Buy Life Insurance?

Tiny Disclosure: I'm terribly sick today and was watching some CNBC while on all sorts of mind-blurring drugs, so I might have this story 100 percent wrong. But I'm 80 percent sure I have it right.

So there were these guys on this afternoon, arguing that folks should stock up on some kind of life insurance that pays you without even dying (I didn't quite get what they were talking about, but again, the drugs). Their claim was that it yielded more than other fixed-income investments and had some tax advantages. Sure sounds like a free lunch, though we know the danger of reaching for yields, no?

Anyway, Dennis Kneale (who I'm ambivalent about) sort of called them out, suggesting that if the market weren't in a tizzy these days, there's no way CNBC would even have on a couple of guys pitching life insurance. One of them -- the guy on the left -- sort of resembled a door-to-door salesman.

Anyway, they were going on and on about how clients should have 5-10 percent of their assets in this kind of life insurance, etc. At one point Kneale asked (sensibly): Yes, but how can you be sure that these companies are reliable?

Their answers were not convincing. One of them said that the various vendors had AA ratings. Now I have no idea what AA conveys, but I know that if even AAA is totally sullied as a mark of security, because of Brown University-like grade inflation,  then I can't get too excited about anything called AA.

But that wasn't even the big red flag. One of the guys then pointed out that they life insurers have very conservative investment portfolios, because, by law, they can only have 20 percent of their holdings in stocks. Hello: it ain't the stock part that I'd be worried about. This idea that a portfolio is conservative cause it's not too exposed to stocks has been blown out of the water a long time ago. And it makes me wonder how deeply that bias -- stocks=risky/cash equivalents=safe -- will persist after all this.

And I wonder about laws that say certain types of companies can only invest so much in certain types of assets. If you're limited artificially in the quantity of stock you can own, then does that lead to reaching for yield in your other assets?

Comments

[RichL]

There is a modest possibility that the speakers had a little self-interest involved given the high sales commissions involved in life insurance. There is a backup with the state insurance fund aside from a separate account, but these guys don't much care about that.

[TheUnrepentantGunner]

Well, my memory is a little fuzzy, but 20 years ago this was a pretty legitimate strategy, before some witty accountant whose name totally escapes me basically boasted about the tax dodge too much and the IRS basically put some major restrictions on what you could do.

The strategy involves borrowing against your cash value tax free and can sort of kind of act like a roth.

http://en.wikipedia.org/wiki/Variable_universal_life_insurance

The tax advantages tab explains it better than me on the wiki there.

But again, I am out of the loop, but last I saw it's still probably too easy to MEC an IRA (MECing being the cancelling of the tax advantages)

Also, Rich is right, these policies have a comparitively huge payout compared to say, term policies.

[Permanent Insurance]

Hi
My husband, 34 and I, 31 are searching into life insurance. Can anyone tell me which company or websites I can work with for getting details. There are many available... wouldnt know how to start. Who do you personally use? Is there a health check required? Exactly what sort of premiums are you paying? Is it fixed or does it rise every couple of years? We live in South carolina also. Any help would be appriciated.

[health insurance quotes]

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[Life Insurance nz]

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