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

The Whole Story of Whole Life

Introduction

Whole life is the most versatile financial instrument ever devised for the protection of families and businesses and the creation and enhancement of wealth. To appreciate the great value of this type of life insurance protection this paper explores how it works, its uses, its benefits and the options you have in structuring a contract to meet your specific needs, and why Guardian is the company of choice.

“Whole life provides lifetime insurance protection with significant guarantees and tax benefits…”

___________________________________________________________

DID YOU KNOW. . .

Walt Disney, unable to land a substantial bank loan,
used the cash value from his whole life policy to build
a sprawling theme park that is now known to the
world as “the happiest place on earth.”

Chapter 1

How Does
Whole Life Work?

Whole life is an insurance policy that provides lifetime insurance protection with significant guarantees and tax benefits for the policy owner. These guarantees can be viewed as either rates or values. When actuaries design a whole life policy, they begin by determining what rates are going to be guaranteed. Once the guaranteed rates have been set, they are used to determine policy premiums and values. Guaranteed rates and values are based upon conservative assumptions. A mutual life insurance company, such as Guardian, will then adjust these rates and values to current conditions through the mechanism of a non-guaranteed dividend. Because life insurance is seen as beneficial to the welfare of society, significant tax benefits have been given to it that are not found in other financial instruments.

What Are the Guaranteed Rates?
A whole life policy is built upon a foundation of three guaranteed rates:

• The guaranteed mortality rate – this guarantee comes from the 2001 CSO table, a table of guaranteed mortality rates that are required by insurance regulations.
• The guaranteed interest rate – this rate for Guardian policies is 4.0% for the entire life of the policy.
• The guaranteed expense factor – an allocation for expense that is covered in guaranteed values.

What Are the Guaranteed Values?
The three guaranteed rates are combined in an actuarial formula that results in three guaranteed values, and it is this trio of guaranteed features that sets whole life policies apart from all other types of financial instruments. Whole life insurance has:

• A Guaranteed Level Premium – The annual premium is contractually guaranteed to never change.
• A Guaranteed Death Benefit – The level death benefit is contractually guaranteed never to go down.
• A Guaranteed Cash Value – The contractually guaranteed cash value grows each year until it is equal to the face amount of the policy at a specified age, usually age 121.
  (Prior to the 2001 CSO table, it was age 100.)

The graph below illustrates the guaranteed values of a whole life insurance policy without any dividend values. The Guaranteed Death Benefit of $500,000 is a combination of Guaranteed Cash Value and Guaranteed Net Amount at Risk.¹ Year by year the Guaranteed Cash Value increases until it is equal to the face amount of the policy at age 121.

¹ Net Amount at Risk is the difference between the policy death benefit and the cash value.

$500,000 Whole Life Insurance Guaranteed Values —
Base Policy Guaranteed Cash Value and
Guaranteed Net Amount at Risk —
Male Age 35 – $6,165 Annual Premiums

Whole Life Insurance Guaranteed Values —Base Policy Guaranteed Cash Value

Dividends
Whole life offers the ability to provide value in excess of its guarantees through dividends. Dividends are paid to the policyholders if declared by the Board of Directors. When dividends are declared they have three components:

• The insurance company’s investment rate of return in excess of the guaranteed return promised in the policy;
• Mortality experience which is better than that which is guaranteed in the policy; and
• Expenses of policy administration which are less than the cost guaranteed in the policy.

The graph on the next page illustrates how a whole life policy can grow in value with paid-up-additional insurance purchased with dividends.

What Are My Dividend Options?
Diverse policy owners have different needs. Whole life offers a variety of dividend options to choose from, in order to customize your coverage so that it’s right for you. The dividend option may be changed year by year to address your needs as they change over your lifetime.

• By far the most widely selected dividend option is to apply dividends to purchase Paid-Up- Additions (PUA). A Paid-Up-Addition is guaranteed permanent paid-up participating life insurance. This option provides you with a growing cash value and death benefit that is guaranteed once purchased. Under this option, each year as dividends are declared, more and more PUAs are purchased which in turn earn their own dividends. Over time, the accumulation of PUAs will offset the effects of inflation by providing a greater level of death benefit protection and accumulated cash values.
• Dividends may be paid to you in cash.
• Dividends may be used to reduce your premium.
• Additional term insurance may be purchased with your dividends.
• Dividends may be allowed to accumulate with interest.
• Dividends may be used to pay back an existing loan on a policy.

The following graph illustrates how the death benefit of a whole life policy can grow in value with Paid-Up-Additional Insurance purchased by dividends.

Base Policy Death Benefit and
Paid-Up-Additions Death Benefit —
$500,000 Base Policy
Male Age 35 – $6,165 Annual Premium

Whole Life Base Policy Death Benefit

The graph below illustrates the four elements of a whole life policy:

• The base policy guaranteed cash value;
• The base policy net amount at risk;
• The paid-up-addition cash value; and
• The paid-up-addition net amount at risk.

These four elements constitute the total death benefit of a whole life policy.

Policy Elements – Whole Life With Dividends
Purchasing Paid-Up-Additions
$500,000 Base Policy —
Male Age 35 – $6,165 Annual Premium*

Policy Elements – Whole Life Insurance With Dividends

Taxation Protection

Because of the contribution that life insurance makes to the welfare of society by providing protection for surviving family members, it has been vested with the following significant tax benefits:

• Income-tax-free death benefits.
• Tax-deferred build up of cash values inside of the life policy.
• Access to policy values on a tax-favored basis.
  • The cash values of life insurance policies may generally be accessed on a tax-favored basis by the withdrawal of dividends or through policy loans.
  • Withdrawal of dividends from a life insurance policy is permitted on a First-In First-Out Basis (FIFO). This means that the first dividends paid out to the policy owner are considered a return of cost basis.²
  • All of a policy’s cash value may be borrowed from a policy without the triggering of income tax on any gain that has been borrowed from the policy.

² Cost Basis is the investment that is made in a life insurance policy. The formula for cost basis is the aggregate amount of premium paid on a base contract and permanent benefits under the contract, or other consideration paid for the contract minus the aggregate amount received under the contract, to the extent such amount was excluded from gross income.

“Human life value is the most valuable asset

of a family or business …”

___________________________________________________________

DID YOU KNOW. . .

in 1913, the United States Congress gave special tax
treatment to whole life insurance as an incentive for
individuals and business owners who were expected
to take more responsibility for their financial futures.
Those same unique tax benefits remain in place for
investors today.

Chapter 2:
What are the Different Uses
for Whole Life?

Whole life insurance provides a means by which families and businesses may enjoy the benefit of their human life value when it is threatened by loss.

Human Life Value Protection

Property values, whether they exist in the context of a family or a business, are in fact the result of human effort. Human life value is clearly seen in a family whenever income is earned to provide for that family’s economic needs. Human life value is clearly seen in a business where a key person is often identified as a significant contributor to revenue and earnings.

Whole life insurance provides a means by which an individual may insure their human life value.

Solomon Huebner defines Human Life Value as the capitalized monetary worth of the earning capacity resulting from the economic forces that are incorporated within our being: namely, our character and health, our education, training, and experience, our personality and industry, our creative power, and our driving force to realize the economic images of the mind.³

Most people see the importance of insuring the value of property such as their home or car for its replacement value and are able to do so with their casualty insurance. The human life value of an individual, which is by far the most valuable asset of a family or business, is also insurable for its replacement value on a permanent basis with whole life insurance. Whole life insurance provides an affordable, effective way of permanently indemnifying a family or business against the loss of its most valuable asset.

There are many benefits that a family may enjoy from the production of income, such as the purchase of a home, rearing and education of children and the enjoyment of life.

The indemnification of the breadwinners in a family will ensure that these benefits will continue to the survivors in the event of death.

³ S.S. Huebner, The Economics of Life Insurance, page 5, (Executive Asset Mgmt. 3rd ed. 1996) (1927)

Family Protection

The death benefits of life insurance can assure the economic continuity of a family at a time when it is faced with the greatest of all possible traumas, the death of a beloved father, mother, husband or wife. Whole life insurance can also assure financial stability through the funding of:

• Mortgage protection;
• Education funding; and
• Income needs.

Business Protection

Businesses face special insurance funding needs in order to provide a business continuity plan that will protect the owners in the event of death. Whole life insurance is ideally suited to provide the capital needed to adequately buy the interest of a deceased owner and indemnify the business against the loss of the services, expertise and skill of a key person. Life insurance is ideally suited to address four major areas of business planning:

• The funding of buy-sell agreements and stock redemption plans;
• Funding of supplemental retirement programs;
• Key person indemnification, and
• The payment of loans and mortgages.

Estate Planning

Planning for the orderly transfer of property at death can minimize taxes and provide for heirs in a way that will reflect an individual’s desires. Whole life insurance plays a key role in providing for loved ones by offering:

• Adequate liquidity to pay estate and inheritance taxes;
• Assets to generate income for a surviving spouse andchildren;
• Estate equalization among heirs, and
• Funding for special needs children.

Asset Maximization

One of the unique benefits of whole life insurance is the way that it enhances the value of other assets in your estate. The presence of guaranteed whole life insurance gives the owner the ability to use estate assets in ways that would not be possible if the insurance did not exist. Whole life is the “permission slip” that may enable you to maximize retirement income and your personal net worth. For example:

• The Power to Consume – The presence of whole life insurance in your estate will allow other assets to produce greater income by providing access to the principal as well as interest as a source of income. Life insurance gives the owner the power to consume assets that would otherwise have to be managed in an ultra-conservative fashion in order to preserve the principal and the income stream it produces.
• Pension Maximization – Most retirees will select a joint and 50% survivor annuity as the retirement income option on their pension plan. The cost of selecting this option is a lower retirement income, as much as 15%, followed by an income to the surviving spouse of 50% of the lowered retirement income. The presence of permanent whole life insurance may enable a retiree to take a much higher retirement income in the form of a single life annuity because the insurance benefits will be available to a surviving spouse as a future source of income.
• Charitable Remainder Trust – The cost of successfully building a business or managing a personal investment portfolio is often measured by the enormous capital gains tax that must be paid when a business owner looks to sell a business interest or portfolio holdings in order to fund retirement income. Often financial success brings with it a desire to express benevolence towards those charitable causes that are of particular interest. With a charitable remainder trust, these two seemingly diverse needs and desires can meet in a plan that provides:
  • A lifetime income for a benevolent donor;
  • A substantial bequest to a charity of choice;
  • Avoidance of the capital gains tax; and
  • Significant income tax deductions.

“Instantly with the payment of the first premium, Guardian sets aside…
the entire death benefit for your family.”

___________________________________________________________

DID YOU KNOW. . .

estate taxes can wipe out the accrued value of
retirement accounts, real estate and businesses
by forcing beneficiaries to liquidate assets.
Whole life’s income-tax-free, guaranteed death
benefit can cover the bill and protect the wealth
a policyholder has worked to accumulate.

Chapter 3:

What Are the Benefits of
Whole Life Insurance?

The Protection of an
Instant Permanent Estate

Instantly with the payment of the first premium, Guardian sets aside the entire death benefit for your family. Whole life insurance provides a guaranteed death benefit for the entire life of the insured.

Disability Protection

Life insurance is uniquely different from all forms of savings and investment vehicles such as bank accounts, IRAs, 401(k) accounts, mutual funds, and brokerage accounts because it can continue to grow even if you are disabled. Disability usually brings with it the strain of reduced income, increased expenses and dissolution of existing savings and investment. The Waiver of Premium Rider guarantees that if disabled, you will not lose the umbrella of financial protection provided by a whole life insurance policy. The policy will continue to provide death benefit protection, the cash values will continue to grow and dividends will continue to be paid just as they would if you had not been disabled.

Liability Protection

In many states the benefits of life insurance are protected from the claims of creditors. If your state provides this legal protection, the cash values and death benefit of a whole life policy will be protected from lawsuits that can claim other assets such as bank accounts, mutual funds and brokerage accounts.

Distribution Like a Will

Life insurance is distributed like a will in that you specify who and how much of the benefit will be distributed to each beneficiary. Unlike a will, however, life insurance has the added benefit of privacy. Wills once probated become public documents. The beneficiary distribution of life insurance is a private, contractual agreement between the policy owner and insurance company that passes outside of a will and thus provides privacy for the beneficiary.

Tax-free death benefit

The death benefits of life insurance policies are free from all federal income taxes. The enormous value of this benefit must not be underestimated, especially in light of constantly growing government expenditures and taxes.

Tax-deferred growth

The growth of cash value inside of the life insurance policy is deferred from taxation while the funds remain in the policy. This is yet another wealth protecting benefit for families and businesses provided by whole life insurance.

Tax-favorable access to policy
cash values through withdrawals
of dividends

During the insured’s life, cash values can be accessed under favorable FIFO (First-In-First-Out) tax rules. This means that dividend withdrawals are tax free up to the amount cumulatively paid in premiums.

Tax-favorable access to policy
cash values through policy loans

During the insured’s life, loans taken against a life insurance policy will not trigger a taxable event even though the policy may have a large gain in excess of premiums paid.

Self-funding

You have the option of having the policy pay for itself over time by applying dividends to pay premiums. This feature may be invoked or changed at any time to meet the changing circumstances of your life.

Ability to invest cash value in
growth securities

Policy values are always available via a policy loan and may be used for a variety of reasons including investment in growth securities.

Ability to pay itself back from
anticipated earnings

Once a policy loan has been taken, the annual dividend can be used to help pay back a policy loan.

You can make direct loans to
yourself for any reason

Cash values can be accessed on a demand basis via a policy loan at any time and for any reason without the application and approval process that is required for consumer or business loans. Whole life insurance can then free a policyholder from reliance upon commercial lenders and high interest rates.

Collateral for a loan from a bank

A whole life insurance policy may be used as collateral to obtain a loan from a bank at favorable interest rates. The ability to either borrow directly from the insurance company or from a bank gives the owner of a whole life insurance policy significant flexibility when there is a need to access policy values.

Flexible loan repayment terms

Life insurance policy loans are flexible to the extent that they do not need to be paid back unless you decide to pay them back. Once a loan is taken out on a policy it can be paid back at the option and discretion of the policy owner. When a policy loan is paid back, there will be a commensurate increase in the death benefit of the policy which may be re-borrowed at a future date or paid out to the beneficiary.

Death benefit increase

When dividends are used to purchase paid-up-additions, death benefits will grow, helping offset the eroding effects of inflation. Once a dividend has purchased paid-up-additions, the additional death benefit and cash value of the paid-up-additional insurance is guaranteed.

Text

“The guaranteed level premium structure gives
peace of mind…”

___________________________________________________________

DID YOU KNOW. . .

the cash value accumulating inside a whole life
contract can act as a “second emergency fund” to
help cover retirement, medical expenses, long-term
care, a down payment on a house, or other needs.⁴

Chapter 4:

What Types of Whole Life
Insurance Are Available?

There are several types of whole life insurance which are designed to provide flexibility and options in the structuring of an insurance program:

Level Premium Whole Life

This is the most popular type of whole life insurance and it is offered with a guaranteed level premium to either age 95, 99 or 120. The level premium structure makes the policy ideally designed to provide affordable lifetime insurance coverage. As policy owner, the guaranteed level premium structure gives you peace of mind, because regardless of what happens in a volatile world, your premium will not change.

Limited Payment Whole Life

This type of policy has a fixed level premium like a Fixed Premium Whole Life policy but the premium is only payable for a fixed period of time. The most popular plans are Life Paid-Up at Age 65 and 20 Payment Life. The advantage of these limited payment policies is that they are guaranteed to be paid-up at the end of the payment period. Thus they allow valuable insurance coverage to continue for the insured’s entire life
without any payment required at later ages and throughout retirement.

Graded Premium Whole Life

This type of policy starts out with a low initial premium which increases incrementally for a period of years. This type of policy is well suited for those who have a growing income and a desire to purchase valuable permanent coverage with an affordable premium.

⁴ From National Underwriter article by Warren S. Hersch.

“The guaranteed level premium structure gives
peace of mind…”

___________________________________________________________

DID YOU KNOW. . .

in addition to acting as a crucial retirement
supplement and during a time of increasing life
expectancy rates, many whole life policies now
come with accelerated death benefit riders that
pay out part of the death benefit for those in
need of long term care.

Chapter 5:

What Options Does Guardian
Whole Life Insurance Give You?

Whole life insurance as offered by Guardian has many riders that may be added to a policy in order to customize the coverage for your specific needs. Some of the more popular riders are:

Waiver of Premium protects you in the event of disability by paying the premium. Because the premium will be paid, cash values will continue to build, dividends will continue to be paid and the financial security afforded by a whole life policy will permanently stand as a sentinel protecting you and your family.

Enhanced Accelerated Benefit Rider allows you to accelerate the benefits of a whole life policy for chronic and terminal illnesses. In the event that you become chronically ill, a portion of a policy’s death benefits may be accelerated during your lifetime if you are permanently unable to perform two out of six Activities of Daily Living (ADLs) or if you become permanently cognitively impaired.

Enhanced Guaranteed Insurability Option (EGIO) gives the owner the right to purchase additional insurance on the insured’s life without evidence of insurability. There are up to eight option dates on the anniversaries nearest the insured’s 25th, 28th, 31st, 34th, 37th, 40th, 43rd, 46th, 49th, 52nd, 55th, and 58th birthdays and/or upon marriage, the birth or adoption of a child. The EGIO option becomes all the more valuable in the event of disability.

An insured who is disabled and has their premium waived under the Waiver of Premium rider may exercise the EGIO rider on the option dates and Guardian will pay the premium on the new policy as well as on any existing policy(s) that have the Waiver of Premium rider.

Enhanced Paid-Up-Additions Rider gives the owner the right to purchase paid-up participating insurance on the owner’s life. The real benefit of this rider is that it gives premium flexibility so that you may add varying amounts of premium to a whole life policy. The greater the premium paid into a policy the greater will be the protection afforded by the policy, the greater will be the guaranteed cash value, and the
greater will be the tax deferred accumulation of cash values and dividends.

Renewable Term Rider purchases ten-year renewable and convertible level term insurance.

Accidental Death Benefit can be added to a policy to provide an additional death benefit in the event death occurs by accidental bodily injury. The benefit will be doubled if the injury is sustained while being a passenger in a public conveyance.

“Guardian is committed to its status as a mutual life insurance company and is here to provide…
now and far into the future.”

___________________________________________________________

DID YOU KNOW. . .

Walt Disney, unable to land a substantial bank loan,
used the cash value from his whole life policy to build
a sprawling theme park that is now known to the
world as “the happiest place on earth.

Chapter 6:

Why Guardian?

Quality Company

Guardian is recognized by all the major rating agencies as a company that provides superior financial strength. The following table shows Guardian’s ratings from each of the five major rating agencies. The number to the right of each rating shows the rank of the rating out of the total number of possible ratings for each agency.

Guardian Ratings

Mutual Company

Guardian is proud to be one of the few remaining major mutual insurance companies in the nation. We are owned by our policyholders who share directly in our annual earnings. We have no stockholders expecting dividends, immediate returns or short-term growth. Guardian has no stock and thus no stock options exercisable by senior management that can sap away the financial vitality of the company. Guardian is committed to its status as a mutual life insurance company and is here to provide policyholder insurance needs, now and far into the future.

Solid History

Founded in 1860, we have paid out dividends to our policyholders every year since 1865. As a mutual company we have been able to provide one of the lowest net costs on ordinary life coverage year after year, while still retaining a solid financial position.

Concluding Note

The protection and wealth-enhancing benefits of whole life insurance make it the most comprehensive financial tool available today. Its great value is enhanced by its flexibility, which enables it to be customized for a variety of consumer needs. Premium flexibility is provided by premium and dividend options. The loan feature and the ability to withdraw dividends provides readily available liquid assets. Together, the guaranteed cash value, guaranteed death benefit and guaranteed premium provide a solid foundation for financial protection and the building of wealth in a turbulent and uncertain world.

“The Whole Story of Whole Life” revised 2008, Clifford P. Kitchen, CLU, ChFC, CFP, CFA, MSFS
Copyright © 2003-2008 by The Guardian Life Insurance Company of America, a New York Corporation

The Guardian Life Insurance
Company of America
7 Hanover Square
New York, NY 10004-4025
www.GuardianLife.com

What’s the big idea?
_______________________________________

Here’s the mindset behind BTID: Life insurance companies invest in conservative, investment-grade bonds and mortgages in order to meet their long-term liabilities. It’s the underlying conservative “returns” on these investments that make up a substantial portion of the gains of a whole life or universal life policy. If your risk tolerance is higher than that suggested by the bond market, then the strategy is that you should acquire cheap term insurance and “invest the difference” between the cost of term and a whole life policy. At the end of the term period (typically 30 years but never longer), the BTID concept presupposes you will have no further use for life insurance and will have accumulated more investment value through this strategy than would have developed through the surrender value of a “permanent” plan of life insurance.

Does it make sense?
________________________________________________________

BTID strategies might make sense for you under the following conditions:

• If there is a specific period of time for which you need or desire life insurance, with a near-certainty that you will not require life insurance beyond that period… even if it’s for just a few extra years; • If the “period of time” does not exceed 30 years;

• If you are age 45 or younger, with enough years to achieve an aggressive investment potential before adopting a more conservative asset allocation, and you are in an age range for which term insurance is relatively inexpensive.

• If you are willing and able to exercise the necessary discipline and expertise both to invest the “difference” and to manage the allocation – through the early “risk taking” years as well as the later “risk averse” years;

• If there is a budgetable difference. Term insurance fulfills an important role in providing needed or desired death benefit at low initial cost. If you lack the financial resources to procure lifetime insurance coverage with the appropriate lifetime (i.e., “permanent”) insurance product, then maintaining a suitable level of term insurance would be the appropriate strategy (presumably without a “difference” to invest).

Why not BTID?
________________________________________________________

One argument that’s often made in favor of BTID is that times have changed, and that BTID represents a newer, better investment alternative in the world of life insurance. Yet it’s precisely because times have changed that a financial strategy based on term life may not be what’s best for you.

Consider: the 21st century marks a shift in the paradigm of what a life span “should” look like. People are not only living beyond life expectancy in ever-greater numbers, but they are working beyond traditional retirement age. Having children later. They’re changing careers, starting up businesses later in life, starting second families. Their parents, too, are living longer and may be dependent upon them for care and support. At the same time, they may be responsible for providing financial support to dependent children, whether young or adult.

In other words, your financial obligations may not only be more wide-ranging than in your parents’ and grandparents’ day, but will probably also last longer. The right choice of insurance can play a crucial role in helping you to protect your ability to meet those obligations before and after retirement. For all the above reasons, given the length of time you’re likely to need insurance, it is increasingly unlikely that a BTID strategy is going to adequately serve your needs. Take another look at whole life Following are three examples that illustrate why whole life is likely to be a better choice than BTID. Each one assumes lifetime uses for life insurance and the expectation that you’ll want to optimize your retirement income from investment assets as well as a desire to leave a legacy to your family. Should you “buy term and invest the difference” … or buy permanent life insurance to achieve the same objectives? Let’s take a look.

1. Look at cost

The following table demonstrates that while term insurance is very affordable (in this example for a healthy, non-smoking 33-year-old male) during the primary premium guarantee period (5 to 30 years), annual premiums escalate rapidly to an unaffordable degree once the guarantee period ends. This “fact” is the basis for the BTID approach, but it is based on the underlying assumption that you are absolutely certain you won’t want to have coverage beyond the original term of the policy and/or you won’t be disturbed by the absence of the coverage once the premium begins its escalation. With more and more people living into their 80s, 90s and beyond, the real fact is that lifetime insurance coverage cannot practically or affordably be maintained with term insurance.

2. Look at legacy value

Let’s say you are that 33-year-old male and you’re seeking $1 million of coverage. You face a choice between a 30-year term insurance policy with an annual premium of $939 and a participating whole life policy with an annual premium of $11,290. You could do a lot with that yearly difference of $10,351, couldn’t you?

Take a look: Say you invested the difference in a portfolio with a net after-tax return assumed as a constant 5.19%. After 30 years, that investment account is worth $746,997 and your term policy reverts to its underlying guarantee of annually renewable term premiums.

You then continue to invest the full $11,290 into the account and to pay the escalating term costs out of the investment account. By the time you reach life expectancy, the account is exhausted and your total legacy value is nothing but the term policy’s $1 million death benefit.

On the other hand, using the current dividend scale, if you had invested the $11,290 into a whole life policy from the start, it could have grown to a death benefit of $3.2 million by life expectancy.²

By the 22nd year of the comparison, the cash value (including the cash value of paid up additions) exceeds the investment value of the BTID.3 You would have to achieve a constant after-tax return of 5.99% to achieve an age 65 portfolio value greater than the cash value of the participating whole life policy. At this higher assumed constant rate of return for BTID, the legacy value at life expectancy would be $535,718 remaining in the portfolio plus the $1 million term policy death benefit. That still adds up to less than half the legacy value of the participating whole life policy.4

In fact, if you wanted to have a legacy value at life expectancy equal to the participating whole life death benefit (again, at the current dividend scale), you would need to achieve a constant after-tax return of 7.49% (10.7% before tax) throughout your lifetime to accumulate $2.2 million in portfolio value after paying all term insurance premiums for the $1 million policy.

3. Look at retirement income

Let’s take a different view: A somewhat older 45-year-old consumer wants to invest for retirement and desires to maintain a $500,000 life insurance policy. He seeks an analysis determining whether he’s better off with the BTID approach, or if permanent (i.e., a participating whole life policy) would better suit his needs with a total outlay of $15,000 a year. Here’s what he learns:

How to Decide?
_________________________________________

Speak with your Guardian representative. He or she will work with you to determine the best life insurance strategy for your individual needs. So you and your beneficiaries will be protected, now and in the future.

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. Please note that deduction of all applicable fees and charges could result in lower performance than shown.

2 Dividends are not guaranteed and are declared annually by the Board of Directors.

3 Accumulating at 5.19% after tax.

4 Assumes 30% tax rate throughout.

5 Ibbotson 2006 Stocks, Bonds, Bills & Inflation (SBBI) Yearbook (Valuation Edition).

The Guardian Life Insurance Company of America

7 Hanover Square New York, NY 10004-4025

www.GuardianLife.com

Life Insurance as an Asset Class:

A Value-Added Component of an Asset Allocation

Introduction
_______________________________________

Do you need insurance for your entire life?

Can you rely on what you hear in popular media?

Is buying term and investing the difference really the right choice?

In today’s complex economic environment, financial advisors and their clients are drawn to the “names” in the industry, many of whom have acquired a celebrity status through television appearances and book-signing events. As always, there is an upside as well as a downside to this – on the upside, it helps mobilize people into taking action for their financial future. The downside is that some of the advice is misleading or simply inaccurate, and particularly so with life insurance.

Many well-known and respected financial advisors, such as Jonathan Pond, focus on stocks and bonds, marginalizing the importance of life insurance as a component in a financial design. The late Louis Rukeyser’s program, Wall Street Week, also focused the public’s attention on the ups and downs of the day’s trading events, as does Bloomberg radio. Jane Bryant Quinn and Suze Orman have been negatively outspoken about whole life insurance; both support the concept of buy Term and invest the difference.

Robert Kiyosaki, author of Rich Dad, Poor Dad, defines an asset as something that can be used, either now or in the future, to generate income. This statement leads us to the objective of this study – to highlight the uncommon knowledge about life insurance as an asset class and to expand the discussion about it.

Life Insurance as an Asset Class: A Value-Added Component of an Asset Allocation was written by Richard M. Weber, MSA,CLU and Christopher Hause, FSA, MAAA, both independent industry experts with more than 60 years of experience between them. The study provides a valuable forum for discussion among Guardian associates, accountants, attorneys, other trusted financial advisors, and clients. It focuses on life insurance as an important asset and foundation to an intelligent financial plan.

As a company that has been in the business of insuring families and businesses for nearly a century and a half, we know of no other financial product that has the ability to build wealth, protect and conserve assets in your lifetime, and transfer those assets to future generations – all with the simplicity, guarantees, and tax advantages inherent to this unique product.

This summary provides a brief overview of the study, which may be obtained from the following website: www.ethicaledge.biz or by calling your Guardian representative.

How Much Life Insurance Do I Need?
_______________________________________

Life insurance has traditionally been purchased to replace loss of income needed to meet the survivors’ ongoing expenses, but how do we determine how much is enough? There are many different philosophies and formulas that can be applied, but the two most common approaches are Capital Needs Analysis (CNA) and Human Life Value (HLV).

Capital Needs Analysis budgets for current and anticipated expenses, and takes into account other income sources as well as projections on what costs such as Health Care could amount to in the future. The analysis will tally expenses, including a factor for inflation, calculate the present value using a conservative rate of return, then offset that by existing assets. Ultimately, the net number produced reflects the amount of life insurance believed to be needed to support survivors.

Human Life Value (HLV) evaluates the economic life of the decedent – the monetary total of all that he or she would have produced and accumulated in a lifetime, thus the method reflects earnings potential and is not cost-based. It is similar to the formulas used to calculate and claim damages under a wrongful death suit, the theory being that the survivors are entitled to the economic value of what the deceased would have produced during a lifetime. For example, a 33-year-old earning $100,000 and working to age 70 might earn a total of $10 million, including 5% annual raises and not discounted for the time value of money.

A recent LIMRA International study portrays a sizeable gap between needs and the coverage people have purchased and that 28% of the wives and 15% of the husbands in the study had no life insurance at all. Experts recommend that coverage is sufficient to replace 7-10 years of income.1 Human Life Values at different ages can be estimated from a simple underwriting guideline frequently used by life insurance companies to determine the proper amount of coverage:

What Should It Cost?
______________________________________

Life insurance costs are based on life expectancy of various age groups. From the probability statistics, a premium amount can be calculated – if the insurance company can estimate how much it expects to pay out in death claims in a given year, it must collect at least that much to cover the cost (this doesn’t take into account other expenses and profits). Important in the calculations is the timeframe from acquisition to life expectancy, and that is why premium amounts increase the older the buyer is at the time of issue.

A common misconception is that whole life insurance is a “good deal” only if the insured dies prematurely, so purchase should be delayed as long as possible. The first consideration is that life insurance is much more economical if purchased at earlier ages. More to the point of the purpose of life insurance is the security and protection it provides as well as locking in one’s insurability, which can potentially change at later ages due to health factors.

Modern Life Insurance Product Options
______________________________________

This section of the study offers succinct descriptions on the wide range of life insurance products available in today’s market, and includes a Product Matrix that visually depicts how they compare and contrast.

Transforming Needs
______________________________________

An important step in purchasing life insurance is to assess as closely as possible how needs may change during a lifetime. This helps determine the type of insurance best tailored to suit the needs and desires of the buyer, and allows for flexibility in planning for the future.

Term Life Insurance

Term is known as the simplest or purest form of life insurance, typically purchased for short-term financial protection. On products purchased for a specified number of years, the initial premium is guaranteed and level, reflecting a mathematical smoothing over the years as life expectancy changes. Premiums often follow the model for permanent life insurance, based on life expectancies, which make them basically unaffordable for renewal after the initial period. The following also impact the calculation of Term premium:

• To determine gross premiums, 15-30% is added to the pure mortality costs for expenses, reserves, and profit margins.

• In a company with many preferred rating classes, the basically healthy will pay more than if there were fewer preferred classes.

Although not economically viable as longer term financial protection, there are specific uses for Term insurance, such as to:

• Secure loans

• Satisfy a divorce or alimony agreement

•Insure a short-term business obligation

In contrast, Permanent insurance is purchased to:

• Protect income for a longer horizon

• Supplement retirement income

• Equalize estates

• Assist in payment of estate tax or for other liquidity needs at death

Cash Value, Whole Life,
and Participating Whole Life Insurance

In a discussion about cash value life insurance, the authors point out that one essential difference between Term life and a permanent policy is that the reserve in the Term policy is typically not accessible to the policyholder, as the reserve represented by cash value is to the policyholder with permanent insurance. Additionally, the longer the Term guarantee period (20-30-year Term), the funding becomes more like the permanent policy, but there still is no cash value – living benefits – to Term insurance.

Whole Life (WL)

Whole Life insurance is considered the oldest form of lifetime, level premium insurance, dating back to 1759. Because a contract can be in force over decades, the careful pricing and design of the policy make this a strong and stable financial vehicle no matter what the economic conditions. In a Participating Whole Life policy from a mutual life insurance company, premiums are returned to policyholders in the form of dividends as their pro-rata share of gains through investment returns, mortality experience, and expense control.

Universal Life (UL)

First introduced in the 1970’s, UL was the first product to transfer sufficiency risk to the policyholder, as there were fewer guarantees and no fixed premiums or benefits. The policy featured flexibility in amount and timing of premium payments, so that the policyholder simply had to maintain a positive balance in the policy account to cover fees and expenses month-to-month.

Adjustable Life

The Adjustable Life policy, distributed by a limited number of companies, is a whole life policy with more of the premium and death benefit flexibility of UL. Premiums and death benefits can be adjusted as guaranteed limited pay policies to Term insurance for limited timeframes.

Variable Policies (VL and VUL)

Variable Life and Variable Universal Life policies offer the opportunity (and responsibility) for the policyholder to direct premiums among various investment options – typically equity and a fixed account – to support the underlying policy and death benefit. The long-term viability of the policy becomes a function of the funding premiums paid and the market values of the sub-accounts.2

Equity Indexed Policies

Another variation on UL, the crediting rate is not subject to the company’s investment results, but based on an elaborate formula derived from the experience of a broad index of stocks.

No-Lapse Guarantee UL

This is the one UL product that falls under the guaranteed premium category of Term and Whole Life. Designed to never lapse as long as the premium is paid, this is typically characterized as a death benefit product – owners should not anticipate accumulating sizeable cash values.

Survivorship Life

Survivorship Life or second-to-die insurance is frequently used for estate planning, where the proceeds are used to pay estate taxes and other costs associated with settling an estate. The common viewpoint is that it should not be considered if the surviving spouse will need additional financial resources at the death of the first spouse.

Insurance Product Matrix
Click on Image to See Full Size

Policy Illustrations
and the Illustration Beauty Contest
_______________________________________

For most insurance buyers, the process will include reviewing one or more company-generated policy illustrations. Even though most insurance companies use current and actual experience as regulations stipulate, illustrations are representations of assumptions made in the policy design. These assumptions are based on mortality experience, investment returns, and expenses. The illustration suggests to the buyer a view of how the policy’s values might look in the future through economic enhancements that exceed its guaranteed pricing elements.

The proper use of an illustration is to demonstrate a policy’s design and flexibility. This would include what may happen with premium offset, or if withdrawals are made in later years to supplement income, or if riders are utilized to enhance the policy’s values.

The improper use of an illustration is to specifically portray numbers in order to compare policies.3 Such an illustration for a mutual fund is specifically prohibited by securities regulations.

How does a consumer evaluate the credibility of two illustrations from different companies, or about different products, or products with different guarantees and enhancements? Most problems arise because the illustration creates the illusion that the insurance company knows what will happen in the future and that this knowledge has been used to create the illustration.4

The Illustration Challenges for
Universal Life and Variable Universal Life
_______________________________________

Universal Life and Variable Universal Life policy development and enhancements would not have been possible without the personal computer. In turn, because of the volatility expected in the sub-accounts of a VUL product, illustrating to show the prospect how the policy works became a real challenge for the insurance industry.

With level death benefit Whole Life, the death benefit is comprised of the accumulating cash value and the commensurately declining Net Amount at Risk:

Net Amount at Risk = Death Benefit – Cash Value

The challenge with Variable policies is that the cash values will fluctuate, requiring simultaneous adjustments in the Net Amount at Risk.5

The graph suggests that assuming a higher premium – a more conservative illustration approach – is probably a better, or at least safer, guideline for a buyer.

The challenge of illustrating Variable products in a more realistic way has been amplified by the regulation and tradition to project a constant return assumption (12% maximum) as far out as age 120. Statistical analysis produces a better way to understand and visualize how variable policies work by providing a more realistic “starting point” which advisors and clients can use as a baseline then revisit periodically.

Monte Carlo Analysis

The definition given for Monte Carlo analysis in the context of portfolio return is a means of statistically evaluating an unknown future outcome based on numerous random samples of prior experience. With today’s computers, it is possible to plug in a range of variables to see if the premium is likely to sustain a policy for a lifetime. The results of this type of calculation are demonstrated in the following graphs:

In the first, a death benefit of $1 million is funded with an annual premium of $6,035 for a 45-year-old to age 100. It shows a 43% ratio of success in sustaining this policy in force at this premium rate. A question would be, “Is this acceptable for this particular client?”

The second graph assumes a slightly higher annual premium ($8,240), and produces a 91% success of sustainability ratio.

The random sampling of the past 55 years’ returns demonstrate the complexity in assessing proper funding and/or performance of a variable product. The same method may be adapted to a UL product with a crediting rate tied to the experience of a company’s general assets account, which tends to change widely over time.

Apples and Oranges

Another consideration is that regulations restrict UL policy illustrations to use values no greater than the current crediting rate and VUL illustrations may use any rate up to a maximum of 12%. If a policy is purchased with an expectation of paying as little as possible over time, a VUL illustration can solve for a significantly lower premium that is unlikely to be realized. It is important that the right policy is matched to the client’s needs – and to be aware that a variable policy can illustrate a better premium at 12% than a UL policy’s crediting rate of 6%.

Above all, financial advisors must be on board to help clients periodically monitor results in order to maximize the effectiveness of their financial strategies. Statistically in force evaluations of these life insurance products should be conducted every 3 – 5 years.

“A likely impossibility is always preferable to an unconvincing possibility.”
– Aristotle

Lifelong Needs: Underlying Factors
to Consider When Choosing Life Insurance
______________________________________

The good news is that life insurance products have evolved over the years with the times, the economy, and individual needs and desires. There is a broad range of choices to dovetail with needs as well as the client’s situation and preference profile. While peer companies typically utilize a similar process to design products, pricing, values, flexibility, and other features can vary widely. Outside influences can also affect product.

For example, in the 1970’s and ’80’s, spiking interest rates with the underlying high rate of inflation had a negative effect on traditional life insurance. The attraction of superior total returns on the short new money portfolios of Universal Life products caused a decrease in sales of whole life with the longer, slower moving old money portfolios. Though whole life was not a bad deal, the focus was on paying as little as possible for the highest return, which drove many clients to the UL marketplace.

Most insurance companies have a similar mix of investments held in reserve to fulfill obligations to policyholders. The investment portfolios are typically comprised of 90% or more in U.S. Government and high-grade Corporate Bonds, high-grade commercial mortgages, and policy loans, with minimal investment in risk-based capital. This practice is consistent in the companies’ ability to allocate excess interest crediting rates on UL policies and dividends on participating Whole Life products.

Creating a uniform approach to configure pricing and contractual benefits has long been a challenge to the industry, where so many variables in the present must be considered for the future time horizon of life insurance.

Policy Standards Analysis
______________________________________

A policy standard is derived from resources such as actuarial tables, levels of investment returns, and average costs incurred by insurance companies in managing blocks of life insurance policies. In this section, the authors provide data analysis through policy standards to compare pricing and results for a Universal Life policy, a Variable Universal Life, and a Whole Life policy issued in 1974 and held for 30 years.

Click on Image to See Full Size

The assessments show 30-year death benefit and total cash values for the three policies, based on the same annual premium. The Variable product shows three scenarios with various asset mixes ranging from the most conservative to the most aggressive. Other assessments are provided using a 60-year old female and a 33-year-old male to illustrate the application of policy standards across various case scenarios and with different products.

It is critical to keep in mind that each client’s needs and desires are unique, and that a one-size fits all financial strategy is inadequate.

Buy Term and Invest the Difference
(BTID) – 3 Views
_______________________________________

This chapter addresses a common opinion that is generally considered an unquestionable truth among many of the media voices. Buying Term insurance and investing the difference can make sense in certain situations. These include:

• When there is a quantifiable time period for needed or desired protection, with a certainty that life insurance will not be required beyond that period.

• When the time frame is 30 years or less and the buyer is under age 45.

• When the difference will indeed be invested, or

• When there is truly a lack of sufficient funds at the time to purchase permanent coverage.

For anyone making a buying decision that cannot check off one of the above criteria, Term insurance is definitely a poor choice.

Focus on Price

Level Term insurance becomes unaffordable after the initial guarantee period. The increase in the typical guaranteed continuation premium is more than 10-fold. In the example provided of a 33-year-old male, the premium for a 10-year Term policy with a $1 million death benefit jumped from $355 during the initial period to $3,865 in the 11th year, and increased annually after that.

Focus on Legacy

If a client wants to leave a specific legacy and buys Term, he or she must be confident of constant and historically high returns on the investment portion of this strategy. The S&P 500 Index experienced great volatility over a fairly short timeframe, achieving returns in excess of 47.85% in 1954 and returns plummeting to –25.99% in 1974. For those seeking a particular objective, BTID is not the most effective strategy.

Focus on Retirement Income

In the discussion, a 45-year-old consumer wants to maintain a $500,000 life insurance policy, but needs to have a supplemental retirement income stream as well. Once again, uses of permanent life insurance working in synergy with portfolio investments can provide a higher net after-tax retirement income and provide a higher legacy value as well, while reducing risk.

Modern Portfolio Theory,
Asset Classes, and Life Insurance
_______________________________________

Developed in 1982 by Harry Markowitz, Modern Portfolio Theory has become one of the most well-known economic theories in our lifetime. The simple idea is diversification of asset classes to achieve the best risk/return balance for a portfolio.

The primary asset classes include:

• Equities (common stocks)

• Fixed Income (bonds and mortgages)

• Money Market (cash)

• Guaranteed (annuities)

• Real Estate

While everyone invests, 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. This section expands the discussion, highlighting life insurance as a viable asset class of substantial value. Here’s why financial advisors need to look at life insurance more closely in helping clients build solid portfolios:

• The death benefit provides cash when needed most.

• The cash value provides the policy owner with living benefits similar to a fixed account with 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 rider6, a policy may be 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.

Assessing the Value of a Bond Portfolio
With and Without Life Insurance7
_______________________________________

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 following graph shows the synergy in funding life insurance from the income stream of a component of the fixed portfolio, with a better risk/return than the bond fund without life insurance.

Risk/Return

The synergies of using life insurance plus other investments can produce more legacy value, potentially more net income, and less market value adjustment risk than a portfolio structured with no permanent life insurance. Considering life insurance as an asset class achieves the ideal efficient frontier discussed in Modern Portfolio Theory and is, ultimately, also in the best interests of our clients.

Building a Life Insurance Portfolio
With Efficient Choices
_______________________________________

While Modern Portfolio Theory emphasizes diversity in investment options, a similar process of diversification can apply to the efficient selection of life insurance policies intended for lifetime use, especially when acquiring an amount in excess of $3 – $5 million.

Selecting a mix of the right products involves consideration of the client’s risk tolerance, time horizon, desired premium outlay, development and access to cash values, and death benefit requirements. The major forms of life insurance present varying combinations of most of these attributes.

If a client is interested in lowest outlay, the No-Lapse Guarantee policy may be the right choice. However, if best cost is desired, Whole Life or Variable Universal Life could be the better buy. There are so many factors to consider that it takes professional expertise to help guide the buyer to make efficient choices.

Financial Expertise Versus Life
Insurance Expertise
_______________________________________

Financial expertise has become more specialized since the 1960’s as the number of products and their complexity have increased. With the advent of the Internet, where individuals can acquire and manage their own investment and insurance choices, there are many resources available for information, advice, and execution of the individual’s wishes.

The best scenario is a relationship with a team of like-minded individuals, each with specific professional expertise in the financial arena.

Policy Management
_______________________________________

The financial “gurus” are all especially focused on the buying and selling process of the portfolio components they favor. Even in discussions of life insurance, the primary consideration seems to be what product to purchase. Very little attention is paid to monitoring, managing, and measuring the success of the portfolio.

Some questions to consider include:

• Does the insurance policy remain suitable to the policyholder’s situation and expectations?

• Is the insurance company continuing to remain financially solid?

• (If a Universal Life or VUL policy) Are scheduled premiums adequate to sustain the policy contract to maturity?

• Is the company providing a high level of service and expertise?

In addition to putting a plan in place, ongoing assessment and careful monitoring are essential for a successful financial strategy that could span a lifetime. Guardian’s Living Balance Sheet is an ideal electronic planning and service platform for use by clients and their Guardian representatives. It helps provide a comprehensive overview of a portfolio with the opportunity to monitor and update as frequently as necessary, to achieve optimum financial balance among all of an individual’s investments. Because life insurance can provide financial security over generations, it is critical to look to the company for its stability, quality products, customer service, and the knowledgeable expertise of its financial representatives.

Since 1860, Guardian has provided high quality products and services to meet a broad array of personal and business needs to enrich the lives of the people we touch.

1 Life Insurance Consumer Studies, LIMRA International.

2 Variable life insurance products and their underlying investment options are offered by prospectus only. Prospectuses contain important information, including charges and expenses, and should be read carefully before completing an application, investing, or sending money. Please consider the investment objectives, risks, fees and charges, and expenses of the investment company carefully before investing. A prospectus containing this and other important information can be obtained from a sales associate or by calling 1-800-441-6455.

Variable Universal Life insurance is issued by The Guardian Insurance & Annuity Company (GIAC), a Delaware corporation and distributed by Guardian Investor Services LLC (GIS). GIAC and GIS are located at 7 Hanover Square, New York, NY 10004-4025.

Values in variable investment options will fluctuate daily and may be worth more or less than the original investment. Any individual soliciting these variable life insurance products must be a licensed insurance agent and a registered representative of the broker-dealer.

Variable products and their underlying investment options are not deposits of, or guaranteed or endorsed by any bank or depository institution and are not insured by the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Association, the Federal Reserve Board, or any other Agency and involve risk, including possible loss of the principal amount invested.

Securities products and services are offered through Registered Representatives of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY 10004-4025, 1-888-600-4667. PAS is an indirect wholly owned subsidiary of The Guardian Life Insurance Company of America, New York, NY.

GIS and PAS are members of: FINRA, SIPC.

3 Final Report of the Task Force for Research on Life Insurance Sales Illustrations under the Auspices of the Committee for Research on Social Concerns, Society of Actuaries, 1992.

4 ibid.

5 For policies with level death benefits, the Net Amount at Risk equals the policy’s stipulated death benefit minus the cash value for any point along the con­tinuum from policy purchase until death.

6 Riders may incur additional costs.

7 Please note that the deduction of all applicable fees and charges could result in lower performance than shown.