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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

Theory: Why Don't More Advisors Understand Cash Value Life Insurance?

Updated: Jan 18, 2023

I'm a voracious reader (sometimes a bit too much). When I entered the financial advisor profession in 2004, I wanted every advantage I could get. I read many books and got involved in many online discussion forums to learn as much as I can to help ensure my success.

Aside from a lack of public knowledge from both the United States Federal Government about life insurance AND the life insurance companies themselves (which I wrote about earlier here: I believe there is a fundamental training issue for financial advisors.

Certification and widely accepted standards: Once I was employed in this industry, I began my ChFC financial planning studies. This coursework along with the advisor I was assisting recommended that I purchase the HP-12c financial calculator.

The HP-12c financial calculator This calculator was created back in 1981 and has been widely heralded as one of the greatest financial tools ever created. It's STILL being manufactured and produced over 35 years later!

It eliminated the need to publish amortization tables for mortgage lending. The calculation results were certified accurate. And while it uses RPN (Reverse Polish Notation) as opposed to algebraic notation, investment advisors and mortgage brokers took to it immediately. (RPN puts numbers in like an Excel spreadsheet: 2 [enter] 2 [+] rather than 2 + 2 = 4.)

The Financial Advisor Test I said I was a voracious reader, right? That includes internet searches on a variety of topics. Here's a paragraph about "How to Choose a Financial Advisor":


"One quick and easy test for competence is offered by California-based financial planner Errold Moody. He calls it the "HP 12C" test. He claims that at least 75% of "financial advisors" cannot operate a financial calculator capable of determining things like the "present value of an annuity." (The "HP 12C" is a financial calculator manufactured by the Hewlett-Packard Company.) This is a good test that will eliminate incompetent advisors from consideration. Unfortunately, it still leaves the dishonest ones in the pool. A dishonest advisor skilled in the use of a financial calculator can cheat you that much faster."


In short - everyone says that you need to know how to use a financial calculator. Why? To show that you understand finance.

Now, I DO have the HP 12c calculator. Having used it for the past 15 years, I can't really seem to use anything else anymore! I have the 25th platinum edition, the app for my Android phone, and a Windows desktop application.

"I don't understand. What's the problem with knowing how to use a calculator?"

The calculator trains the advisor to believe that "more money is better, more rate of return is better, and this is the foundation of financial planning." Everything else is an extension of knowing how to use a financial calculator. Look at this image from one of my favorite retirement planning packages:

This image has a number of factors being shown:

  • Income target (the thin horizontal blue line above each bar) being adjusted for a given amount of inflation each year

  • Growth withdrawals from investments (the green part)

  • Principal balance withdrawals from investments (the grey part)

  • Beginning social security income (the blue part)

  • Running out of money based on these factors (the red part)

Yes, an HP 12c can calculate all this, but all in separate calculations. It still shows that "percentage increases and given withdrawal assumptions" still operate under the assumption that "Math = Money and Money = Math".

The financial calculator is PRECISELY why "Buy term and invest the difference" is so prevalent. Here's another blog post of mine that is heavily based on financial calculations:

Life insurance is a multi-dimensional product and strategy Because you can borrow against your cash values, it creates new dimensions in planning that cannot be accounted for with a standard financial calculator. The financial calculator puts the % rate of return as the highest factor in understanding finance and accomplishing your plans - of course, tempering it for a given risk tolerance.

By the way, it's called an "internal rate of return" for a reason. The internal rate of return is simply a given amount of money earning a certain rate of return. There is no factoring in any further erosion to this investment, such as income taxes, capital gains taxes, and accounting for risk tolerance compared to everything else. All that seems to matter... is how much can I grow this pot of money on a GROSS basis. (This is how investment advisors believe they bring value AND what they believe they are being judged by their clients to perform.)

What if we could get more efficient by understanding EXTERNAL rate of returns?

If there's an internal rate of return, there must be an EXTERNAL rate of return. This is factoring in all the other factors that affect your total NET returns. Here are just FIVE eroding factors to consider in retirement income planning:

  • Federal income taxes

  • State income taxes (depending on your state)

  • Taxation of Social Security

  • Additional costs of your Medicare premiums (IRMAA)

  • Investment fees to put your capital at risk so you can have the money to pay the above.

You are paid SIXTH in line.

But this is happening because investment advisors are trained to think and advise in terms of GROSS returns because of using financial calculators. It limits how they give advice. And because they only see limited returns in cash value life insurance... they denounce it as a "poor investment".

But if they understood the external costs... and how to collateralize the policy... they wouldn't believe what they believe. But since you cannot necessarily account for all that using a financial calculator... their advice will continue to be limited to just producing "gross returns".



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