Is Your Permanent Life Insurance Policy Killing Your Retirement? – Episode 57

There are two types of people in the world: those who have heard a sales pitch about permanent life insurance, and those who will hear a sales pitch about permanent life insurance. And the way these policies are sold ― on the premise of guaranteed returns and tax-free withdrawals ― often give investors a false sense of security. In this episode of Dentist Money™, Reese & Ryan walk through the stages of grieving that usually follow the purchase of permanent life. They also talk about the rare exceptions for justifying insurance as an investment, and how to unwind a bad policy if you already have one.

Podcast Transcription:

Reese Harper: Welcome to the Dentist Money show where we help dentists make smart financial decisions. I am your host, Reese harper, here with my trusty old co host, Sir Ryan Isaac.

Ryan Isaac: Good Morning Reese, I appreciate the trusty comments. I trust that you will find my comments today interesting.

Reese Harper: Yes, and I want to let everyone know that both of us have a beard now, and I appreciate that because I feel more at home.

Ryan Isaac: You do? Ok.

Reese Harper: Ya, in my trusty old co host.

Ryan Isaac: I am still trying to figure out trim length.

Reese Harper: Well there is a difference between a legitimate beard that needs an actual grooming at the barber…

Ryan Isaac: Ya, some oil, and a cut.

Reese Harper: …and someone who has a half inch that they keep well trimmed. Those are the kind of beards that we are currently sporting. I don’t know it is pretty difficult to get the full length groomer.

Ryan Isaac: Well, ya..

Reese Harper: I went to a beard barber this weekend actually. I didn’t get my beard trimmed because I didn’t have a long enough beard to actually justify it…

Ryan Isaac: You just went somewhere to ask someone questions for like an hour.

Reese Harper: Well, it was an old school barber that is in my neighborhood. I was like, this is going to be sweet. I sat in the chair, they said would you like us to start with the beard or the haircut. I was like, this is a beard barber! I looked around in this shop, there were six chairs, and six stylists, male and female. They were all grooming like foot long beards that these people have. I was like, this is the coolest barber ever. I kind of felt lame because I realized i would never be able to grow out a foot long beard.

Ryan Isaac: That is a perfect segue. Perfect. Today we are talking about permanent life insurance.

Reese Harper: Ok, I don’t know how to turn that segue any better, but this week Ryan emailed me a proposal from a well respected life insurance broker in one of the cities that one of our clients lives in.

Ryan Isaac: A key market.

Reese Harper: A key, U.S. market. What we did was I kind of just lost my mind. For about ten minutes, I was reading this proposal and there were so many blatant errors and disregard for actual math and science…

Ryan Isaac: Data, facts..

Reese Harper: Uh…the truth, reality, not to exclude the other facts that bothered me such as, poor design, poor image quality, typos, poor color palette choices, whatever.

Ryan Isaac: Oh my gosh.

Reese Harper: There were some design things that bothered me, but mostly the content was the issue.

Ryan Isaac: He had no idea how bad he was being judged.

Reese Harper: Here is the thing, today we want to talk about life insurance because everyone listening to this podcast will have one of these two problems. At some point in your career, even if it hasn’t happened yet, someone in your family or a friend or a neighbor or a well respected person in your community will come and meet you and tell you about the merits of mixing your investments with a life insurance policy. We call it permanent life insurance or universal life or equity index life variable, universal life, but it is basically mixing investments with an insurance policy. You are going to feel the pressure to meet with them or be interested in meeting with them or want to find out what they are talking about because they are so excited about it and they have got a very compelling pitch and they are going to buy you free lunch! So, you are going to meet with someone, or want to. Or you are on the other side of the equation, you haven’t met with someone yet but you might meet with them in the future or whatever. There are all of these scenarios. I don’t want people to tune out. This will happen to you if it hasn’t already.

Ryan Isaac: Ok, let’s tell the real story. I will start with the disclaimer that this real story sounds like a lot of stories that we have heard. This could be a general story as well because it kind of blankets every story we have heard that is just like this.

Reese Harper: Before you jump into your story, I want people to make sure to know that after we tell the story we will let you know how to direct a pitch, how to understand a pitch, how to separate the truth from the myth of the life insurance pitch, and some good and bad things about it. Life insurance is essential and there are some great life insurance professionals out there. They dedicate their whole life to making sure that people are insured properly, and I value those people, I want them to stay in business. I like competition in the marketplace. I want as many good life insurance brokers to have a career as possible. We want to make sure all of our life insurance broker friends out there know that we are not disparaging all of you out there directly, some of you do a really good job.

Ryan Isaac: Ya, if Jim Gaffigan was on this podcast he would be like, “these guys really hate life insurance. They really hate it.”

Reese Harper: The second thing we are going to talk about is, what if you already have one of these. How do you figure out whether it is good or bad and can you make adjustments to it and how do you talk with your insurance agents and company to fix something that is already kind of a mess for you. Or should you keep it because it is so good? How do you know if it is so good?

We have clients that we recommend keep this, and hold on to it. We have clients that we say scrap it. Clients that we say adjust this and drop your death benefit, change your premium type. We have clients that are in pitch phase that we say, “ok, that makes sense for you.” Then we have clients where we tell them it doesn’t. Anyway, after all that context, we hear Ryan’s story. Tell us the story Ryan.

Ryan Isaac: Well, to set the stage, the story starts like all of them usually do. A conversation takes place between you, the esteemed dentist, the client, the perspective insurance purchaser, and the insurance professional. We start there. Usually, the person selling the life insurance is someone you know very well. I can’t think of a case where it was a stranger. Can you think of any of our clients who were pitched by a complete stranger?

Reese Harper: Well, if it is a stranger, it is a very well respected stranger that everyone knows.

Ryan Isaac: Who has a nice car.

Reese Harper: He’s a great guy.

Ryan Isaac: Usually it is someone you know well as a family member or friend. These conversations are happening over get togethers and community events where you are talking about career and how is work going. That’s how it starts. Now, to get into a little bit of the issues we have with this. We hear the other side. The clients call and say, “hey, I got some investment ideas from a friend.” It turns out that the conversation between our client and the friend selling the insurance. It wasn’t a long conversation, quick lunch or something, did they find anything out about the client before sending the proposal? Do they know what their tax rates actually are, and how much A &T they are paying? Do they know what kind of liquidity needs they have, or that they need to purchase a building and build a house next year? Or that they are in the process of acquiring another practice? Did they know their savings rate or other debts they have to pay for right now? No…

Reese Harper: You are just saying, this particular case, you are bothered because the client says, “hey, I have this great investment idea, I want to consider it, here is the proposal.”

Ryan Isaac: Thanks for keeping me on course, ya.

Reese Harper: Did you know it was an insurance policy when the client called you?

Ryan Isaac: No, it is usually like, “I have a friend who has some ideas for my kids college savings or retirement planning.”

Reese Harper: I get that one all the time. My friend is going to propose me a 529 plan for the kids, or some college funding plan. Then I see it and I say, “this is a life insurance plan, are you crazy!?” This is not a 529 plan my dear fellow.

Ryan Isaac: If you are going to get into a 529 plan you just get into it, you go to the website and get into it. It is simple and straightforward. So this conversation between this client and our good friend it is a ten minute conversation. What do you do for work? That’s great, you sell life insurance. Or it is not even I sell life insurance, it is like, “I do wealth management for retirement, or I help people save money for their kids college.” It’s a ten minute conversation, and then ten minutes later, an email shows up with two proposals. Each are 25 page long PDF’s, and you didn’t like the charts and graphs and the design effects, but…

Reese Harper: It looked pretty fancy.

Ryan Isaac: You know, there are all of these charts and it looks pretty fancy and there are these two proposal for our client to invest a large chunk of his free cash flow into this new retirement plan that is a wealth creation tool right? There is no thought put into it! It is estimating a tax rate that is way off, it is comparing indexes for other portfolios comparisons that aren’t even valid.

Reese Harper: Alright, alright, you are diving into the granular here. I’m holding you to your story, here. So you’ve got your buddy first of all, the problem you just mentioned was uh, here is a proposal after ten minutes of conversation. You are bothered because your client is getting investment/insurance advice after a ten minute conversation. You are bugged because you have to spend at least five hours talking to someone before you can tell them anything.

Ryan Isaac: At least!! It takes a long time!

Reese Harper: You’re like, wait a minute, how did he know how to give him advice in ten minutes!? All of his discretionary income could be dedicated to this plan after ten minutes?

Ryan Isaac: Ya, how did he know that you should dump every penny into this thing? Accompanied by this is a tone of conversation that is anti government right? The government is going to rob your stuff anyway and 401Ks are evil. Ironically, it ends up being a little anti stock market. One of the big pitches is that you will lose money in the big crap shoot of the stock market manipulated by the very elite.

Reese Harper: Ya, and another thing I thought was interesting because you forwarded this to me when I lost my mind and thought we have got to podcast this. The first page did it say, a life insurance sales illustration? No, it says, your wealth report.

Ryan Isaac: Yes.

Reese Harper: What is that!? A wealth report? Of course, it is a wealth report because it is about wealth and not insurance at all. And it also on page 2, it says, “a message from your advisor.”

Ryan Isaac: It is loving and kind.

Reese Harper: Number one, it is illegal to say you’re an advisor in today’s 2017 world if you are not securities licensed and not providing actual investment advice. Which I find to be a little bit difficult to stomach. If you look at the policy, there a lot of different types of policies, this one was called an indexed universal life policy. An indexed universal life policy is what, Ryan?
Explain what that is.

Ryan Isaac: Well, it is what it sounds like. If you are familiar with investing in an index it is basically tracking a stock market index. So it is a life insurance policy that gives you a life insurance policy with an investment component that tracks a specific index in the world often times a stock index.

Reese Harper: So the pitch behind this product is what? What is the pitch that was being made to the client?

Ryan Isaac: Well, this is to the point we were just making, there is this kind of anti stock market mentality. You know, “stay out of the stock market this thing is going to protect you.” Then at the same time the whole basis of this policy is that it invests in the stock market and gives you some guarantees. You tell me, Reese, if this sounds like any other thing in life at all? It is all upside, and guaranteed no downside. Does that sound like, “ya know, nothing?”

Reese Harper: That just sounds like pizza.

Ryan Isaac: Ok, alright. Fine, the one exception is pizza. It is all upside and no downside.
You know so you have this anti government/anti stock market it is evil and crashes all the time, you will just lose money, so buy this thing. We have talked about this before, but what is actually happening with your money and with this money is in the title. It is being invested in tracking an index which is typically a stock market index. The insurance company is investing your money in the markets too!

Reese Harper: And an index universal life policy like this, the pitch that is really compelling is there is a floor on it so you can’t lose money because if the index goes down a lot they will cap your rate of return and a particular rate like at 2% or 1.5% or whatever the floor is. Then on the upside, they tell you that you will get as much as 12% a year or as much as 11% a year or as much as 14% a year. They give you an upside cap and a downsize cap. When we look at these after the fact, five or ten years down the road, and knowing how stock market indexes work, we know that once every four or five years is when a stock market index has a really great return year. So take 2016 as an example when the S&P index was up pretty substantial double digit returns, so if you have a 22% year in the stock market and the insurance company caps your return at 10% or 12% you may only get a 4-5% return over time because they are capping the big upside years every four or five years to the point where you are not able to get the average of 9-10% like you were hoping to get from a market that you invest in like the S&P 500 or an equity market. So big picture, this type of policy promises a floor and a really high number for upside but people don’t realize that if there upside is capped at 10% or 12% it is really going to make their average return more like 4-5%.

Ryan Isaac: Well, and let me jump in there too. One of the problems I have with this that is misleading is they give you the caps and the floor and I don’t really see the ceiling caps that frequently unless you dig for it. But they will tell you the floor because that’s a selling point. Usually they say something that is a mind trick. It is a moderate gain, that is guaranteed. So plastered all over this one is 7% guaranteed. There is definitely a floor and there’s probably a cap that is not really mentioned in this material but there is this 7% number that is on every single page. Subconsciously you think about that and if you ask someone what do you think the stock market returns are over long periods of time they say low double digits 10%-12%. So when you see this 7% its like people are reading that going, “that is a little bit conservative but I’m taking bit of a hit because it is guaranteed.” I mean, if I could guarantee you 7%, for the rest of your life, with no downside, would you take it?

Reese Harper: Ya, totally.

Ryan Isaac: The other problem I have with this is that there are numbers here that do not tell the whole story. When you see the 7% you think that every dollar you put into this policy is growing at 7% every year. I am sure you will get into this later about how to go back and look at a policy that you have already got, but…

Reese Harper: What did you see in this? There are a bunch of numbers on here. Did you run some of the time value calculations and kind of see something? Did the numbers even match up to be 7%? What did it look like.

Ryan Isaac: No, it is not even close. This is the anecdotal side of it. If we had time to talk about all of the policies we have seen after the fact from 5-40 years you would see that the rate of return actually never hits this point. In the early years it is often times less than 0, it is a negative rate of return because you are catching up from all of the fees and stuff. This is what is crazy to me. 7% is plastered all over this thing, but you go twenty years in on the sales material that they are giving you, and with a simple time value of money calculation your rate of return is less than 2%! It is misleading. The way that they are explaining that 7% or whatever a lot of times they are called crediting rates. It is the interest rate that they are crediting towards certain dollars in the account, but the misleading part is that you think it is on every dollar or investment dollar in the account. If you just do the math on the sales proposal right in front of us you can see that it is a very modest return that is similar to like an extremely conservative bond fund or something.

Reese Harper: Yes, and you see that a lot where insurance companies will use rates like 7%, or a crediting rate, or they will say it is an interest rate. They won’t call it an internal rate of return or an IRR.

Ryan Isaac: Because it is not!

Reese Harper: It is not, it is a crediting rate. It is a rate of return that they will apply somehow to the contributions that you make into the policy after fees and expenses and everything get taken out. So after your fees, insurance charges, and the overhead is taking out…

Ryan Isaac: Commissions, state premium taxes…

Reese Harper: Ya, cost of insurance, once that is removed there is a crediting rate that gets applied to the net amount of money that is in there and that is where they can legally get away with quoting things like this is 7% crediting rate. I saw a major, major national carrier put an advertisement in a newspaper in the wall street journal and say our average dividend rate is 7.5%. They say that. Then I have got a bunch of clients with policies with this carrier which they have had for like twenty five years and the internal rate of return that they get on the money, the investment yield, or whatever they actually get.

Ryan Isaac: The ACTUAL return.

Reese Harper: Is more like 4, or 3.9%, and that is a good rate of return. If I see that, I’m happy. In this case, even though there is 7% plastered all over this thing, we are looking more at an internal rate of return at like 2%. The client is assuming it is 7%. I am seeing the same thing you are seeing going, if you were just a normal person looking at this you would be like, “I’m gonna get 7%.” I hear that from EVERYONE who owns these things. I will share my story here in a minute because even after ten years of owning the policy, the example I am going to share still thought they were getting 7%. Their return was actually negative.

Ryan Isaac: You know, that is what we were just talking about with a client in this situation. If this were true, Reese, think of the heartache when the market takes like a dip or there is some bad news or rumors go around of crashes or things like that, the hours that we have to spend educating and reassuring and talking to clients and making sure people stay the course and keep going. Those are hours are wasted if we all had to do was sell someone a policy that guaranteed a 7% rate for the rest of their life. If this were true, we are really doing this the hard way and I think we are making less money than we should be making.

Reese Harper: Ya, ultimately, I think what you are saying is that we have chosen a business model where we don’t get paid to sell things and partially because there is no way to do good financial planning without getting paid a fee for your time, right? If you want to do good planning you can’t sell things to people and then call in financial planning even though this does. It says it’s a financial plan, that it is a wealth report, given to you from your advisor. He has known you for ten minutes, so he should be able to give you a good plan.

Ryan Isaac: That is my whole point. If we could replace our entire business by getting rid of all of our portfolios and anything that could ever lose money, and sell everyone this policy than our lives will be richer and a lot easier.

Reese Harper: Why would our lives be richer, this is going to be a $95,000 annual contribution? So I am going to put in $100,000 a year. How much money do you think I might make if I am a life insurance professional, professional mind you, that is selling this policy for a $100,000 premium? We don’t know the exact commission, but what is the range that is typically paid?

Ryan Isaac: 80%-120% of the first years annual premium. It is a mix between the broker and the agent and they will get $80,000-$120,000 for that first year.

Reese Harper: Not to mention a pretty sweet trip to Hawaii, or Cancun, or a European getaway with the family, or the big island adventure!

Ryan Isaac: Yup.

Reese Harper: “Go to Japan, and see the temples, climb mount Fuji!” This is where you are going with this stuff.

Ryan Isaac: So that is what I am saying, Reese, we are doing this business the hard way.

Reese Harper: I haven’t ever been to mount Fuji, and I would like to go.

Ryan Isaac: You’ve been to Idaho quite a few times.

Reese Harper: My wife is Japanese, and I have never been to mount Fuji, we need to do this!

Ryan Isaac: This is my argument. We could go to mount Fuji every year, we could make much more money, and we could guarantee that our clients would never lose money and get a 7% return. This is something that every investment professional would have been doing since the dawn of time. We would have by passed the old stock market gamble routine and just sold life insurance policies! We would have all been rich and happy and everyone would be fine.

Reese Harper: It just doesn’t work people. She doesn’t work this way. I haven’t told you my story that happened.

Ryan Isaac: No, you told me bits and pieces, I am chomping at the bit as they say.

Reese Harper: Chomping at the bit?

Ryan Isaac: Who says that…

Reese Harper: You do like these stories. Here is how it happened, this has actually happened four times in the last three weeks I swear, but I will narrow it down to the one I prepared for today. I get a new client and he tells me that he has a great policy that has been earning him somewhere around 7.5% a year. He says, “It is guaranteed and I am happy with it, but ya go ahead and look into it, see what you think.” So it has been eleven years since this person began the policy.

Ryan Isaac: Which in perspective, if you held a market portfolio for eleven years, that is a respectable amount of time to hold an investment.

Reese Harper: What do you mean by that?

Ryan Isaac: If you look at the history of a lot of market returns in different portfolios, 10+ years is a respectable amount of time to have a reasonable expectation of some positive return.

Reese Harper: Yes, totally. You should see a reasonable return.

Ryan Isaac: Especially on that proposal you are seeing 7% annually, so you should at least have that right!?

Reese Harper: And the client is telling me during the on boarding conference that they are confident that they have been able to get a 7.5% return rate on this policy. So in my mind I am thinking, “how do I bare the bad news on this thing? I don’t know how to do it in a positive way.”

Ryan Isaac: How much was going into it every month?

Reese Harper: This one was being funded at about $3500 a month.

Ryan Isaac: Not a tiny amount of money.

Reese Harper: Yes, $3500 a month in funding and the policy had been ten years. So I think it was North of $370,000 or $380,000. That was in the tenth year that I was looking at.

Ryan Isaac: Ok, so almost $400,000 of contributions at that time.

Reese Harper: Right, and 75% of that money was in surrender value. When you buy a policy like this and that broker gets a commission like this, that $100,000 that was in Ryan’s example, that policy also gets assigned a surrender value or a surrender charge. What happens is if you try to pull money out of your policy during that surrender charge period or that surrender period than you get dinged. So even though you think you have money in your policy, and it shows up on a statement saying you have an accumulated value of 100 and something thousand, you may not have that much. You have to look at the surrender value to determine how much you have.

Ryan Isaac: Let me give you the language right from this proposal, “the surrender value is if you needed to liquidate the money for any circumstance.” Basically the surrender value is the money that you can actually get.

Reese Harper: Because it is gone.

Ryan Isaac: The accumulated value is a fake number that doesn’t exist.

Reese Harper: That is what is crazy. You don’t actually have the money even though you think you do. I don’t even know how they can show that, I don’t know how that is legal. To say that it is an accumulated value and a surrender value of zero? But that is what you will have in that first year. A significantly lower if not 0 surrender value in that first year and your accumulated value will be that amount of money you put in. But you can’t get it, its not a real number. So that first year, and up to the first ten or fifteen years, in the case of this client and this policy their surrender value still wasn’t done. Their surrender charge went through year sixteen. So it was a sixteen year surrender charge. If it is that long of a surrender period it is usually means the broker got paid that 120%.

Ryan Isaac: That was the 120% or 130% broker. He gave you a huge surrender charge and period on this policy.

Reese Harper: I was still kind of blown away because I thought that we would be wrapped up by now. It was still going on forever. So you have to make a decision at that point. The client was kind of blown away. They didn’t realize that they weren’t making 7.5% return every year. They kind of thought this thing was smokin’ along getting them a great return and they didn’t realize they had, even in their accumulated value was less than their contributions, and the surrender value was 25% less than their accumulated value. So they didn’t even have the ability to get their contributions out. Not even close to what they put in. Plus, the cost of insurance, this policy had like a 2.9 million death benefit or a 3 million dollar death benefit. So in term insurance language with the American Dental Association, if you were just to say what should 3 million dollars of insurance cost, what do you think it would cost, Ry?

Ryan Isaac: What does 3 million dollars of insurance cost for a 40 year old, through the ADA, oh man, like 15-20 bucks a month.

Reese Harper: Ya, maybe a few hundred dollars a year, as much as $300-$400 a year. If you are a healthy horse.

Ryan Isaac: Yes, a healthy horse.

Reese Harper: So maybe, at the most, let’s say it the cost of insurance had they bought it though an inexpensive source would be like $500 a year. An expensive, high quality term insurance company might have been like, if you went private, you could go to $1000 a year right? And in this case, the cost of insurance still, on a monthly basis, was $890!

Ryan Isaac: HOLY CRAP!! For how much!?

Reese Harper: For three million.

Ryan Isaac: Woah!

Reese Harper: You are paying almost $1000 a month, not $1000 a year for your death benefit. You are underwater 25% on what you have put in. So we had to figure out how to unwind it. In this situation, the cost of insurance, when we looked at that cost disclosure that gave us the 800+ per month for the cost of insurance. We were able to look at that and compare it to what cost would be if we just bought a term insurance policy today and replaced his death benefit. He still needed like 3 million dollars of coverage or more, based on the calculations. So you can lower death benefit on some types of death insurance policies. They won’t let you lower it down to the cash value, there has to be a little bit of a difference between the death benefit and the cash, so I was able to bring this policy’s death benefit down by like 2 million dollars, a little more than 2 million, so we were able to have a policy that was closer to a million dollar death benefit and that allowed us to bring the cost of insurance down to $200 a month or $250 a month.

Ryan Isaac: Which is still crazy for a million bucks.

Reese Harper: But since that surrender period was on his policy in force for another five years, we wanted to let that expire. We stopped making premium payments. We told the carrier we are going to stop making premium payments. No more thousands of dollars a month going into the policy and we let the existing cash value pay for the cost of insurance by bringing the death benefit down and we are just going to let that $200 a month cover that million dollars of insurance until the surrender period expires and then we will take that cash value and extract it once there is no surrender charge. Right now there are literally tens of thousands, nearly $100,000 worth of surrender charges still on it. After ten freaking years, ya know?

Ryan Isaac: I want to back you up a little bit. I have been in the meetings where you have to deliver the news. So you have a client that after almost eleven years thinks he has been getting a7% plus rate of return on this policy. Then not only is he paying ten times too much for the actual cost of insurance every month, but he only has 75% of the money that he has put in over a decade. What was that conversation like? What was the realization like? Was it denial? “No way that’s possible!” I have been in these meetings and seen what happens when it dawns on people and they actually see what happens. The statements they see seem misleading because they see an accumulation value of what they have put in or more, but what they actually have access to is far less.

Reese Harper: It is tough. First, they are really upset. They are angry. I don’t know the stages of grieving, but it is probably something similar to that.

Ryan Isaac: Throwing things, is that one of the stages?

Reese Harper: There is just a lot of anger there, they don’t know! They literally have been sitting on a handshake and an expectation from ten years ago on what they were sold thinking it was good. They had an inkling, I imagine, at various periods of time that maybe this wasn’t the best thing, but they didn’t know it was this bad. Anyone who has owned insurances is saying, “ya, that is me. I went through that.” Ya know? This is a very similar story for a lot of people. The second part that is so hard for me as a financial advisor, is that they are almost mad at me too. They are upset with the old broker, but they are also kind of mad at you. They don’t tell you they are mad at you, but they are really bothered, ya know? Most people are cranky and ornery about it and I am not happy as a clam that I have had to spend twenty hours dealing with these stupid customer service people over the phone either! So I’m about to lose it, ya know!?

Ryan Isaac: No one is happy!!!

Reese Harper: No one is happy. This is a mess. I think that it is probably just important to know this is a common thing and feel validated at some level that everyone gets upset by the headache that this can create if it is not done properly.

Ryan Isaac: I was going to say really fast, you have said in a previous podcast when we have touched on this subject that, you know, you encouraged people that were considering doing this to go find somebody that has been in a policy long enough to actually have an experience with what has happened. Go find someone that has been in there ten, fifteen, twenty plus years and what you just said that, “this is most people’s experience”, I would agree with that. Everyone that I have ever met, that I can think of, that has had a policy for that long has had this experience. They didn’t know that they have had basically a negative rate of return for a decade and they don’t have as much money available as they put in there. That was not the expectation for a long time.

Reese Harper: I just think that when you buy a life insurance policy and mix investments with insurance you are jumping into one of the most highly sought after product industries in the world. It is a very, very competitive market and you have big, big, big money that is driving the motivations behind a lot of these products and the insurance agents don’t have the experience or the insurance knowledge to sort of navigate the insurance world. They are just being given this 120% first year commission and trip to Hawaii. So they are willing to turn the other way and say this thing is pretty good. They are looking at the same PDF that they sent to the client and saying, “ya, the stock market is a wreck, and this is awesome.” When you are going to get paid $100,000 to sale something to someone, it feels pretty dang good, and you can look the other way.

Ryan Isaac: It is a pretty good incentive.

Reese Harper: There are a lot of industries like that. The bigger the commission the more people are willing to look the other way. You have just got to be aware that it is a complex industry and you don’t have to go through it. I do want to spend some time touching the good parts about permanent life insurance. The good things about it and talk about the way that the industry is evolving right now. We have seen a lot of carriers who have tried to disrupt this problem and who are trying to bring solutions to this fifty year racket that has been going on. How do you want to tackle a few of those Ryan?

Ryan Isaac: You are saying that there are life insurance companies, carriers, that are trying to offer these products and solutions to the market, but strip out the expensive fees and commissions. There is a company, and you can talk a little bit about this if you want, that we have used if we had to work with an existing policy or the client wants to keep it around but we just want to get out of an expensive policy and put it in one that is much more inexpensive and is lower cost insurance lower fees and is much more transparent and there are a few companies out the that are doing a good job at this. The problem though is when you don’t pay the company $100,000 in the first year, they don’t have the marketing to get their name out there. You don’t hear about them a lot. They don’t have the sales force that is incentivized to make awkward conversations happen at dinner parties all the time, but there are a few good ones for permanent life insurance policies and annuity products.

Reese Harper: Basically, they are just taking the industry and saying if term insurance costs $1,000 a year for 3 million or whatever, that is what the cost of insurance is actually going to be. We are not going to mark it up or hide it. There are no commissions to sell the product. Fee only financial advisors that don’t get paid on commission to sell things. they might recommend that you go and buy an insurance policy form a carrier that doesn’t have loans, commissions, and sales charges. I wouldn’t recommend accumulating inside insurance. It is not a place to save for retirement for 99% of people. Unless you have income north of 3 million a year, and you are already financially independent, I don’t recommend accumulating through insurance as an investment. Regardless of whether there are fees or not. Mostly because it is hard to get the money out in a really efficient and easy way. However, if you already have a policy that has some gain in it and if you took the money out then you would be taxed on that gain, then there are policies that you can move the money to that are basically stripped of all their fees except the cost of insurance. You can pick from really inexpensive investment options and I feel like these policies are a step in the right direction towards having an insurance industry that is more transparent. We have written tons of articles on our website and there is a lot of content that we can give people more information. We are not supposed to talk about specific names and carriers over the airwaves here because I get sued and yelled at. We have to keep it at a high level. So just know that if you really want to own one of these, you can use a policy that when you put $10,000 into it that first year you will see almost all of your cash, you will see like $9,500 at the end of the year, minus whatever reasonable cost of insurance you have in there. There are some rational reasons to own permanent insurance, I just don’t feel like it is the accumulation retirement rational that a lot of people use.

Ryan Isaac: Do you want to touch on those really fast? There is not an argument for an accumulation, there is not an argument for tax avoidance, there is not an argument for superior investment returns, there is not an argument for government intervention avoidance. Those are why these products are sold, that is what is plastered all over the sales material and the proposals. Those are not the reasons you would ever want to do it. So what are a few of the reasons then? Let’s list a few as we wrap up.

Reese Harper: The disclaimer is, you have already said it, you are not going to go out of your way to say Mr. client you really should direct some money into this policy, but if a client came to us which has happened in the past and they had a few compelling reasons that they were just really interested as having life insurance as part of a well balanced portfolio there are a few reasons that are rational. Those reasons are not emotional, or based on a half true pitch. The first one of of those that I would say is when a client says, “I want a way to guarantee that I will have money to leave to charity when I die. I want to do some sort of charitable giving through my estate and I don’t want to take the chance that I have to use my families money, the money that I have accumulated, or sell a business, or some real estate or assets, and I don’t want to take the chance of running out of money and not being able to plan for charitable giving.” If they said I just want to guarantee I can give to charitable giving at the end of my life. Then that might be rational.

Ryan Isaac: Yes, there are some compelling reasons why that might make sense. Different carriers compete in this market in different ways and you could use a carrier similar to the one that we explained earlier where there are not a lot of commissions and fees built into it but different carriers depending on how the the commissions are paid are very reasonable or they are not very expensive commission payments. They may be adjustable or negotiable payments as well. You can make an argument that if someone has a lot of assets and a lot of real estate that is in their family and they have a charitable aspiration of wanting to pass money on to a third party. It could be something to consider. I can also argue against it if we wanted to, but that is a rational way to look at permanent insurance. That is what it is meant for. It is supposed to be insurance. It is supposed to be there to pass on money and it is a pretty tax efficient way to do charitable giving. You can do it in other ways, but I wouldn’t say that that’s not a horrible rational.

Reese Harper: Ok, number two would be, and we have done this for clients who have a very high net worth and a lot of their assets might be illiquid in businesses or holdings or that are hard to sell, for estate planning and estate tax purposes.

Ryan Isaac: Ya, when you die a certain amount of your estate goes to the government. There are situations where depending on the composition of someone’s balance sheet, again it is back to this real assets thing, how many real assets they have, (which are things like real estate and land and business holdings that are not liquid) and depending on how much of their net worth is tied up in those things, it can be difficult to create a way to pay the taxes efficiently. That is something that I don’t think is totally unreasonable.

Reese Harper: Ya, and as current laws stand, which can change obviously, but the average dentist retiring with what he has got probably isn’t a high likelihood that he is a great candidate for big permanent life insurance policies for the purpose of estate tax planning right?

Ryan Isaac: Nope. I think another one that comes to mind is clients that come to me and say, “my dad had heart disease, or had cancer at an early age, or I have a family history of this issue and I am worried about whether I will be able to get insurance.” My argument for that is that there is some rational that you could have a small amount of coverage that you wanted to lock in that was going to be with you until you die no matter when that was, but you could also just lock in term insurance that lasted for a very, very long time. You can get term insurance that lasts until you are eighty or ninety, it can just get very expensive. I think for some people if they have a high concern for deteriorating health or family history of a disease or illness that they are worried about, then permanent insurance gives you a chance to buy coverage that lasts for your whole life. As long as you are not taking too much of your income to dedicate towards that, or an imbalanced percentage, then it is probably not awful. You can get around this issue by just getting insurance and saving money and trying to accumulate a net worth, but I don’t think it is totally unreasonable. These are just a few of the things that I feel like are reasonable. As you can tell it is tilted to people with large net worth North of ten or fifteen or twenty million. Not people with the two to four million dollar net worth which is our typical dentist. Permanent life insurance serves a very specific role in our opinion and it is not for accumulating for retirement income purposes if you want to use that use it for that purpose and it needs to be scrutinized really well. There are very, very few carriers that are high quality and will offer a pretty compelling bond like rate of return after twenty years. I would just make sure that you talk to someone who doesn’t sell insurance to give you an opinion. Someone who’s got a little bit of a jaded opinion about it probably isn’t a bad person to ask, don’t ask your buddy who sells it what he thinks.

Reese Harper: Ask a skeptic.

Ryan Isaac: Yes, ask a skeptic or someone who has had it with the same carrier for thirty years. Just like mutual funds go out of business and just like businesses go out of businesses, insurance companies sell to each other all of the time. Small insurance companies that are really aggressive at marketing a lot of them are out of the industry by the time that you are going to take withdrawals on that policy. You need to make sure that you are thinking through it and buying it for the right reasons and as a general rule we do not see it used well. It causes a lot more damage than good in our experience. I wish it didn’t, but it does.

Reese Harper: Well, we started talking about beard grooming, and ended with permanent life insurance I think that is a good day.

Ryan Isaac: It wraps up well. It is exciting. It is an exciting subject. It is an exciting time to be alive this time. Thanks for listening, we would appreciate some feedback. Please go to our website, click on the listen tab at the top, and find the comment section for this episode and leave us some comments. Leave us some nice comments. Leave us some constructive criticism.

Reese Harper: Ya, just whatever.

Ryan Isaac: If you would like to chat with us we have a link at the top of the website you can click that and schedule a free consultation on our calendar any time you like and thanks again for being with us.

Reese Harper: Thanks Ryan, carry on.

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