The following is a warning to anyone actively looking for an “objective” financial advisor:
Yesterday, I wrote about another life insurance agent who sells both whole life and indexed universal life policies, and how my comment on his blog was unapproved for public consumption.
I’ve been a long time follower of his and have always respected his viewpoints, with some of the more interesting ideas differing from my own viewpoint.
Anyway, I don’t blame him for not publishing my comment. Maybe he’ll have a change of heart but assuming he doesn’t, I still think he’s a nice guy and probably does a decent job for his clients.
I’m not 100% certain about that. I’m just assuming based on what little I’ve seen of his policy designs and his clients.
But, one area where he and I (and a great many other insurance agents and probably the entire field of financial planning), disagree on is the concept of “objective” financial advice.
Here’s why I say that:
The way nearly every financial advisor and insurance agent uses the word “objective” goes something like this:
“I am unbiased”
“I don’t take a position on X”
“I don’t make money by selling you a financial product” (AKA “I don’t have any conflicts of interest”)
… or something along those lines.
And indeed, the way my peers in the industry use the word “objective”, they seem to think “objective” means “neutral”.
As in, they don’t pass judgment on what is good or bad, right or wrong.
They “analyze everything” and then consider every option as, more or less, the same.
In this context, it means treating whole life insurance and indexed universal life insurance as merely different products — one is not better or worse than the other. They’re just… different. And, because they’re “just different”, this seems to imply that somehow they are also the same or at least the same enough to recommend each one based on how the hypothetical illustration pans out, or the historical performance of the products, or some other good-sounding (but ultimately meaningless) metric.
In my heretical (but true) opinion, being neutral is a great way to get into trouble. And taking financial advice from someone who has a neutral opinion is a great way to get bad advice.
As the great philosopher Mr. Miyagi says, “Walk on road, hm? Walk left side, safe. Walk right side, safe. Walk middle, sooner or later, get squish just like grape.”
Being “neutral” is not “objective”.
It’s a way to appear objective without actually being objective.
Objective means you consider the for-real facts of reality, and make opinions based on those facts. You might even be highly biased, and be totally correct in your bias, as long as the bias is rooted in the facts. And, eventually, being objective means you have to make a choice about certain things.
You can be objective and still have many different, all true and correct, options in front of you. Objective doesn’t necessarily mean there is only one true option.
Even so, none of this means all options are *the same* or are neutral or whatever.
Because… it is almost never the case that all options are equal or neutral in their outcome or effect.
That’s true in virtually every aspect of life and it’s true in life insurance.
It could be that 2 objectively good options are indexed ULs and whole life insurance.
But, both products are very different, have very different risks embedded in them, and are almost certainly going to produce very different outcomes, and the journey for a policyholder would be very different in each product.
And, in many cases, it really is going to come down to one product versus another and there are going to be solid reasons for choosing one over the other, and a lot of it will hinge on the objective (i.e. factual) differences between the two products (of which there are many and all of them relevant), the assumptions being made in each, and the risk and likelihood of certain things materializing in the policy.
For example, an indexed life policy sort of assumes the optimal scenario from the outset. This is why every indexed UL policy illustration strongly emphasizes the current crediting rate (which is usually fairly high) and all insurance agents talk about “the upside of the stock market, without any of the downside risk”.
The focus is almost entirely on the upside potential of the product.
That’s going to be attractive to some folks. In fact, it’s attractive to a lot of folks.
With whole life insurance, it is entirely about the guarantees, and the dividends are an enhancement to the basic guarantee. But, every whole life policy is built on those guarantees and that’s what’s emphasized in all the whole life literature, and even in the policy illustration.
Since there is no explicit guarantee of future cash value in an indexed UL policy, there isn’t a focus on the guarantees. The guaranteed column in an IUL illustration always shows the cash value being completely drained out of the policy and the policy lapsing.
This is why insurance agents always tell you to ignore the guarantees in UL. They always cause the policy to implode. Now, it might not be that an indexed life policy implodes. It might just be nerfed enough that it performs more like whole life insurance (which is, incidentally, happening to a lot of IUL policies) or it underperforms whole life insurance.
At that point, you’d have to decide if it’s worth the extra risk to get the same or similar results as whole life insurance.
Of course, if everything in the options market, bond, market, and the life insurance business simultaneously and immediately stops and reverses course, indexed UL could become one of the best products in the marketplace.
On the flip side, a whole life policy is structurally different from a UL policy. It will always do certain things and never do others.
For example, you will always get at least the minimum guarantee in the policy. You will never get less than the guarantee. Any dividends that are paid become part of the guarantees of the policy, so that guarantee increases each year dividends are paid.
It’s never going to act like an indexed UL policy. Even the mutual insurance companies that have tried to implement an indexing feature in their whole life policies don’t show the illustrated performance potential of an indexed UL policy and have to charge a somewhat high fee to implement the indexing feature.
Ultimately, you have to make a choice about what you want to do.
In my way of thinking, life insurance is meant to transfer financial risks away from you and onto an insurance company, and the best way to do that is to plan for the worst (i.e. lean on the guarantees of the policy), and hope for the best (dream about what your future dividend payments might be).
This is why I recommend whole life over IUL.
IUL is essentially a hybrid product. It tries to make a compromise between strong guarantees and speculating in the stock market.
In doing so, it sort of adopts the weaknesses of each approach and, by extension, amplifies risk for the policyholder.
Here’s what I mean:
The guarantees in an indexed life product aren’t really there (i.e. there’s no explicit guarantee on cash value), and the things that are guaranteed (the minimum interest rate and maximum charges) won’t save you if they come to pass — the policy can implode if conditions are less favorable than projected by the insurance company. The speculative part of the policy never gives you the full upside potential of the underlying stock market index. At today’s options budgets, those cap rates are falling toward a 6% (or lower) cap rate.
In order to offer a sustainable 10% cap rate in an indexed UL, life insurers would have to earn more interest on their bonds than what their current bonds are earning and even what’s currently available in the bond marketplace.
Bottom line is… if you can afford to take risks in the stock market, then the choice is obvious. But, most people can’t afford to take risks with all their money, which is why they choose whole life insurance.
The major risk with a whole life policy is the issuing insurance company demutualizing, like what happened recently to Ohio National Life.
The way to avoid that risk is by sticking to the “true blue” mutuals that don’t take excessive risks with their product line and their business.
Either way, a compromise between risk and guarantees, in my mind, don’t make no sense.
Former FBI negotiator Chris Voss puts it this way: ‘let’s say I’m getting all jazzed up for a night on the town and my wife likes my brown shoes but I want to wear my black shoes. So, I wear one black shoe and one brown shoe. How does that make any sense?’
And so it is.
Anyway, if you want to learn more about how whole life insurance works and whether you think it would be a good option for you, then join my email list, download the free report Why Successful Businesses Fail.