owned.

First to come to mind was Switzers, a ladies ready-to-wear store where my mother-in-law worked for over 40 years. Switzers was founded in the late 1920s or early 1930s with $1500 Walter Switzer Sr., borrowed from his life insurance policies. Switzers grew over the years with stores all over the southwest and Los Angeles—a very successful operation. But it all started with cash from a whole life policy.

Then there was my longtime friend Willie Benoit. At age 45 Willie had not been able to save money and had never had a savings account with more than $100. When I entered the life insurance business he was quick to let me know he was “insurance poor” and we could stay friends so long as I did not try to sell him more. I put up with this for a couple of years, then one day I said to Willie, “Let me look at those policies that have made you so impoverished.” He agreed, and after a few minutes of calculations I told Willie that he had accumulated over $5,000 in cash value in his policies. He was stunned to learn he was a man of substance rather than poverty. To make a long story short, it changed his life. Saving wasn’t impossible—he bought more insurance—and 3 years later, backed by his savings, he went into business for himself. When he died 20 years later he left a substantial estate for his family. Whole life did for Willie what no other savings mechanism had been able to do.

On a much broader scale I remembered the experience of Walt Disney. When Disney was developing Disneyland he soon reached the limit of credit available for the project. He then turned to the cash values in his whole life policies for the additional funds needed to complete the project. I have often wondered what the return on those funds borrowed from his policies has been in the intervening years. Cash available for opportunity has always been a strong point for owning whole life.

Roe Bartle, Kansas City’s colorful former mayor, speaking at the 1961 NALU convention in Denver, told how his whole life policies saved 5 banks from ruin. During the Depression era “bank holiday,” the federal government shut down all banks until they could prove they were solvent. Bartle said his banks were not in bad shape and with an infusion of a little additional capital they could reopen. He said this was the most frustrating period of his life. He could not sell anything—there were no buyers. He could not mortgage anything—the lenders were all closed. His friends could not help—they were in the same boat. Then he remembered his insurance agent had told him if he ever needed money he could borrow on his policies. He went down to Kansas City Life to see if it was true. It was, and those loans on his whole life policies, along with policies on the other directors, saved all 5 banks. He said the value of having those funds available has been worth millions in the years since.

From my own files I can cite numerous instances where having policy cash value available has saved the day for my clients. Could other savings have done the job? Of course they could have—but they weren’t there, so they couldn’t do the job.

But I also remember a boat ride that shed light on this issue. I was attending a Life Insurers Conference Annual Meeting in Florida where I received an invitation to go sailing on a yacht owned by one of the CEOs in attendance. While sitting in the bow of the yacht, I engaged in a conversation with the CEO of a small member company. He told me that all of his professional life his company had sold only term insurance. He had believed fervently that term insurance was the only kind to own. “But,” he said, “now that I am reaching retirement age I think I was wrong.” He admitted that there was no point in his life when he could not have afforded the extra cost of whole life, and if he had bought it, today he would have something. Instead, he had no significant savings beyond his pension plan, and he could no longer afford the premiums on his term policies.

And there is one final point I can never forget. Fifty-two years ago I was considering a career change. I had a good job but it looked increasingly like a dead end. Gladys and I were children of the Depression and one did not walk away from a good job and steady income into a venture offering an initial cut in pay and an uncertain future. Luckily we had enough policy cash values to ensure 6 months’ income, and on the strength of that we made the move into life insurance. What a wonderful decision for us.

If Suzy Orman’s advice in other financial areas is not better than her tired tirade of life insurance she doesn’t warrant the attention she gets.

Source: www.lifeandhealthinsurancenews.com

DATELINE: WASHINGTON Jan. 28

WASHINGTON, Jan. 28 /PRNewswire/ — During one of the most unsettled periods in recent financial history, author and investment guru John E. Girouard ( http://www.johngirouard.com/ ) is warning people to think twice before moving their money into bank CDs and money market funds.

He says the ultimate bomb shelter during scary financial times is your grandparents’ life insurance, called participating or mutual whole life, which dominated the industry until falling out of favor in the late 1970s, but is now coming back into style.

“Few people know that the life insurance industry was one of the few economic sectors to survive the Great Depression intact. It was one investment that kept its promises,” says Girouard.

Buying a policy from a mutually-owned company, you become an owner instead of a customer. “It’s like becoming your own bank,” notes Girouard. Mutual life premiums accumulate cash value that earns untaxed interest, and policyholders can borrow against it, no questions asked. Mutual whole life policies have recently been earning around 6 percent and carry ironclad guarantees: your cash value and the death benefit are secure. Some policies even include disability benefits.

Girouard observes that corporations for years have been buying mutual insurance policies on their employees’ lives as a way of stashing corporate cash in an untaxed vehicle they can draw down on a moment’s notice.

“My phone and those of America’s nearly 300,000 investment advisors are ringing off the hook. The question on everyone’s lips: ‘Where do I stash my money when nothing looks good?’” Girouard says. Bank CDs help people sleep better, “but low interest rates, inflation and taxes steadily erode buying power so people actually lose money instead of protecting it.”

“Investing is a three legged stool,” Girouard says. “One leg is the money you need to live on, one leg is the money you invest for growth, and one leg is the bomb shelter you can retreat to when you can’t sleep because the rest of the world seems to be falling apart.” He says most investment advisers don’t understand how mutual whole life policies work, and don’t offer them to clients “because they aren’t sexy or new.”

John E. Girouard is author of “The Ten Truths of Wealth Creation” and founder of the Institute for Whole Life Insurance: ‘The Investment Bomb Shelter for Scary Times’
http://www.insurancenewsnet.com
Financial Independence ( http://www.independenceinstitute.com/ ).
Web site: http://www.johngirouard.com/ http://www.independenceinstitute.com/
SOURCE John E. Girouard http://www.prnewswire.com
Copyright © 2008 LexisNexis, a division of Reed Elsevier Inc. All rights reserved.

by Clifford P. Kitchen, CLU, ChFC, CFP, CFA, MSFS

Cliff Kitchen is an analyst for the Guardian Life Insurance Company of America, New York, N.Y. He can be reached at cliff_kitchen@glic.com.

In our market-driven society, people face wildly competing choices every day in deciding how to spend a dollar. New shoes? Kitchen remodel? College savings plans for the kids? A vacation in the Bahamas?

Consumers often turn to the popular financial media for help in managing their money. Newspapers, magazines, and Web sites all play an important role in educating the public on matters of health and wealth. But do you want your clients to live by the maxims of personal finance reporters? Probably not. One of the satisfactions of being a financial advisor is you’re able to help clients see beyond catchy messages and taglines. You can help them discover the truth about how to secure their financial futures, particularly when it comes to life insurance.

The rise of term insurance

One of the more popular media bromides with regard to life insurance is to “buy term and invest the difference.” People should purchase term life insurance, the thinking goes, and invest what they would have otherwise spent for a permanent policy in alternative vehicles such as mutual funds. This financial strategy became popular in the 1980s, when interest rates soared into double digits.

It has since become commonplace for consumers to buy term life insurance policies. Whether they actually “invest the difference” is doubtful. But when it comes to life insurance, many have concluded that cheaper is better. The same cost-benefit analysis would have a hard time succeeding in relation to other products, such as cars. Most people would still find significant differences between a Lexus, a Chevy, and Yugo.

Nevertheless, term insurance has found its place in the market. It is a welcome product for those who want to provide temporary financial protection to their families but don’t quite have the cash flow to fund a permanent life insurance policy such as whole, universal, or variable universal life.

Permanent insurance endures

Whole life insurance used to be the only form of permanent cash-value life insurance available. It emerged in 1913, when Congress established the Federal Income Tax. Lawmakers vested permanent life insurance with benefits for “the well-being of widows and orphans.” In this generation, we add “widowers” to the list of beneficiaries, as spouses today rely on each other in equal measure to earn a living for the family.

Three advantages were accorded to permanent life insurance from the beginning: a tax-free death benefit (true for all types of life insurance), no taxation on the build-up of the cash value inside the policy, and the ability of consumers to tap the cash value of a contract on a tax-favorable basis. This unique combination of benefits provides a powerful reason for anyone to consider adding a permanent life insurance policy to his or her financial portfolio.

______________________________________________
Whole life insurance is more expensive than term,
but it comes with a different value proposition.
Consumers buy a “sure thing” with whole life.
______________________________________________

That message has not been entirely lost on consumers. Even in today’s economic environment, where term insurance holds broad appeal for its simplicity and low cost, according to a recent LIMRA report whole life single-handedly accounts form more than 20 percent of industry-wide life insurance sales. Since the broad de-mutualization of the life insurance industry in the 1990s, fewer companies are promoting whole life insurance these days, but that doesn’t mean it should be written off.

Whole life insurance is more expensive than term, but it comes with a different value proposition. Consumers buy a “sure thing” with whole life. It comes with a lifetime guarantee: a guaranteed level premium, a guaranteed schedule of cash values, and a guaranteed face amount upon either the death of the policyholder or maturity of the contract.

Consumers who purchase from a dividend-paying mutual insurance company stand to benefit greatly, especially if they apply the funds toward paid-up additional insurance to offset the effects of inflation. Their death benefit can grow far beyond its originally scheduled value. Their personal “balance sheet” never suddenly drops in value because a term policy expired.

New products, old needs

New types of life insurance have emerged to bridge the different advantages of term and whole life. Variable universal life, for example, is a form of permanent life insurance that mimics a buy-term-and-invest-the-difference strategy by giving consumers control over the investment portion of the contract. Return-of-premium term insurance has also entered the market and is growing in popularity because people like the idea of getting their money back at the end of the contract term.

Each client’s needs are unique. Financial advisors must have the freedom to offer whatever type of coverage is required to satisfy a client’s situation. A key purpose of insurance, after all, is to protect people from devastating economic loss. Advisors should help clients find whatever products, term or permanent, work to protect their financial assets, meet their goals and insure their human life value.

But consumers are exposed to many unanticipated financial risks in today’s economy. Pension plans are failing. Housing markets are erratic. Risk has a way of emerging suddenly and unexpectedly. In such an environment, many consumers may particularly appreciate the guarantees offered in a tried-and-true product like whole life insurance, especially from an established mutual insurance company that pays dividends each year.

In concert with other savings and investment plans, permanent life insurance helps provide a “synergy” effect. Its presence on the family balance sheet helps people maximize their wealth, including retirement income. A consumer’s ability to draw upon a policy’s cash value, either as a loan or an outright withdrawal of dividends, provides financial peace of mind. It enables people to achieve their life goals with less risk, and it fosters a sense of well-being and security.

While the media is fascinated with the idea of buying term insurance and investing the rest, the fact of the matter is that most reporters are adept at communicating and simplifying complex information, but many, if not most reporters, don’t have the in-depth knowledge of financial professionals. For some clients it will be best to rent their coverage with a term policy, but for many others it will be better to own their policies with permanent coverage. It is our role as advisors to help consumers select the products that are best suited to fit their needs.

Copyright © 1995-2006 JonHope Publishing Company, Inc.

As seen on: LifeHealth.com

Modern Portfolio Theory,
Asset Classes,
and Life Insurance¹

Don’t Put All Your Eggs
into One Basket
__________________________________________________________

The simple idea behind Modern Portfolio Theory (MPT) is diversification of asset classes to achieve the best risk/return ratio for your needs, lifestyle, financial situation, and personal preferences. The first step is to identify asset classes. Most advisors agree that the primary classes include:

• Equities (common stocks)
• Fixed Income (bonds and mortgages)
• Money Market (cash)
• Guaranteed (annuities)
• Real Estate

The next step is to diversify assets among and within these classes in order to offset both systematic risk – recession, interest rates, and the like – and unsystematic risk – or risk specific to individual stocks, businesses or industries.

No matter what precautions are taken, there is typically some reduction of earnings from all of the above asset classes due to:

• Volatility
• Inflation
• Taxes
• Fees

For example, from 1977 through 2006, total equity returns of Large Cap stocks (comparable to the S&P 500TM) reflected a nominal compound annual rate of return of 12.27%. With the effects of taxes and investment fees (2.63%) plus the compound inflation rate (4.45%), the actual compounded rate of return over the 30-year period was 5.19%.³

Timing is Everything
_________________________________________________________

For those seeking less short-term risk and volatility, Treasury Bonds had a 30-year compounded real rate of return over the same period of within a range of 0% – 2%, and Municipal Bonds produced a compound return of 1.8%. The shockingly low reward was a trade-off for the higher security of capital during that time. In a shorter time frame from 2001 – 12/31/2006, Large Cap stocks produced a real return of just 2.02% while International Stocks were up 10.01%.⁴

Life Insurance as an Asset Class
_________________________________________________________

The uncertainty of risk versus reward can delay development of a sound financial strategy, so consider this smart alternative. Life insurance is an ideal vehicle to integrate into the idea of Modern Portfolio Theory as an asset class of substantial value, meeting all of the designated important criteria. Here’s why:

• The death benefit provides cash when needed most.
• The cash value provides the policy owner with living benefits similar to a fixed account with a guaranteed minimum return, and may be used as a supplement to retirement income, mortgage or loan repayments, or a wide range of other applications.
• The tax-deferred cash accumulation can be accessed income tax-free.
• The death benefit is payable income tax-free and quite possibly estate tax-free.
• Policy proceeds are typically beyond the reach of creditors.
• The policy is funded with affordable periodic payments that, over time, are inherently leveraged to a capital sum.
• Unique to life insurance – With a Waiver of Premium rider,⁵ a policy is self-completing in case of disability.
• The death benefit is based on the event of death – not a market event that can cause a downturn in value.
• Premiums may be funded with capital earned from other invested assets in lieu of budgeted income.
• Permanent life insurance can produce at least as favorable a long-term result with less risk within an equity and fixed income portfolio than a portfolio without life insurance.

The Synergies of Life Insurance Plus Investments in an Efficient Portfolio⁶
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Retirement Planning

To provide income beyond Social Security during retirement, many people rely on employer-sponsored plans, investments, and life insurance. As the time to retirement gets shorter, it’s wise to scale back on more risky investments and increase the stability of fixed components. The following charts demonstrate the value of integrating life insurance with a bond portfolio rather than purchasing additional bonds.

Value of Bond Component with Income Purchasing More Bonds

Asset Values of Bonds and Life Insurance

The charts evaluate growth of a $500,000 initial investment from age 45 to age 90. The first chart shows that the investment in bonds, growing at an assumed constant 4% rate of return over the years would accumulate an asset value of $2,920,588.

The second chart compares the results if the $20,000 initial bond income was used to purchase a whole life policy with the results of an all-bond option. During the first 19 years, the all-bond option produces slightly higher accumulations than the bond/cash value alternative, then the values utilizing life insurance rapidly increase, outstripping the bond value alone in the later years. This coincides with the years when an individual may want additional resources to draw upon for income, as inflation and the cost of living could have outpaced Social Security and a pension.

Legacy Planning

Because the life insurance death benefit is paid in full at the event of death, no matter what the “timing,” the legacy value of the bond/life insurance combination delivers a significantly greater result in every year.

Legacy Value of Bond Plus Insurance Death Benefit

The synergy in funding a life insurance policy from the income stream of a component of a fixed portfolio is this – it will typically produce a more favorable result because the return will be higher and the risk lower – achieving the ideal “efficient frontier” highly sought in the applications of Modern Portfolio Theory.

Let’s Look at Another Example

This variation evaluates the 45-year-old’s $500,000 municipal bond/fixed component in the ability to maximize retirement distributions as well as the legacy value at life expectancy:

Option 1: $500,000 Bond Investment Converted to Income at Age 65

Option 2: Bond income to pay $20,000 annual premium on a 20-Pay Whole Life Insurance Policy; $1,064,171 Face Amount; Amortize Income from Age 65 – 89

Take-Aways

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1. Diversification is critical for a well thought-out portfolio.

2. Risk profile and time horizon are both important considerations in developing investment choices.

3. Permanent life insurance is a qualified asset class, and provides the ideal capstone to a solid, balanced financial strategy.

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1 This brochure is derived with permission from Life Insurance as an Asset Class: A Value-added Component of an Asset Allocation, by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA, both of Ethical Edge Insurance Solutions, LLC.

2 Asset Allocation, Roger C. Gibson, McGraw Hill 2000. Third Edition.

3 A Study of Real, Real Returns, Thornburg Investment Management, 2007.

4 Ibid.

5 Riders may incur additional costs.

6 Charts and examples derived from Life Insurance as an Asset Class:
A Value-Added Component of an Asset Allocation, by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA. Please note that deduction of all applicable fees and charges could result in lower performance than shown in examples.

The Guardian Life Insurance Company of America

7 Hanover Square New York, NY 10004-4025

www.GuardianLife.com

Pub. 4082I (03/08)