What's old... is new. Take venerable whole life insurance... you know... the kind that Robert Young sold on Father Knows Best (for those of a certain age!) During the go-go days of the markets it was downplayed by the various know-it-all financial pundits.
Not anymore. Even the "buy term, invest the rest" folks are realizing that "their father's" life insurance plan was really pretty good.
I'm going to dedicate this issue to whole life. Why? Simple. I actually like the concept of "buy term and invest the rest" but it is (and has shown to be) virtually impossible for most people to do it... they either spend the rest... or they invest it badly... and lose the rest. Thus, I'm a big fan of the idea that you should have a "forced saving" plan without risk, which is what whole life is.
What if I have a magic umbrella that disappears in two weeks. Say you give me a dollar for it. Now, say I have a non-magic umbrella that does not disappear. I want you to give me five dollars for that one. And lets say the forecast is for rain sometime during the next three months.
You might say "I'll take the magic umbrella since it is only a buck." You will take your chance. In two weeks you have no umbrella and you are out a buck. But what if I say "If you give me the five bucks not only will you have the umbrella in two weeks but if you like you can give it back to me at that time and I'll give you SIX dollars. If you decide to keep it and pay me another five dollars, in two weeks from then I'll offer you ELEVEN dollars for it... and so on forever."
Term life insurance is the magic umbrella, whole life has no magic but gets worth more the longer you have it. Read on.
-Al
Many of you will know Dave Ramsey, as well as Suzi Orman. They are "talking heads" on the radio/TV who purport to know what is best for you financially. Dave and Suzi hate whole life insurance... hate it with a passion. Dave is the poster-child for the "buy term and invest the rest" position. I agree with him. Yeah, that's right. I really do... but wait... there is more!
Obviously I am a Dave Ramsey listener (via his website) and enjoy his show. I think he's a great communicator. Even though he hates the more expensive permanent insurance products and loves term... I still sell a LOT of his listeners whole-life plans as well as guaranteed universal life which he says are a waste of money. How do I do it? I just agree with him... IF the client is following Dave's plan.
Here is an actual conversation I had this week. The client was a divorced lady age 50, slightly overweight and good but not "preferred" health, lower middle-class income. She wanted $100,000 of insurance mainly to cover funeral and final expenses, and make sure her daughter would have some money for college if she died:
Client: I listen to Dave Ramsey and he says to only buy term life insurance. I don't totally understand why or what other kind there is.
Me: I like to listen to Dave too. He is very good about reminding people to live within their means and not running up debt. That's important for everyone.
His insurance information is sound also provided that you are going to fully follow Dave's complete plan and NOT pick bits and pieces of it.
Client: What do you mean?
Me: Well, you have a choice of term life insurance like Dave recommends or permanent whole-life insurance. The term insurance is MUCH less expensive which is why Dave recommends it. Whole-life is very affordable in smaller amounts but probably 5 to 10 times more than term if you are comparing the same death benefit.
Client: So why would anyone buy whole-life?
Me: Because it's permanent. It will always be the same premium amount. The term will last 20 or 30 years or for whatever term you need it but then it will end or the rate will be so high no one would keep it.
Client: Why does Dave say EVERYBODY should by term? What if you live past the insurance coverage?
Me: It won't matter because if you're following Dave's complete plan you will be filthy rich anyway.
Client: How can he guarantee that?
Me: Dave's plan makes perfect sense IF you are going to get intense with it AND FOLLOW IT to the letter. You have to do ALL these things for it to work OR you will expose yourself to problems.
1. Cut everything you can out of your spending.
2. Increase your income by asking for raises or finding a new employer that will pay you more. Take on extra jobs like delivering pizza at night.
3. Never eat out. Take your lunch to work. Eat lots of rice and beans and beans and rice.
4. Pay off all debts from the smallest balance to the largest. This is called debt snowballing. Get completely out of debt.
5. If you have a car payment, sell your car. Even if you are upside down in a payment sell it for what you can and refinance the balance and pay it off in your debt snowball. Buy a $1,500 "beater" car to drive until you are completely out of debt.
6. You need to make sure you have good health insurance in place (preferably an HSA) and long-term disability coverage.
7. You need an emergency fund that is liquid and has at least $1,000 in it. Once you are out of debt you want to build 6-months of expenses in it.
8. Once you are completely out of debt you stay on course and sock all that extra money into retirement accounts. You can upgrade your car to around $3,000 at this point if you pay cash for it.
9. Once you are rich enough, you can cancel your term life insurance and when you retire you cancel your disability and get LTC.
Now you can live like no one else because you have lived like no one else. If you can do ALL the above you are truly exceptional!
Client: OK, so how much is term?
Me: Only $32 a month, for 20 years. When you are 70 you will outlive it and have nothing. You will have put in about $7,700.
Client: Hmmmmmmm. I don't think I'm ever going to be able to follow Dave's plan and get rich. How much is the whole-life insurance?
Me: $138 a month. At the end of 20 years you will have about $35,000 of cash to take out. You will have put in about $33,000. It's free!
Client: GIVE ME THAT!!! That Dave Ramsey is full of crap! I'm not driving a beater car and delivering pizzas all night just to save a hundred dollars a MONTH and then have nothing! He's NUTS! Why would I want term life insurance? I'm not paying for something and then worrying that I might LIVE TOO LONG. Give me that $138 plan. I need to turn off the radio.
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I don't remember the year, but it was less than 5 years ago. Ben Stein was speaking at a life-agent meeting and made a statement to the effect that people who live in trailer parks listen to Dave Ramsey, people who live or aspire to live on the 8th fairway in a golf community listen to their financial advisor.
Here is an article (that I've edited a bit) by an agent named Ian Freeman that was published in a magazine targeted to agents... so here is some more inside info on how we agents are "taught" to sell you you... the clients.
People tell us all the time, “I don’t believe in life insurance.” My answer is, “You don’t have to. It’s not a religion! It’s a tool.” And when used well, it is a very valuable tool in your financial toolbox.
I explain to my clients that permanent life insurance is an asset that’s guaranteed to grow each year as long as they continue to pay their premiums. And that growth is tax-deferred. No other financial tool can provide confidence in the following ways:
- If you continue to pay, you know you’ll be OK.
- If you die, you know your family will be OK.
- If you become seriously ill or disabled, your premium (for policies with waiver of premium) is paid for you.
Life insurance is not a commodity purchase. Not all policies are created equal, and we as financial professionals provide value by educating our clients about these differences and identifying what best fits their needs. It’s important to understand the distinctions between term and permanent insurance.
I like to compare term insurance to renting, where God is your landlord and the property manager is your insurance company. The cost of a rental may seem less than buying, but often prices go up over time and when your lease is up, you have nothing to show for it.
With term insurance, you have a roof over your head (death benefit) for a while at a lower price, but once your term is up, the protection is gone. It’s not a bad thing. To me, protection is the most important aspect of life insurance. But if you’re going to buy that protection anyway, would you not want it to be there when you need it most?
Put another way, the best life insurance policy is the one that is in-force when you die. The value is in the financial protection it offers your family, yet that protection disappears after the term runs out. It is “cheaper” because many people never end up using the death benefit. In fact, for example, although the new policies sold by Northwestern Mutual are roughly 50 percent permanent and 50 percent term, 97 percent of all claims are on permanent policies, because the majority of term policies expired, lapsed or were converted to permanent insurance before the insured died.
On the other hand, permanent life insurance is like owning a house and paying a mortgage. Each payment builds equity until sooner or later you own your home. The protection might have a higher price, but it comes at a significantly lower cost over time — and it lasts for your entire life.
Let’s look at that difference between “price” and “cost” another way, with an example from the automotive world. Say you buy a car for $50,000, and your friend buys one for $40,000. It’s obvious who paid less — or is it? After five years, during which maintenance and fuel costs were about equal, you both sell your cars. You get $40,000 and your friend gets $20,000. Now it’s obvious who really paid less, right? And in my line of work, the time frame is much longer — 25, 35, 45 years or more — so the dis- parity can be much greater.
We hear all the time that permanent insurance is too expensive. When I hear this, I ask whether that refers to the price or the cost. The lesson here is that even when the price of something seems lower at the outset, the cost can actually be much higher. And if clients don’t understand the difference, they — or their families — may end up paying dearly, both literally and figuratively.
The role as financial representative is to think long-term, taking into account the real cost — rather than just the price — and determining what is right for the client. To put this into context: whether it means term, perm or a mix of both, always doing what’s right for the client is most important.
You might think that recent economic conditions have caused more people to think in the short term and worry more about price than cost. Not so. We’ve seen the Great Recession bring the true value of permanent life insurance to the forefront. Clients who own permanent insurance marvel at how it continued to grow while their other assets lost as much as 50 percent. Other clients who didn’t own it until now tell me they wish they had bought it earlier. Younger clients now appreciate the need for permanent life insurance because they’ve seen how just one bad year can have a devastating effect on people’s savings.
I always ask clients to identify the point in the future at which they are sure they won’t need life insurance. I have never had a policyholder tell me he is glad his TERM policy is expiring. Rather, for those who bought permanent insurance, most wish they had bought more permanent life, or had bought it earlier, and they realize its place in their overall net worth.
Take the example of a person who reluctantly bought permanent insurance a number of years ago — “reluctantly” because he believed he would not need the coverage after he retired. But things don’t always turn out the way we plan. At age 83 he still leads the family business (the term insurance he wanted would have expired at age 79), and he now recognizes the true value of his permanent life insurance. Last year, while his other assets depreciated, he used the cash value of his policy as collateral for the bank, and he knows that any death benefit paid can be utilized by his children to help continue the business after he dies. It is safe to say that the peace of mind provided by the permanent coverage has turned his reluctance into gratitude.
And that gratitude brings me back to my original thoughts about what life insurance is not. For those of us who sell it, it’s not a one-and-done. Our job is not over when we make the sale; rather, it’s just beginning. We want to provide the right solutions for our clients’ needs as they change — through home purchases, marriage, kids, businesses, retirement and more. I’ve seen firsthand the value of permanent life insurance, and I always wonder: if it weren’t called insurance, would you already have it?
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