Life insurance and pre-existing conditions

xahrx:

Like all insurance then there will be winners and losers.

I am studying for my series 6 license and have a learned a little bit about perm vs term life (which is why I posted this question and thread). From my understanding, it is possible that there aren't necessarily losers, much like how there isn't necessarily losers in the market. Two parties with different knowledge can benefit one another, thus both profiting. 

For one thing (and this is just from what I understand), I am pretty sure that the insurance pools are different for those who hold term policies and those who hold perm policies. So, if everyone in the perm life pool is guaranteed to die and their perm policy is guaranteed to pay when that event occurs, then each will be a "winner" eventually, or so long as he pays his premiums and keeps his policy.

Also, if the insurance company can invest your perm life policy's premiums correctly, then the internal interest rate growing the cash value in the permanent life policy could be greater than the premiums paid. For instance, on the one hand, if you buy a perm life policy and die in 5 years, then the death benefit should be higher than the premiums paid so far, thus making you a winner (but, I guess you could say this winning is at the cost of the temporary pool of living "loser", or those who haven't died yet). 

However, on the other hand, if you buy a perm policy and die in 20 years, then either the death benefit is higher than the premiums paid so far or, by that time, the cash value might be, and perhaps both.

From the numbers I recently saw from my agent, in either case, either the cash value or the death benefit will be higher than the sum of the premiums you have paid so far. It also seems there are some tax advantages to perm life, but I am a little unsure about this.

Either way, though, that all might be illusory because any interest rates I saw do not beat current real inflation rates (probably closer to 10% as opposed to 3%). They usually do beat the governmental figure, but that doesn't mean much. The highest rate I saw was an expected cash value interest rate of about 5.5% and a guaranteed rate of 4.5%, which, like I said, probably doesn't beat out any real inflation rate, so one might be a loser in that case bc you could have spent the difference on Gold or something else that would perform better against inflation.

However, I don't think that life insurance (at least theoretically) is always, or even usually, a zero-sum game in that a lot of the cash value's interest rate's are "guaranteed" through the insurance company's portfolio. This begs a few questions though, which I asked my life agent when I was redoing my life insurance a few days ago.

1) I asked how the perm life policy could possibly guarantee any interest rates (you must have risk if there is reward, right?). He admitted that I was right that there is no guarantee, but if the insurance company is financially strong enough from the get-go and conservative enough with their promises then they can make these guarantees in pretty good confidence. This is how they can insure anything, after all. He said it all comes down to trust of the company's name kind if like when we trust Tide when they guarantee to get out those grass stains in our white pants. If they don't meet the guarantee, there is legal recourse. But, more technically, what the insurance company's do is schedule the payoffs of their corporate and governmental bonds in order to meet expected payments.

2) I then asked: what if the corporation that the insurance company holds bonds in goes bankrupt or the government renegotiates its bond deal or just flat out defaults or repudiates the bonds?

•  I was told that in the case of corporate liquidation or bankruptcy, the pay back hierarchy puts bond holders pretty high up there (which would be the insurance company in this case, acting as a sort of proxy bond holder for the clients, much like a mutual fund holds several stocks for many people). He also said that a good insurance company (like his, of course!) would be so diversified, especially in its bond holdings, that it would take massive bankruptcy on a very wide scale to have much of an effect. 
• As for governmental bonds that were defaulted, repudiated, or re-negotiated, again a good company should be diversified enough, but if not, then that is where the insurance company's surplus should act as a buffer and make up the difference.
  • However, he also said that for the company to have to dig in to its surplus would either mean the company wasn't really worth its salt in the first place, or there would have to be widespread feelings among most of its clients' wishing to cash out early (cash out the cash value on their policies), and he likened this to a run on a bank, only in this case, his company could actually pay everything and still have surplus left over, unlike the banks.     

3) What if the dollar collapses? He said in that case, basically your policy is only worth as much as the company's portfolio had assets in things of value (i.e. what little precious metals it owned, what real estate it owned, and what other currencies that the company had invested in that were still worth something). Other than that, it would be pretty worthless. Go buy Gold and Silver if that really worries you...lol - silly Libertarians!

Anyway, I am sure it is more complicated than that, but that is how I understand it. I know that was long, but if that is all true, then I see how, at least theoretically, there might not be "losers" using your definition of the word. I'd also bet that in a stateless society, where there were no governmental bonds at all, much less those guaranteeing 7-10% interest rates with absolutely zero credibility other than a printing press to back that up, permanent life insurance would cease to exist, at least in its current form. I would also be willing to bet that the very act of these governments paying off their bonds as promised would mean an increase of the money supply because there would be no other way for them to pay them, at least not with the debt and liabilities they currently hold.

I'd also guess that these companies get a lot of their tax advantages through special interests, and, what really pisses me off about them is I know for a fact that these companies (including the one my agent works for) both lobbies for, and would benefit from, a decrease in the estate tax exemption because if it were lowered, there would be a higher demand for perm life policies on older, more expensive to insure elderly to cover the cost of paying the taxes through a trust at the event of their death. Its shit like this that makes this all so complicated. 

But, maybe perm life would exist in the same way. Maybe private, corporate bonds would issue interest rates much higher than even the government is issuing today because they would be so much more productive. It might still serve as a way for more risk-averse, late-age investors to sustain and protect their nest egg while adding a modicum of growth without much risk - just nothing sexy. The big difference would be, we wouldn't have to worry about all these policies becoming basically worthless in the case of a currency collapse.