Speaker 1 (00:00):
Welcome to part two of Understanding Life Insurance Performance. We’re gonna start off with a short history of why things worked the way they do in the seventies. With the advent of the computer, everything started to be modeled. This modeling incorporated assumptions. Furthermore, these assumptions were variable. The modeling also had a fatal flaw, which continues to this day in that whatever assumptions were input into the computer were expected to stay exactly the same forever. Most of us are generally aware that when something is based on assumptions management becomes important. However, the public never really made that jump. With regards to life insurance. I can assure you that today most policy owners mistakenly believe that their life insurance is as guaranteed as it was back in the old days when it actually was. Of course, there are some guaranteed policies today, but even they don’t always work as understood.
Speaker 1 (00:52):
Also, many people will tell me that they understand this, but their policies are on the realm of guaranteed. Many of them are woefully mistaken. What do we know about retirement planning today? Better yet, what did we quote know about retirement planning? In the late nineties, blind monkeys throwing darts could get 20% in the stock market, right? People were doing conservative planning, assuming 10%. When exceedingly high returns are projected forever, the required contributions are very low. Assumptions were dashed. Corrections were made. Those who didn’t suffered. What do we know about insurance crediting In the eighties, permanent life insurance policies were crediting double digits, even conservative whole life policies. When policy owners calculated required premiums to fund their insurance, assuming an exceedingly high rate of return, which was assumed to stay high forever, the required contribution was quite low. Assumptions were dashed. Corrections needed to be made.
Speaker 1 (01:53):
Those who didn’t suffered. Think about it. For a 25 year old to have a million dollars at age 65, assuming a 10% rate of return, she’d have to put away about $2,000 a year. If she woke up at age 65 and realized she had only earned 8%, she would have only a little more than half of what she expected. Do you hear that? Only a 200 basis point reduction cuts her balance almost in half. What about a 19 80 0 life insurance policy? 10 to 14% wasn’t out of line at all, even with traditional whole life. While 4% isn’t uncommon today, if this same spread was present in your retirement planning, you’d have to put away 10 times more money to hit your goal. You simply can’t support at five to 6% a transaction that was put in force in a 10 to 12% environment. In fact, don’t assume that you can support a 6% what was put in force in a 6.5% environment.
Speaker 1 (02:55):
Yet most policy owners do not connect the 35 year continuous decline in the interest rate markets, which drive most of their life insurance policies to their policy performance. Why? Because most people do not understand how life insurance works and that their premiums and death benefits are not guaranteed as they understand them. If they did, they would realize that today’s interest rates cannot support a policy put in force under yesteryear’s interest assumptions, and they would be making the requisite corrections. Policy owners who understand the financial dynamics discussed here still have to internalize that what they expect and understand to be true simply may not be.
Speaker 2 (03:37):
Sometimes this advice gets through and sometimes it falls flat. Despite repeated efforts, given modern understanding of behavioral economics and the better and worse aspects of human nature, it’s important. We keep trying.
