Wednesday, March 14, 2007

Objections to Term Insurance

Here are some of the things that many agents, financial planners, financial advisors or whoever is certified or licensed to talk about finance will say about term insurance. I'm not saying all are bad, just most of them are.

1) "The problem with term insurance, is that premiums will go up." That is true, but every insurance, not just in life, has rising costs. For example, doesn't your car insurance premiums rise over time? Doesn't your homeowner insurance premium go up? In cash value life policies, while the premiums remain level for life, the cash value is used to pay the rising cost. With term insurance, your premiums are low and level for certain period, which enables you to save your money elsewhere. When level term expires, most term policies are renewable without the need to provide proof of insurability. By buying term and keeping investments separate, you can change one without one affecting the other. For example, if you lower your coverage, would that slow down the growth in your investments? In cash value policies, when you lower your coverage, you slow down the growth in your cash value because less premiums are going toward it. If you stop investing, would your life insurance be affected? In cash value life insurance, you don't have the option to stop putting money into the cash value becaue your life insurance and savings are bundle together in one premium payment. If you cancel your life policy, do you pay surrender charges on the savings? In cash value life insurance you do, but in term insurance, your investments are not affected. Instead, you have more money to invest.

2) In response to above paragraph, someone said "But the premiums remain level in whole life and it never goes up." But the cost of having it does. As you get older, less and less of your premiums are going to the cash value and more toward the insurance payment. Premiums remain level, but not the cost.

3) "Life insurance companies loves to sell term insurance..." If that was true, then why only less than 2% of American families have it and 38% own some sort of cash value life insurance? The other 60% don't even have life insurance.

4) "... because less than 2% of term insurance are ever paid out." This is a myth and there is no data on this comment. The real truth is that less than 2% of Americans own term insurance. Anyway, do you know when a person going to die? How would this person know that term insurance rarely pays out? Maybe he/she think that term insurance rarely pays out because he/she never sold a term policy or maybe because he/she keep converting all the term policies to whole life insurance. Would you rather die with $100,000 whole life policy or a term policy of $500,000 coverage?

5) "Investing the difference is a scam." If investing was a scam, then what's the point of having a stock market? What's the point of having companies selling stocks? Why do bonds even exist?

6) "Insurance companies makes lots of profits by selling term insurance." Hmm, you either pay $1000/year for term insurance or pay $2000/year for whole life. How does that compute that life insurance companies makes lots of profits by selling term insurance? Why is that average face amount of whole life policies is only $100,000 and that term insurance is $275,000? The real truth is that life insurance companies makes lots of profits by selling cash value life insurance. You pay lots of premiums for low amount of coverage. Do you know that if you want to use your cash value, that you have to borrow it and pay 6-8% interest on it? Do you know that if you die someday, that the insurance company keeps your cash value? So which product is the life insurance company really making more money off of?

7) "If you invest the difference, you pay taxes on them. With my life insurance, you don't pay taxes on the savings." Of course you don't pay taxes on them because you are paying at a loss. Do you pay taxes on a loss? What is the loss? Its the difference between total premiums you pay in and the net cash surrender value. If there is a gain, then you will pay taxes on them when you withdraw the money. I guess this guy or girl doesn't know about IRA accounts or variable annuities either. If they did, they would of suggested of investing your money into these tax-deferred accounts instead of putting it in a life policy. I always try to open Roth IRA for every client I sit down with. Currently, not everyone can get a Roth IRA, so I open a Traditional IRA instead.

8) "Buying term is like renting an apartment. With whole life, you build equity just like as you pay your mortgage." Apples and oranges... this person is comparing an insurance product to a house. The truth is that the equity in your home is count as part of your asset. Life insurance does not count as part of your asset. If you die, all the "equity" in your life insurance is kept by the insurance company. The equity in your home will still be there because someone in your family will get ownership of the home, which is mostly likely to be your spouse and then your kids.

9) "Permanent life policies pays out dividends." Of course it does because you are over paying your premiums. For example, lets say you pay $1800/year in premiums, when it really cost only $1600 for that year. So they pay you a dividend of $200. You may take it in cash or re-invest into the cash value. I would take it in cash and put into a Roth IRA. Of course, I wouldn't own cash value life policies in the first place.

10) "Nobody invests the difference." If you are not securities license, of course you are not helping anyone invest the difference. I am and therefore I can help people invest the difference. All my clients invest the difference using dollar cost averaging and they are still doing it today. So don't say "nobody" because its really agents who can't help clients invest the difference because they don't have the proper license to do so and/or their company doesn't offer investments.

11) "What if you outlive the term? Then all your money spent on it was a waste." What if you don't? Do you know when you going to die? Would you rather leave behind a $100,000 cash value life policy or a $500,000 term policy? If you outlive the term, you didn't waste your money. In fact, its money well spent because the premiums were low and you had more flexibility to save your money elsewhere instead in a life insurance policy. Its like you buying car insurance and you never get into an accident. Is that a waste of money? No because you were protecting yourself in case something does happen.

12) "Buy term and invest the difference doesn't fit for everybody needs." Let me ask you this, who in the right mind would want to keep life insurance and savings together and then find out you can only get one back? Who would want to spend more on insurance coverage with a whole life or universal life versus spending less and maxing out the coverage needed with term insurance? Who would want to invest their money in a life insurance policy that has expense ratios above 3% versus getting 1% if they keep the investments outside of a life policy? Term insurance fits for everybody needs because people can buy the right amount of coverage for the lowest possible cost.

13) "Most people are not discipline enough to invest their money." That maybe true, but I teach my clients on why they should invest on a monthly basis. I teach them to pay them self first because the most important asset in their life is themselves. So I setup a systematic investment plan for them. They can invest as little as $25/month into their mutual fund. Most people don't add themselves as another bill and they really should. If you don't pay yourself first before paying others, the chance of you becoming financially independent or even wealthy will be very slim (unless you win the lottery or inherit large amount of money).

As you can see, if someone is trying to sell you that whole life, universal life, or variable life insurance as the "right" plan for you, its really the right plan for them because they earn lots of money by selling these products. They don't care about your finances. Why would they sell you a cash value life policy and you can only afford a small amount of coverage? Why would they recommend investing or saving money in a life policy rather in an IRA account or your 401k plan? Why is it good to bundle life insurance and savings together and that it only pays out one benefit?

I believe greed affects many people judgments and therefore, they make bad decisions. If people step back and think about what they are saying, does any of it make logical sense? They should put themselves in the client's shoes and ask, "What would I do if I were in his/her position?"


Anonymous said...

my company always tells us to sell universal life as 1st option or whole life as 2nd option. They say its a great way for you to earn income. If you sell term, you won't make much money. Even though I knew it was bad product to begin with, I needed the money to support myself.

Anonymous said...

The agent that needs the money to support himself/herself obviously needs to be recruited to a company that does the right thing for their clients, 100% of the time.

allcustom said...

Excellent Article! Thanks very much for the info, and I will be writing my own (admittedly simplified) article on this shortly. As for my professional works,I will be taking your advice and "standing on the shoulders of giants," so to speak.

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Reverse Mortgage Calculator said...

I truly like to reading your post. Thank you so much for taking the time to share such a nice information. I'll definitely add this great post in my article section.

Rob Drury said...

Would you recommend permanent insurance if it cost less than term? Do you sell 30-year term? The average participating whole life policy "N-pays" in 12-15 years and has a premium of about three times a 30-year term premium for the same death benefit. So, for about the same total premium outlay as a 30-year term policy that will most likely not be around to pay a death benefit, the whole life will definitely pay the death benefit. If one decides that there is no longer a need for the insurance, the WL can be surrendered for greater than the premiums paid or sold for several times the cash value. Final question: Do you have the integrity to maintain this post?