If you’re an insurance agent and life insurance sales make up most of your business, go ahead and just stop reading now. You’re just going to get defensive and mad at me. But I’m going to use math to show why the product you sold them actually helps you more than your customer. If you’re a consumer of life insurance, pay attention: what you learn here could be the difference between tens of thousands of dollars and hundreds of thousands saved for your future. Here are four pieces of information on life insurance.
1. If you have dependents that will be put into financial hardship because of your death, then you need life insurance. That’s a no brainer. I’m an advocate of having life insurance because I’m an advocate of taking care of your family. The whole point of insurance is to transfer risk. If you can’t afford to replace your car if you wreck it, you get car insurance to replace it. If you can’t afford to pay insanely high medical bills when you get sick you buy health insurance. If your family will suffer because you died and lost your income, you buy life insurance. Insurance transfers risk away from you and to the insurance company. You pay a premium and they agree to take on the risk for you. This is all insurance does. This is all insurance is good for.
2. With life insurance things get a little more complicated than with accident and health and other kinds of insurance. Maybe it’s because people get weird, gullible, or fantastical thinking about death. Maybe it’s because life insurance salesmen are greedy. I don’t know for sure, but I do know that many people sell and buy life insurance as a retirement savings product that also helps if you die. I don’t think it’s a good idea to use life insurance as a retirement savings plan. My calculator agrees with me. If you pay for any type of life insurance that has a “cash value” then you are paying a heavy opportunity cost. Term life insurance premiums for the same amount of death benefit (the only amount that matters in life insurance) as a cash value account are a fraction of the cost. I’ve had clients paying around $100.00 a month for a cash value policy that had a mere $125,000 death benefit, when the same death benefit on a 20-year-level-term would cost them less than 10 bucks. There are hidden fees in cash value policies, the premiums are outrageous, the death benefits are too low, and they are overly complicated.
3. Life insurance agents make a commission on the sale of life insurance. Usually the commission is equal to the first year premiums of the policy they sold. Using the above example: Do you think the agent would rather make a commission of $1200 or a commission of $120 for the same amount of work? This is the single biggest reason cash-value life insurance is spun as a good deal (in my opinion). Cash value life insurance is more profitable to the insurance company and the agent and more expensive for the client. I’m not saying all insurance people that sell cash-value life insurance are crooked, but they are at the very least misguided.
4. Buy term-life insurance and invest the difference between the premium price. If term costs 15 dollars a month for a $350,000.00 20 year policy and a whole-life policy costs 130 bucks a month, buy the term insurance and invest $115.00 a month into a hypothetical portfolio that returns an average of 8% a year for 20 years. At the end of 20 years(if you didn’t die) you don’t have insurance, but on top of your last 20 years of saving 15% of your income for retirement you grew an additional account to almost $70,000.00. That’s a nice bonus. If you did die during the term-life term however, your family would have not only gotten the 350,000 dollar death benefit, but whatever you grew alongside it. With a whole-life policy you might not even get the gains (if there were any). Your beneficiaries would just get the face value.
Cash-value life insurance is a ripoff in almost every context. Investigate getting term-life if you are serious about protecting your family. Level term life insurance is an integral part of building wealth. Partnered with an emergency fund, no debt, and saving 15% of your income for retirement term-life is vastly superior to whole-life. Just not for the insurance agent.