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Old 05-16-2015, 12:56 PM   #21
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for sure , it is almost non existent and certainly 2008-2009 would have wiped out plenty if it could.
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Old 05-16-2015, 01:15 PM   #22
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then you have various state guarantees . states require insurers to just absorb failed companies.
That works in the case of an isolated company that fails for an isolated reason (malfeasance, uniquely poor decisions, etc). It does nothing but spread the damage and force other teetering companies over the edge in the case of a systemic problem. The weight of the increasing number of companies falling into the pit assures even the strongest companies will be drug under. 2008 is far from as bad as things can get, I'm sure most people here are structuring their affairs to weather such a storm. And yet, during that time, insurance companies were not sanguine about their ability to withstand the gale, instead approaching the government for help. It's all "solid as a rock" when selling policies to people, some companies (and their trade groups) didn't sound that way behind the scenes when push came to shove. We can all choose which version to believe today.
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Old 05-16-2015, 01:18 PM   #23
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you have a whole lot more to worry about than insurers.

i think you are dwelling on something very remote.
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Old 05-16-2015, 01:25 PM   #24
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you have a whole lot more to worry about than insurers.

i think you are dwelling on something very remote.
And I think you are brushing it aside. "Remote risks" are what insurance is >supposed< to reduce. Yet, by "betting" our future--decades of future-- on one company (or industry) instead of a more diversified approach, I'm not sure we reduce those remote risks.

Annuities have a place. If I were 80, in great health, had a portfolio that might not be able to support my basic needs for the next 10-20 years, I might buy one and hope for the best.
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Old 05-16-2015, 01:33 PM   #25
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our entire system of safe withdrawals is based on remote chance. the entire reason we don't spend 5-6% is because there were 2 remote times, otherwise the average rate is 6.50% .

but we don't just because of remote chances and that is why we have insurance against certain things. guarantees will always cost .
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Old 05-16-2015, 01:37 PM   #26
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If one wants an insurance payment to be a non-taxable payout for a surviving spouse or heir, why not buy straight term insurance at a much lower cost?

(why screw around with whole life policies)??
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Old 05-16-2015, 01:46 PM   #27
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straight term may not stay in effect long enough . besides in this case being discussed it is to be left to heirs which means term is likely long gone by that age or so expensive at that age it would be insane.
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Old 05-16-2015, 01:54 PM   #28
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There is an active Boglehead thread on this article (personal finance, noninvesting). Wade Pfau put a post in and is coming back later to answer some questions, including the whole life matter. He noted that the underlying white paper gets into the nitty gritty that had to be omitted from the forbes article.
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Old 05-16-2015, 02:09 PM   #29
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That works in the case of an isolated company that fails for an isolated reason (malfeasance, uniquely poor decisions, etc). It does nothing but spread the damage and force other teetering companies over the edge in the case of a systemic problem. The weight of the increasing number of companies falling into the pit assures even the strongest companies will be drug under. 2008 is far from as bad as things can get, I'm sure most people here are structuring their affairs to weather such a storm. And yet, during that time, insurance companies were not sanguine about their ability to withstand the gale, instead approaching the government for help. It's all "solid as a rock" when selling policies to people, some companies (and their trade groups) didn't sound that way behind the scenes when push came to shove. We can all choose which version to believe today.
I couldn't disagree more. In 2008 there were a handful of insurers who were indeed nervous, but the issues in the insurance industry were minute compared to the banking industry, where banks were failing seemingly every other day. Only two insurers, Lincoln and Hartford, accepted TARP money and in both cases they repaid less than a year after they received it.

If it ever gets so bad that insurers are unable to perform on their contracts, then the banking industry and stock and corporate bond markets will be in tatters.
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Old 05-16-2015, 03:07 PM   #30
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I am trying to see where he missed something, but I can't find it.
I think that's important. He uses a 3.5% SWR rate which allows for inflation driven increases, then he compares that to a non-indexed SPIA.

Investment management fees and asset allocation before retirement are probably bigger deals.

He assumes that our 35 year old couple is so naive regarding asset allocations that they need to pay 75 bp to an adviser to get them into the right mix of stock and bond funds. And, that adviser buys funds with average expenses of 84 bp. (Those are his Target Fund expenses.)

But, when that couple buys a WL policy, they suddenly get so sophisticated that they can run their own asset allocation strategy that involves annually offsetting the bond allocation with the WL cash values. This increases their equity allocation in the WL scenario, helping to produce nearly as much at-age-65 401k balance when they save $9,000 per year as when they save $14,281.

I don't buy it. They are either sophisticated in both cases or naive in both cases.
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Old 05-16-2015, 03:09 PM   #31
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this is true
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Old 05-16-2015, 03:12 PM   #32
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nope , that is the smallest "IF " of them all. even 2008 did not effect one annuity or life policy. in fact agg's insurance business was unscathed.

then you have various state guarantees . states require insurers to just absorb failed companies.
This would be true if Pfau were using the guaranteed values in his comparison.

He isn't. He is using the illustrated values. So, he assumes that our couple can stop paying the $4,500 annual premium at age 65 because by then the dividends will be sufficient to cover the premium.

And, he is using the illustrated death benefit (presumably including dividend-funded additional insurance) when he buys the SPIAs and when he calculates the "legacy value".

Since he has "Actuarial Science" in the title to his paper, and since this is funded by OneAmerica, it might be good if he talked to the actuaries responsible for those illustrations and disclosed the interest and mortality in the guaranteed values and the expenses, interest, and mortality in the illustrated values. Then the readers might guess something about the uncertainty in the illustrations.
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Old 05-16-2015, 03:39 PM   #33
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Only two insurers, Lincoln and Hartford, accepted TARP money . . .
True, but not the whole point. What CNN said at the time (emphasis added)
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Treasury Department spokesman Andrew Williams said Allstate, Ameriprise Financial, Hartford Financial Services Group Inc., Lincoln National Corp., Principal Financial and Prudential Financial Inc. have qualified for TARP money.
"These life insurers met the requirements for the Capital Purchase Program because of their bank holding company status and each applied for CPP capital investments by the deadline of November 14, 2008," Williams said.
Allstate, Principal Financial, Prudential--these are companies we've all heard of, not bit players. They all asked for government bailouts, some later turned them down. If/when they paid 'em back, or if they took the money at all isn't the point--when the chips were down, these supposed bedrocks of stability were so unsure of their future financial strength that they begged the government (taxpayers) for help. So, what are we to believe today about the safety of these and other companies? And a few decades from now?
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If it ever gets so bad that insurers are unable to perform on their contracts, then the banking industry and stock and corporate bond markets will be in tatters.
It works the other way, too: If the banking industry, stock and corporate bond markets are in tatters, the insurance companies will be unable to perform on their contracts. So, I'd prefer to just cut out the middleman (and all their fees, costs, and huge HQ buildings) and invest in the underlying assets.
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Old 05-16-2015, 03:42 PM   #34
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True, but not the whole point. What CNN said at the time (emphasis added)

Allstate, Principal Financial, Prudential--these are companies we've all heard of, not bit players. They all asked for government bailouts, some later turned them down. If/when they paid 'em back, or if they took the money at all isn't the point--when the chips were down, these supposed bedrocks of stability were so unsure of their future financial strength that they begged the government (taxpayers) for help. So, what are we to believe today about the safety of these and other companies? And a few decades from now?
That the government will bail them out again to prevent total economic collapse?

I'm finding current government debt to be a bigger concern...
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Old 05-16-2015, 03:44 PM   #35
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to much worry about this stuff . aig insurance was fine , allstate does not sell life and annuities and prudential didn't need the bailout.

until we have a modern day failure to pay i wouldn't give this two thoughts. we have zero to date.
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Old 05-16-2015, 03:50 PM   #36
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That the government will bail them out again to prevent total economic collapse?

I'm finding current government debt to be a bigger concern...
Related issues, right? The bailout worked last time because the world still clamored for US bonds as a safehaven when the sky was falling. Increasing USG debt and decreased US economic growth could make that less likely next time.
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Old 05-16-2015, 04:04 PM   #37
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I couldn't disagree more. In 2008 there were a handful of insurers who were indeed nervous, but the issues in the insurance industry were minute compared to the banking industry, where banks were failing seemingly every other day. Only two insurers, Lincoln and Hartford, accepted TARP money and in both cases they repaid less than a year after they received it.

If it ever gets so bad that insurers are unable to perform on their contracts, then the banking industry and stock and corporate bond markets will be in tatters.
Whatever the next crash turns out to be, it will be different than the last one. I would make no assumptions about how stable the insurers are in the next crisis. What if the states sign off on principles based reserving in the interim and the insurers all get their fox-in-the-henhouse freak on big time?
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Old 05-16-2015, 04:10 PM   #38
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to much worry about this stuff . aig insurance was fine , allstate does not sell life and annuities and prudential didn't need the bailout.

until we have a modern day failure to pay i wouldn't give this two thoughts. we have zero to date.
But, once again, the gov't is not going to bail out their illustrated values. And, Pfau is using illustrations.
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Old 05-16-2015, 04:10 PM   #39
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i would still believe the insurers would likely stand up a whole lot better than your portfolio would if that was the case.

as far as pfau's numbers and assumptions there are lots of skewed things going on . but odds are a base of guarantees and your own investing should produce better results .

i just can't say how much better.
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Old 05-16-2015, 04:17 PM   #40
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..... Allstate, Principal Financial, Prudential--these are companies we've all heard of, not bit players. They all asked for government bailouts, some later turned them down. If/when they paid 'em back, or if they took the money at all isn't the point--when the chips were down, these supposed bedrocks of stability were so unsure of their future financial strength that they begged the government (taxpayers) for help. ....
They did not ask for bailouts as you claim and they definitely were not begging the government for help. There was a lot of uncertainty at that time with the financial system as a whole and there was no real cost for applying for TARP so many of them applied in case things got worse even though they had no real need at the time. Given how crazy things were at that time there was no reason not to apply just in case. As it turned out, once the feds stabilized the banking system and financial markets, there was less uncertainty and other than The Hartford and Lincoln they decided that they wouldn't need additional capital and even The Hartford and Lincoln only needed it for a short period of time.
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