insurance or investment?

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PostPosted: Mon Aug 03, 2009 6:02 am   Post subject: insurance or investment?  

I read that as from 2011 certain life and annuity products will no longer recieve government tax benefits (H.R. 2733)



How do you advise your clients who are looking to use insurance products mainly for investment purposes?



I heard that it is illegal for agents to sell insurance for the sole purpose of invesment returns. However I reciently studied the correlation between VUL products and the S&P 500 and found a very strong correlation (growth r = 0.66) however when VUL sales were down UL sales only reacted slightly (r = 0.44) which leads me to believe a significant number of policy holders are using insurance products soley for investment.



I also read that the extra costs involved in being insured can be outweight by the tax incentives (deferred tax on returns and no estate tax etc) on using the insurance product as an investment vehicle.



I'm sure this varies from state to state. I'm interesting in hearing about your experiences in the field...

darnardo1
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PostPosted: Tue Aug 04, 2009 1:58 am   Post subject:   

VUL sales are way down.



Nothing has changed in the taxation of life insurance.



I've never advised clients to use an insurance product for investment purposes.



The strength of a permanent insurance policy is the death benefit.



VUL is a flawed product.



Why are you assuming that if someone isn't buying VUL, they are buying UL? Can't they be buying term insurance and whole life insurance?

InsuranceExpert
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PostPosted: Tue Aug 04, 2009 4:18 am   Post subject:   

Hi Insurance expert



Quote:
Why are you assuming that if someone isn't buying VUL, they are buying UL? Can't they be buying term insurance and whole life insurance?
Good Point!



If we assume the purpose of purchasing life insurance is mainly for “insurance,” as apposed to “investment,” it would be logical to assume that when the equity market is doing poorly and people are giving up their VUL contracts they would be substituting them with other “safer” insurance products. The obvious choice of a safer insurance product would be UL as it is the most similar to VUL, in terms of characteristics, among the various life insurance products in the market. If this were true it would be fairly simple to prove with a comparative study of the growth of both UL and VUL. The two growth rates would reveal a strong negative correlation.



Another reason is that whole life and term life has been fairly stagnant since 2000. Whereas UL and VUL has be all over the place and has been in tandem with equity markets.
darnardo1
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PostPosted: Tue Aug 04, 2009 8:53 am   Post subject:   

I'd really like to know in what sense you're pointing out to term life insurance being stagnant. Are you referring to the sales volume of such policies? I'm sure the carriers have tried to improve the policy designs from time to time within a competitive market.


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PostPosted: Tue Aug 04, 2009 11:20 am   Post subject:   

Quote:
The obvious choice of a safer insurance product would be UL as it is the most similar to VUL, in terms of characteristics, among the various life insurance products in the market.




What makes VUL risky isn't just the "V", but also the "U". If something isn't safe and people want something safe, why would they go to something similar instead of something different?



The combination of a product being variable (V) and universal (U) is a very risky combination. The biggest problem with the product is the fact that it is sold as a permanent insurance product, but the insurance is annually renewable term insurance (ART) that increases in cost every year. ART is best for short term insurance needs. This combination makes any type of UL product risky. (The exception is if the product has a secondary guarantee and the person is going to pay premiums forever and never take money out of the product. In essence, they need to treat it as a lifetime term product.
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