<![CDATA[Rudi Hoffman's Blog]]> http://www.longecity.org/forum/blog/153-rudi-hoffmans-blog/ Mon, 23 Jun 2014 04:48:40 +0000 forum@longecity.org (LONGECITY) IP.Blog 60 Hello, Longecity! Glad to be a part of this vibrant community http://www.longecity.org/forum/blog/153/entry-2080-hello-longecity-glad-to-be-a-part-of-this-vibrant-community/ Hello, Longecity community.
Here is an article just published in CRYONICS magazine.
 
"CRYONICS FUNDING IN AN INFLATIONARY UNIVERSE: AN ANALYSIS OF ONE POSSIBLE SOLUTION"

By Rudi Hoffman CFP CLU ChFC
 

Monetary or price inflation seems to be built into the fabric of twentieth century economics as inexorably as inflation is built into the structure of the universe.  Both seem to be simply part of the facts of life, and we as humans with ambitions beyond our current station need to find ways to deal with these facts.
As you read these words, stars and galaxies are exploding away from us at enormous speeds.  And, also as you read these words, inflation may be causing the cost of specialty medical interventions like cryonics to rise.
 
Numerous stories abound dramatizing the effects of monetary inflation. Cards which feature the price of bread, milk, stamps, and houses in the year of your birth are popular with baby boomers, a nostalgic tribute to a simpler and less costly past that  were  in fact almost certainly neither by real metrics, as Matt Ridley documents in "The Rational Optimist."
 
For the purpose of this article, let's stay focused on the cost of cryonic suspension, a medical intervention with tremendous potential which can only be realized if a number of variables work well for us, including the financing piece.
 
PURPOSE OF THIS ARTICLE, AN ANALYSIS OF INDEX UNIVERSAL LIFE
 
Compared to the fields of endeavor which comprise the current consumers of cryonics services are engaged in, such as artificial general intelligence, biotechnology, advanced physics,  software engineering, and the (almost) intractable field of ending aging,  life insurance and finance is relatively straightforward.  
If you are reading this article, the odds are very good that you are both smart and highly educated, and can handle a reasonable amount of nuance without breaking a sweat.  In fact, you may find learning about this to downright fun!
 
We will be analyzing a relatively new product offered by the life insurance industry called an "Index Universal Life."

You may be familiar with the basic concept of a Universal Life policy.  Let's take a quick review.
 
 
UNIVERSAL LIFE:  THE BUCKET OF CASH METAPHOR
 
We can think of putting money into a Universal Life (UL) policy as putting money into an bucket of money made available by the life insurance company.  From this bucket the insurance company pulls a relatively tiny dipper, which is used to pay the internal "cost of insurance" each month.  The actual "cost of insurance" is an internal risk cost and in the early years of a policy is generally quite low, enabling the cash in the bucket to grow and compound.  
 
The cash in this "bucket of money" grows due to the  influx  of money, and the interest or growth credited on this money.  
 
So, the simple variables are 1.  The amount going into the bucket,  2.  The growth credited on this money, and 3. The cost of insurance being withdrawn from the bucket. 
 
When UL illustrations are made, they generally, and in some cases by law, provide at least two illustrated scenarios of these variables.
 Some UL policies also have a guarantee rider, that protects the death benefit even if the cash value falls to zero, which could be perceived as  a helpful feature for cryonicists who want to know that their policy will pay the death benefit without fail regardless of market conditions.  
 
 
One of these illustrations will be showing how the policy will work using several "worst case" assumptions.  

The other, generally the rightmost three columns on the year by year illustrations page, assumes the CURRENT or actual interest rates and internal cost of insurance being charged by the insurance company.
 
Pretty straightforward so far, right?  Here's where it gets a bit nuanced.
 
 

HEY, I READ A WALL STREET JOURNAL ARTICLE SAYING THAT SOME OLDER UNIVERSAL LIFE POLICIES ARE A DISASTER.
 
In November of this year, 2013, the Wall Street Journal had not just one but two separate articles informing their readers about a legitimate but not well known financial train wreck.  The articles both accurately depicted what is happening to Universal Life policies which were sold back when the interest rates on fixed investments were not just higher, but in some cases much higher.  UL policies sold in the 1980s were often illustrated at 12% or more growth on the cash value.  And, with the interest rates continuing to be at historic lows, these policies are lapsing, or requiring more money to be put in them. (1) (2)   

If you have one of these older policies, you own a ticking time bomb.  You need to immediately call the company that issued the policy and ask for an "In force illustration" which will show you how the policy will perform under the current interest rate and contribution scenarios.  It may help to have an expert run an analysis of your policy to see what the reality is.  This policy review is certainly a good idea to have done every five or ten years or so regardless of when your policy was issued.  
 
There is good news, however, especially if you are healthy and insurable.  This brings us to a way you can structure a policy that will last as long as you do, with an increasing benefit the longer you live.
 
THE PAST, PRESENT, AND FUTURE OF UNIVERSAL LIFE POLICIES
 
Do you like history?  Can you see yourself on a timeline stretching from the past to the present where you are reading these words and continuing to the future?  On this timeline, if we put the OLD style Universal Life policies, we have some UL policies which could lapse...the policy could "die" before you do!  .  These were often sold using HIGH INTEREST projections and did not have any underlying "guarantee riders."  If you have a policy more than ten years old you may have the "obsolete dinosaur" UL model, and you should get it checked to see how it will perform using more accurate current interest rates.  
 
If you have a NEWER model of UL, it may have a guarantee rider to guaranteeing coverage to age 120.  But, what if you live PAST age 120?  
 
The future of Universal Life is what we move to now...a policy which can grow and help address the inflation question.
 
 
HOW INDEX UNIVERSAL LIFE WORKS, EVOLVING A NEW FINANCIAL CREATURE
 
What if you could obtain most of the "upside growth" of the stock market, without taking the risk of your account going down, the "downside risk" if the market turned south and plummeted?
 
The search for this  "best of all possible worlds" and the evolutionary pressures of the financial industry has enabled the emergence of a new financial creature.  This creature combines most of the upside growth of the market when times are good, but manages to avoid the downside risk of major market pullbacks.  Instead, it simply takes a nap for a year, has zero growth, but zero loss, and waits for the market to start going up again.
 
This creature has evolved after decades and centuries of evolution of financial products, responding to enormous pressure in the reputation based free market system.  
First introduced in 1998, this creature has been evolving nicely, with more and better consumer protections built in, multiple indices to utilize for growth options, and lower internal costs enabling streamlined growth of internal cash values in the policy.  This new creature is called "INDEX UNIVERSAL LIFE INSURANCE." 
 
 
The cash value inside the life insurance policy has options that the policyholder can decide on, with percentages of the cash value defined in each. 
 
One or more of these investment options enables that section to have index related growth.  This means that while the dollars are not invested directly in a stock market index like the Standard and Poor 500, the insurance company credits a growth to your account based on growth or change in this index.

WHAT DOES THIS MEAN TO ME AND MY POLICY?
 
In the case of at least one cryonics friendly insurance carrier,  there is what this means to you and I as consumers .  If the S and P 500 goes up in a given year, your account is credited with up to 12% of this growth.  
 
If the Standard and Poor  500 index  goes down, nothing is credited to your index account...but it does not go down either.  
So, we are basically credited with something between zero and 12%, depending on what the S and P 500 does.  
 
 

The obvious question, "How is this sustainable by the insurance company?" could fill a book length explanation.  The short answer has to do with economy of scale that insurance companies have, as well as the ability to buy options on the S and P index that go up if the index goes up. Plus there are some profits on the life insurance part of the program. 
And, there are built in penalties that discourage people from pulling their money out in the early years of the program. In short, it is a financially transparent product, in that we can see how the simple parts work, and also how the insurance company can rationally make it available.
 
We will show an example to see how this works.  The example assumes an male 32 year old...let's call him Joe  Visioneer...applies for and obtains an Index Universal Life policy at preferred non nicotine using rates.  The policy is an Index Universal Life policy for a face   amount of $300,000.  Joe is paying 300 dollars a month into this plan.  

 


 

WHAT IF YOU CAN'T AFFORD TO FUND A POLICY AT THE NECESSARY LEVEL NOW?

One of the enormous benefits...and dangers...of any universal life policies is that you can ADJUST the premium.  While this does give people the right to shoot themselves in the foot and underfund a policy, this provision does something very positive.  It gives people the right to establish a policy, pay less now, and more in the future when they can.  So, Joe could start with 100 a month, and increase this after a few years to $300 a month or more.   

 
SO, WHAT ARE THE TRADEOFFS?
 
We intuitively know that there must be tradeoffs in any decision.  What are they with Index Universal Life?  What are the risks?

Well, remember we talked about the "worst case scenario?"  When you look at an IUL illustration, you will see a section that shows what happens in a worst case scenario.  And, in Joe's case, this means that his policy shows zero value...cash value and death benefit of zero...at his age 75, some 43 years into the program.  Should this worry us?
 
Probably not.  Here is how the "guaranteed" side of an IUL is determined.  It actually assumes FOUR worst case scenarios...occurring every year between now and the rest of your life.  These four are 1.  That the stock market goes straight down, decades in a row.  AND 2. The insurance company goes to their maximum internal cost of insurance, which would only happen if all companies were doing this due to a worldwide pandemic or war  AND 3.  All internal costs of the policy go to the maximum  AND 4.  You and your broker see these things occurring year after year, decade after decade, and do nothing to adjust the policy so it delivers as needed, or redirect the premiums into a different policy or company.
 
It can be fairly observed that the likelihood of all four of these occurring is small.  And, more importantly, if the stock market drops relentlessly for the next 43 years, and we have worldwide pandemic and/or wars, the odds of a good cryopreservation are certainly low.  
 
WHAT IF YOU ARE 52 INSTEAD OF 32?
 
Joe's father John Visioneer is 52.  He can invest $500 a month into a life insurance and savings plan.  This gives him a death benefit of $300,000 which constantly rises each year, a reasonable expectation of over $339,000 in cash and a death benefit over $639,000 at his age 82.   
 
There is no magic bullet that fixes every concern about proper cryonics funding.  But a well funded Index Universal Life is certainly a program rationally minded and highly analytical cryonicists may want to consider.  
 

End Draft Two 
 
1. Universal Life Policies Hurt by Low-Rate Era - WSJ.com


 
2.  Is Your Life-Insurance Policy at Risk? - WSJ.com
 
 

 

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