Archives For Insurance

I have yet to find an insurance person who compares an equity-indexed annuity or insurance policy to the S&P 500 Total Return Index, which includes dividends.

One of the reasons could stem from the fact that the S&P 500 Index Price Return (Ticker: ^GSPC on Yahoo!) is what the insurance company uses when determining the amount to credit the policy each month or year. We won’t get into why insurance companies don’t credit based on total returns.

The other reason I can come up with as to why they don’t is that their products look much better when compared to the price index rather than the total return index.

I came across an article Sunday morning about an Indexed Universal Life (IUL) policy. This particular policy had a floor of 2% and a cap of 11.25%. A 2% floor means that the account value will always get credited at least 2%, no matter how badly the market performs. As you can probably guess, an 11.25% cap means that annual gains are capped at 11.25%, no matter how well the market performs. The index used to judge the amount credited to the account is the S&P 500 price return.

Two things can be seen from the graphic I put together, which looks at 10-year holding periods. The returns you see are average annual rates of return over the 10-year period. The math equation for the 1926 – 1935 time period looks like this (NOTE: the list of numbers you see below are the annual price returns for the S&P expressed as factors):

[(1.0572 x 1.3091 x 1.3788 x 0.8809 x 0.7152 x 0.5293 x 0.8485 x 1.4659 x 0.9406 x 1.4137)1/10 – 1]

A couple of things are made clear by the following graphic I put together:

1. It’s definitely to the insurance company’s advantage to credit based on the price index.

2. It’s also obvious why insurance salespeople like to compare their products to the price index (it makes their products look much better).

Comparing IUL to SP500

One thing that also needs to be pointed out is that although the credits are “after all fees and expenses,” that’s not entirely accurate. A better way to say it would be, “after all fees and expenses on the investment account of the policy.” In other words, when a person sends a check to the insurance company, not all of their money goes to work for them in the investment account.

I hope the last few posts about insurance products has been helpful. I am not an insurance expert (heck, a big bulk of insurance salespeople are only familiar with a few of the products they sell), but I would think long and hard before I used the Bank on Yourself strategy or bought an equity-indexed annuity or indexed-universal life policy.

Here is the scenario:

You’re either retired or getting close to retirement. Not to be rude, but you are “prime meat” for advisors. They love your demographic because it usually means a nice lump sum for them to work with.

You either get invitations in the mail or someone calls you to invite you to a “free” dinner. All you have to do is listen to a financial consultant’s (investment advisor, insurance salesman, etc.) presentation.

Before you decide to go, let me share a few tips with you.

1. Understand that the advisor is trying to SELL you something. Whether it’s his or her services or some kind of product or idea, the intent is to get clients.

2. Once you understand number 1, you would be wise to be skeptical of EVERYTHING they say.

3. If they are talking about some kind of insurance product (IUL, equity-indexed annuity, variable annuity, etc.), they’ll usually start off by trying to scare the audience with talk about how risky or volatile the “stock market” is, which is true. It is “risky”, but most retirees don’t have 100% of their assets in the stock market. If the salesperson starts throwing around numbers, BEWARE!

The S&P 500 Index that is quoted in the media is a price index. That means it does not include dividends. So, although a price index is a decent barometer, it is not good for
comparing investments because a person who invested in a mutual fund or exchange-traded fund that tracked the S&P 500 Index would receive dividends as part of their return. So, it is misleading on the part of the salesperson to use the S&P 500 Index price return when drawing a comparison to what they have to offer.

How misleading?

Take a look at the following graphic I took from a book I received recently. This book was published in 2015, so I’m not sure why they stopped at 2012 (I will note that 2013 and 2014 were both up years as you’ll see in a later graphic). He also has the wrong return for 2012. It should be 13.41%, not 10.20%. You can click on the graphic to see a larger version:

Table from pg 15

That table is based on the S&P 500 Price Return Index. Yes, the author does mention that the table does not include dividends, but I question his motive for not including them. The next graphic will show you why:

S&P 500 TR vs S&P 500 Price
NOTE: Does not include fees or taxes.

Obviously, leaving dividends out of the equation highly favors whatever product it is getting compared to. That’s why you should be prepared to ask the following question:

“Are the returns you are talking about real returns that include dividends?”

If the answer is “No” or “I don’t know”, you need to get up and walk out. They are being dishonest and purposely misleading the audience.

4. Ask about surrender periods and charges. Some strategies using insurance have long surrender periods of 7 to 15 years. A surrender period is a time period in which you must pay a fee in order to terminate your policy. The amount declines over the years.

5. Be wary of bonuses. Remember, there is no such thing as a free lunch. If a company is going to give you a 10% – 25% bonus, it’s coming from somewhere.

6. If it’s complicated, forget about it. Retirement planning doesn’t have to be complicated. The vast array of products (most of them unnecessary) is what complicates things. Insurance products are among the most complicated because there are so many of them and each company has its own spin, which makes them difficult to compare.

7. Ask them point blank how much they will make off your transaction. Don’t feel embarrassed to ask. It’s your money. If they say, “The insurance company pays me,” leave. That’s not the question you asked. If they avoid answering the question, don’t do business with them.

8. No matter how good the deal sounds, NEVER sign or agree to anything during that presentation. Instead, get as much information as you can and leave. Then, once you are home, read all the information and ask any questions you may have. I would even suggest you get a second or third opinion. Find a fee-only advisor through NAPFA.org and go see them. Expect to spend $250 – $500, but that’s a lot less than you could lose if you make bad decision.

Sadly, most of the people reading this blog post probably already know this stuff. Here’s to hoping this information reaches those who can use it.

For more information, check out this article from FINRA.

I agreed to look at another book about retirement. Last night, the book’s author emailed me and thanked me for agreeing to give his book a look. He included a link to a YouTube video he put together that explains his strategy.

What I found is his strategy is similar to Pamela Yellen’s Bank on Yourself strategy. UH-OH…haha. What’s different is he uses Indexed Universal Life Insurance. I AM NOT an insurance expert. I won’t discuss the intricacies of the policy. What I do want to discuss is how the interest is credited to the account holder (about 5:42 into the video). NOTE: Notice that he uses the average return of 8.12% (I get 8.13% when I calculate it), and not the average annual rate of return, which is 7.98%.

So the way this particular policy works is it will credit the policy holder’s account a maximum of 13% and a minimum of 0%. So, if the market returns 10%, you get 10%. If the market returns -10%, you get 0 (you won’t lose money except for inflation). If the market returns 20%, you get 13%. Pretty straight forward.

What I found interesting is the index they use in order to calculate the annual credit.

If you look, you’ll see a column titled “Actual S&P 500 Growth %”. This column represents the PRICE return of the S&P 500 Index, NOT the TOTAL RETURN. His numbers look like this:

IUL Account Credit

Now, what would the account look like if the insurance company used the S&P 500 Total Return Index? Let’s see:

IUL Account Credit Using SPTR

That’s quite a difference.

It’s important to point out that the insurance company is only using the S&P 500 as a guide for crediting the interest that goes into the account. The problem I have with this is that’s not how it is often sold to the buyer. It’s usually sold as a “What if you could get the return of the stock market without the risk?”

My point in all of this is just to make you aware of the way interest on most of these policies is calculated. They aren’t using the entire index. That’s important to know.

I’ll review the book once I receive it and have read it. Stay tuned…

I see ads all the time for that say stuff like:

“Drivers who switched from State Farm to Allstate saved an average of $362 a year.”

This reminds me of the time when I called my insurance agent to ask a question about our policy and she talked me into a different plan with the same company because it would save us lots of money. So, I went from a one-year policy to a six-month policy. The premium a little over half what I was previously paying. All was great until the 6-month renewal, which increased a lot. I wasn’t happy.

Anyway, back to the ad…

Two things to consider:

1. It’s only savings if the two policies are the same. Insurance companies can and will shave off benefits and call the reduced premium “savings.” Perhaps the reduced coverage is okay. It’s up to you. Just make sure you know what you are getting.

2. Don’t expect the same low premium upon renewal (think about the really low rates for first time subscribers to newspapers. The rate is incredibly low and then incredibly expensive upon renewal). It’s a pain to change insurance companies. Insurance companies know this. That’s why they tell you how much you can save by switching. But…they don’t make money if they are charging a lot less than everyone else.

In another month or so, our household will have our second teenage boy licensed driver. Ugh!

Pray for me.

I received our flood insurance renewal. It’s jumping from $365 to $412. That’s a 12.8% increase.

UGH!

Happy Friday, everyone!

I received our six-month auto insurnace renewal yesterday. The premium is going up 9.79%! We added our oldest son last March. Our rates basically doubled. They didn’t change much at our July 2012 renewal. Yesterday’s renewal came as quite a shock. We haven’t had any issues. So, I called our provider yesterday and one of the first things he told me was, “I know rates have gone up in Texas.”

This is the breakdown of our rate increase (click on the graphic to see a larger view):

This is what irks me about insurance. If you purchase insurance and get into an accident or have to file a claim, they jack up your rates. Then, if you don’t use your insurance, they jack up your rate via rate increases at the state level.

So why did the rates go up in Texas? I did a little research and found two reasons:

1. Cost increases at auto body shops.

and…

2. High numbers of uninsured drivers.

The second one really bothers me. Responsible people have to pay increased insurance rates to compensate for the lowlifes (yes, if you are driving without car insurance, you are a lowlife).

I put in an email to our agent to see if they can shop around. I’m not hopeful.

Oh, and get this: in about 6 months we’ll have teen driver number 2. I guess we’ll stop saving for retirement so we can pay for car insurance. Our monthly premiums are already about the same as a car note.

It’s been awhile since I have posted something controversial. This one is an opinion piece by Alan Blinder regarding the Supreme Court and the health care law.

Whether you are for or against the health care law, Alan Blinder misses the point of the Supreme Court, which is to decide whether or not something is constitutional. And, Mr. Blinder is trying to make this a party issue by claiming that since the Supreme Court is more conservative-leaning, it will vote along party lines.

Anyway, I’m interested to hear your thoughts on Mr. Blinder’s piece. Oh, and if you’re interested, there is an interesting reponse to the Blinder piece.