Bill Boersma: On Life Insurance

A ridiculous analogy to bring reality into focus.

Let’s assume your client’s financial goal is to accumulate $5 million for retirement. The stock market has been on fire and it’s suggested to do your client’s planning based on a 10% rate of return. Your client is 25 years old and has a 40-year time horizon. The numbers show they need to put away $10,270 a year to hit their target.

However, 10% turned out to be too aggressive and your client actually earned 7% but never really paid attention after the original plan was put in action. At that lower rate of return the client won’t hit their $5 million target and will only accumulate roughly $2.2 million. This will be devastating to their standard of living in retirement. In reality they need to be socking $23,407 a year away to hit their goal at the lower return rate. A feature of their planning that they never really understood, or maybe were never even told about, is that their financial planner has arranged for a third-party to automatically loan them the spread, over $13,000 a year, to make up the difference so they hit their target. After the plan is in place they never sign anything, don’t have to approve it, there’s no renewal process or required disclaimer; it just happens. The loan accrues indefinitely at an 8% interest rate. For full post, click here…

A version of this question has been posed to me so many times, I’ve lost count.  Following is my answer.

Question:

How on earth do I have a policy loan when I’ve never taken any money out of my life insurance policy, let alone a loan?

Answer:

I understand your confusion as it seems almost impossible.  When they’re introduced to me, many policy owners seriously believe there is an error on the part of the insurance company.

That being said, this is not uncommon.  I more often see loans on traditional whole life policies than I do other type of life insurance contracts.  This is because there are multiple possible dividend options available and most policy owners aren’t aware of the decisions made on their behalf. For full post, click here…