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Dear Everyone!
And the "hits keep on coming'" What a mess the markets are in and what a dismal outlook we have for the 2009 economy.
Are a lot of people fleeing the markets and taking what they have left and making that flight to safety? As Sarah would say, "You betcha!" So in this edition I want to talk a bit about life insurance.
I love life insurance, especially whole life (and some universal life (UL) plans... but not all.)
OK, life insurance should not be sold as an investment. However, the safe, solid guaranteed 3% return (with the possibility of getting 5% or 6%) pales in comparison to 15% mutual fund returns, right?
Oh, you mean your fund didn't return 15%? You are getting 10% right? Huh? You lost money this year? Sorry I can't relate. I sell safe-money life insurance products. I have no idea what the words "big loss" really means. It's almost impossible to lose any, some or much money with whole life and "guaranteed" ULs.
Why people don't understand that, is beyond me. I call them and they say "I'm getting killed in the markets and I don't want to talk to you."
But those who DID talk to me in the past... are watching the Dow tank... seeing the 401s of many people turn into 200.5s (!!)... and are just yawning and saying "So what?"
I've told you folks a million and one times: At the end of the day, week, month, year, or life... your net worth will not depend on how much you make... but on how much you don't lose.
I must be the stupidest person on the planet... because no one ever listens to me.
-Al
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Save with a blended life policy
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Here is a secret of the industry no one wants you to know about: Blended policies.
Everyone wants low cost insurance that stays with them their whole life. Term is low cost... but it eventually terms-out. Permanent life is often too expensive. But there is a third alternative that knowledgeable agents sell... a blend of universal life and term.
Blended life policies combine universal (or whole) life and term life insurances. They allow you to purchase coverage at a substantially lower cost than you would ordinarily pay for whole life.
Insurance agents, however, generally earn lower commissions when they sell blends, so they may not go out of their way to offer or educate you about them (big surprise there, right?)
Let's look at how they work:
You're in need of, say, $1,000,000 in coverage. The blend policy that you choose might contain $300,000 worth of whole life and $700,000 worth of term insurance (your agent will help choose the ratios of coverage that you want to have... it makes a difference!)
Every year the policy's dividends go toward purchasing more whole life coverage (known as paid-up-additions (PUA)), which gradually replaces the term insurance. You can also buy paid-up additions with part of your premium. You pay the full sales commission on the term and whole life portions. But the agent earns very little on the paid-up additions that you acquire, which means money saved for you. (Remember, the bulk of the agent commission come out of the first year premium... and a small amount each year after that.)
You can lower your insurance costs with blends in one of two ways, depending on what you wish to achieve. First, the blend can lower your premium. This type of blend builds cash value more slowly in the policy's early years (because a lower ratio of whole life is used to begin your coverage) but catches up later on.
There is a risk when lowering your premium, however. You're counting on the dividends you earn to be large enough to buy enough paid-up additions to replace the term insurance on schedule. If interest rates fall or term prices rise, your dividends may not be sufficient and your policy will begin to unravel. In order to save it, you'd have to increase the premiums you pay or pay them for a longer period of time. This risk can generally be avoided by not cutting your premium too far below what you'd pay for regular whole life.
The second way that blends can lower your insurance costs is by building cash value faster than usual. You pay the same premium as you might for whole life, but less of your premium is lost to sales commissions; instead, it goes directly into your policy. This approach can be attractive to investors who desire a higher tax-deferred retirement fund. It must also be stated, however, that with blends the death benefit generally remains the same for life, so inflation may erode its purchasing power.
The best buy in blends will typically result when you pay the full UL or whole life premium (or almost that amount) for a mix which contains the largest possible quantity of term coverage. That will put the maximum amount of money to work for you in your policy, as well as eliminate policy risk.
I do this all the time... blending Ohio National's Virtus Value universal and their FlexTerm plans. True, I make less commission, but when I have clients who need (or willing) to forgo cash value to get a good rate of perm coverage, I'm happy to do it. It's not the right plan for everyone, but it will work well for many. It all depends on your situation... which is why you want to talk to an agent who knows what he or she is doing.
Sorry to say... most don't.
I do.
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UL (Universal Life) vs "buy term and invest the difference"
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With the markets tanking there is more discussion than ever about term vs. perm.
In the mid 20th century, a number of life insurance companies used some aggressive sales tactics to persuade people to buy term life. Term life is, without question, the cheapest life insurance you can buy. That's because you are paying only the cost of insurance plus annual fees. Your insurance premium is based on the cost of insuring you today.
The company is betting that you won't die within the time period, so even though the entire face value is at risk (at least for the first few years), the entire premium will ultimately be profit for them. At the end of the term, you will either cancel the insurance, or convert it to some other form of term insurance, either annually renewable, or decreasing term. Thus, in 20 years, your new premium will be based on your age at that time, and will go up sharply. Furthermore, while some companies offer the option of converting a term to whole life or UL, most limit your choices to simply another type of term. The odds are all on their side.
Why did they push this "invest the rest" gibberish?
In the mid to late 20th century, the stock market was booming, interest on savings was as high as 11 to 14% in some places, and various mutual funds appeared to have no ceiling. Thus, agents reasoned (under instruction from their companies), instead of spending all that money on whole life in hopes of having a cash value that could be used later as an investment, a client could buy the cheapest insurance possible, protect home and family for 20 years, and simultaneously invest the money that would have been spent on more expensive life insurance.
By the time the life insurance expired, the investment, at compounded interest, would be enormous, giving a person both a retirement fund and enough money for final expenses.
Why didn't it work?
The logic of the term soliciting made sense. The problem was, very few people ever invested the difference. Some companies preyed on low income families who had no clue about investing while others simply left it up to the client to figure out what the "difference" actually was and where to invest it.
If a company had nothing but term to offer (which is all some had) they had no reliable way of comparing term to perm; who would know how much to "invest." Furthermore, many clients-feeling the financial crunch of raising large baby-boomer families-were concerned only about having life insurance in the event of an emergency.
They trusted in retirement pensions for money in their senior years, and took advantage of cheap insurance to keep more money in their pockets. Knowing they should invest some of that money, many put off doing so, thinking they would have more money when the kids were through college, or when the house was paid off.
It didn't work like that, of course, and today, an alarming percentage of people about to retire are discovering the term insurance they took out 20 years ago is going to be impossible to maintain. Additionally, many who believed they had life insurance "on the job" are discovering that the employers control the policies-meaning a person's insurance can entirely disappear once they retire... or are laid off.
Term coverage has its place... but it's a bandage... it does not cure the disease. Everyone needs a "base" of permanent coverage that even if it does not build cash value it will at least provide protection from poverty or foreclosure should a major breadwinner die.
More than ever you need to ran as fast as you can from the agents who call you with the "buy term and invest the rest" mantra. You need to find an agent know knows what he or she is doing.
Talk to me. I know what I'm doing. I will not make you the kind of returns the "invest the rest" term guys promise, but you will sleep at night not caring about the Dow, the S&P or where the money will come from for the college fund or retirement.
What is that peace-of-mind worth to you? You decide and let me know.
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Well, that's a wrap for this issue. I hope you've found some of the info above useful and interesting. If you have questions about life or health coverage, safe-money annuities, or employer group benefits just give me a call or send email.
Sincerely,
Alan N Canton
InsuranceSolutions123 Agency
InsuranceSolutions123.com
916-962-9296
CA License # 0F31110
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Al Canton, Owner
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I'm Al Canton, owner of the Insurance Solutions Agency.
Everyone promises the best service, etc. So I won't bore you with that message.
Bottom line, I know health insurance, disability, Medicare, life, and annuities.
Most importantly, I'm honest. I will not put you in a product just for the money. I've lived in the Northern California area for 35 years and I've built my reputation on integrity and honor.
It's that simple.
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