Life insurance and Annuity selling by Wade Pfau?

[pb4uski]

In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.

 

[samclem]

In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts.

I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.

 

[meierlde]

In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.

For individual companies there are the state guarantee funds, that cover some defined amount of value of an annuity or life insurance. Of course this is paid for by assessments on all insurance companies doing business in the state. So if enough insurance companies fail then the funds could fail. But then the various bond and other markets would have frozen up due to no buyers and lots of sellers, as the insurance companies dump assets.
As a result in the case of failure of state guarantee funds the whole financial system could well freeze up and liquidity in the whole market evaporate.

 

[mathjak107]

I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.

i think until the first policy holder does not get paid this is a moot point.

 

[meierlde]

I would not say there is a "lot of risk" of not getting paid, but over a contract period of 40-50 years that it is not a negligible risk.

And I think that the definition of "safety" needs to be very well defined. Is it "likelihood of receiving the illustrated rate of return," is it "likelihood of receiving the guaranteed rate of return", or is it "likelihood of keeping up with inflation so the product does what the client bought it for--to provide for his bare minimum spending needs". Mr Pfau and many other insurance advocates (paid and unpaid) make a living by blurring these lines.

By its definition the guaranteed rate of return or cash value or the like is all that is riskless. For whole life essentially this represents the build up until effectively you are ensuring your own life with the cash value. (A paid up at age X policy does this explictly, as does reduced paid up insurance, which in general is an option on a vanilla whole life policy.) There should be a table that shows the amounts at various ages of paid up insurance if you select the option and effectively buy a single pay life insurance policy at that time.

 

[robertf57]

What are insurance products? LONG-term commitments. You have to hold these policies for LIFE! Over long time periods a diversified portfolio doesn't lose money. During the modern era the worst you would have done over any rolling 20 year time period is like 5.3%. That makes these "guarantees" pretty pointless. You're not gonna lose money anyway.

I would say this is a mischaracterization of whole life. It is a long term committment from the insurer; but the insured is free to drop the coverage at anytime and receive the surrender value or "barrow" his own money from the policy.

Quite frankly, I think the good Dr. P 's comparison in this article are quite flawed. The expenses on the investment side are inflated, the returns on the WL are inflated to the illustration values and the not the guaranteed returns.

 

[mathjak107]

meteoroids can strike the earth to but it is not a risk i would put in to my daily plan or thoughts .

the reality is anything bad enough to belly up so many insurers would have destroyed your own investments too so in that case out your money is out your money.

but on a scale of 1-10 with 10 being highest odds of the income stream being un-broken because of extreme markets i would go 9.99 in favor of the insurers.

that being said there is lots of plausibility in pfaus logic and this is nothing new.while i question the numbers , the outcomes have pretty much always shown

annuities out perform cash flow of our safe money and immediate annuities and equities have out performed bonds/cash and equities in every study i have seen.

since sequence risk can vary the bucket of money from zero to more than we started with the addition of life insurance should reduce the amount of dry powder needed in the remaining bucket increasing cash flow for spending.

i question his numbers and assumptions but not the end results.

 

[bclover]

Start a thread over at Bogleheads touting whole life policies and see what happens....

Oh God no. not unless you have very thick skin. as much as I enjoy that forum never have I seen a bunch of folks more eager to pounce on a poster and proclaim them stupid.
I read, never ever would I post.

lol by the way I love your tag.

 

[bclover]

In post #33 and others you suggest that there is a lot of risk associated with getting paid on life insurance or annuity contracts. My point is that there isn't much out there that is safer other than full faith and credit financial instruments or FDIC insured savings accounts. Life insurance and annuity contracts would be safer than corporate bonds, stocks, mortgage backed securities, and many others.

You're skeptical of the safety of life insurance and annuities, I'm just challenging you to name something safer other than those than obviously safer full faith and credit financial instruments or FDIC insured savings accounts.

BTW, I'm not a fan of whole life insurance or annuities either, but it is because of their mediocre returns, not because they are not safe.

true and that in itself is not bad. My father had an annuity, my father would never, ever invest heavily in the stock market. no matter what argument you try to sway him with, he pretty much believes all of wall street to be crooks and thieves and I know quite a few folks to this day that feel that way.

His annuity did what he intended. gave him 2K a month until the day he died. from age 65 to 85. Now I don't know how much he paid for it but however much it was is moot. he would have never ever sunk that money into the market.

I inherited an annuity when my dh died last year. I haven't decided on whether or not to cash it in and do something else with the money. I'm in a great position in that the annuity is only a small fraction of my overall plan but until I learn a bit more about investing I'm cool with owning one.

 

[aja8888]

lol by the way I love your tag.

Thanks!

 

[nun]

I'd never buy whole life insurance and as I don't have any dependent so don't even bother with term life insurance. Also because I have no dependents I think it's a good plan to use some of my retirement money to buy SPIA type products to give guaranteed income as I'm not bothered about passing on the max to anyone. I've always planned to generate my retirement from a combination of pensions, rent, SS and an annuity so that I can leave the rest of my retirement money invested in equity index funds and basically not worry about the state if the markets.