The Great Life Insurance Debacle!
“If you know the truth, the truth will set you free”.
20 years ago I found myself in a great deal of financial distress due to excessive debt. I was looking for ways to cut my monthly costs in order to attack the consumer debt.
In the process of searching for cost cutting ideas ,I began to read a book about the life insurance industry and how they make thier money.
What I found out was a total shock to me.
The life insurance industry is the richest industry on the planet!
How do they make thier money? Largely they sell insurance against financial loss due to death.
If you pay, lets say $50.00 per month , for a $100,000.00 whole life policy, you are paying a very small fraction of that premium for the death benefit.
The rest of the premium goes into a cash accumulation account.
Lets say $25.00 pays for the death benefit and the rest accummulates in the cash account at interest.
Sounds good so far, right?
Lets say you have that policy for ten years and the interest credit is 0%
Your cash value would be $3,000.00, right?
Ok, lets say you need that cash you have saved in the policy, how do you access it?
1. You can borrow your own savings from your policy and pay around 7% interest to the insurance company. Your death benefit is reduced by the amount you borrow and the premium is increased to pay the interest.
$100,000.00 death benefit - $3,000.00 policy loan = $97,000.00 new death benefit. Old premium $50.00 per month, new premium $67.50.
How do you like borrowing your own money, paying interest to the insurance company and they lower your death benefit?
2. You can take all of the cash value out by surrendering the policy. In which case if you die, your family is left $97,000.00 poorer.
3. If you die, the cash value is kept by the insurer.
$100,000.00 death benefit at purchase $100,000.00 death benefit ten years later.
Where did your savings go?
Still sound like such a good deal?
You either get your insurance or your savings, But Not both! This is true REGARDLESS OF THE COMPANY!
Why not insure to insure and save to save?
Using a form of life Insurance called Term , you can get much more insurance benefit for your money and save the difference!
Most life insurance companies offer Term Insurance, but they strongly encourage their agents to sell whole life, universal life, variable life etc. because the profit is “Off the charts” compared to term.
Unfortunately that puts your insurance company in an adversarial position with you.
I’m a paasionate capitalist, but I am also opposed to being sold products without the client fully understanding the products they buy.
The agent makes a substantially larger commission on the cash value style insurance than he will on term insurance, so the insurer is putting the agent in a position where if he sells the best value his income is greatly compromised.
Term insurance can be designed around your benefit and budget needs more easily due to the greatly reduced cost.
Term is the better Value
Generally speaking, if you are 50 years old or younger and in reasonably good health you should buy term insurance.
The problem is finding an agent who will give you an unbiased assessment of term vs. cash value life insurance.
If you would like more information on this or any other “Money Matters” subject, contact the guest host, Joe Money Matters.
Next time, Savng and investing .
Joe Money Matters is a section of the VAJoe Blog to ask for quick financial tips and advice from an expert with more than 20 years experience in counseling families to live without debt and to reach there financial potential. Please leave comments on this Blog. You can learn more about the Joe Money Matters advisor at his website. The posts and comments by JoeMoneyMatters reflect his two decades of financial counseling expereince. VAJoe.com does not endorse any financial strategies, but offers this blog as a service to its site members for discussion.
January 28th, 2008 at 8:12 am
I can only agree with this article. People should understand what their life insurance policy is about, but the reality is very different. People are making the same mistakes, e.g.: they wait with life insurance until they are old and have healthier problems, but then is too late, or there is another extreme, there are people who have life insurance, but they don´t need it (they are single and footloose), or people are ignoring the disabled insurance, which is in my opinion very important and so on.. So t is vital to ensure that the insurance you eventually invest or plan to invest in is the most suitable for your particular needs.