| Has a life insurance agent suggested that you | | | | policy with the same death benefit. But let's |
| buy 'permanent' insurance such as Whole Life, | | | | look at some real numbers. The annual premium |
| Universal Life or Variable Universal Life? | | | | for a 45-year old man in excellent health for |
| The reasons they give seem so compelling, but | | | | $1,000,000 in coverage is $1400 per year for |
| are they in your best interest? Here's an | | | | 20-year term. That man would pay roughly |
| explanation of the basics, plus what the | | | | $8,000 a year for permanent insurance. That's |
| insurance agent isn't telling you! | | | | right--about $6600 more every year. |
| | | | |
| There are two broad categories of life | | | | That reserve in the permanent insurance can |
| insurance--term and permanent. The basic idea | | | | become a substantial over time, so they give |
| behind life insurance is that if you die | | | | you the ability to borrow the money held in |
| prematurely, there will be a pot of money | | | | reserve. This has spawned the use of |
| there to take care of your loved ones. That | | | | permanent insurance for needs other than the |
| pot of money is referred to as the 'death | | | | death benefit, such as a way to build a |
| benefit'. | | | | retirement nest egg. The 'ploy of the day' is |
| | | | that you should take all the equity out of |
| The cost of life insurance is based on your | | | | your home and put it into a universal life |
| age, your gender and your health. The | | | | insurance policy because it will allow you to |
| insurance company bases the premium on the | | | | build your wealth more quickly. (I expose the |
| risk that you will die. The older you are or | | | | fallacy of that argument in a future |
| the poorer your health, the more expensive | | | | article.) |
| the insurance will be. | | | | |
| | | | What your insurance agent isn't going to tell |
| The 'raw' cost of insurance goes up every | | | | you is that the commission on permanent |
| year because the risk of death increases | | | | insurance can be around 70% of the first year |
| every year. Term and permanent insurance | | | | premium and then maybe 5% a year on |
| approach the payment plan differently. With | | | | additional premiums. Commissions on first |
| level term, these increases in cost are | | | | year term premiums can be as high as 100%. In |
| spread out over 10, 20 or 30 years and the | | | | our example above, the agent will make about |
| premium is kept the same. If you renew your | | | | $5600 on permanent versus only $1400 on the |
| policy at the end of the term, your insurance | | | | term. This higher commission is a tremendous |
| costs will increase. | | | | incentive for agents to sell permanent |
| | | | insurance instead of term. |
| With permanent insurance, your premium stays | | | | |
| the same as long as you own the insurance, up | | | | The result is a huge conflict of interest |
| to age 100. That way, you shouldn't be in a | | | | between the needs of the client and the |
| situation where it becomes too expensive as | | | | desires of the agent. I would like to think |
| you age. Initially you pay more than the raw | | | | that every agent will always do what's in the |
| cost of insurance and that money is kept in | | | | client's best interest, but we know that's |
| reserve. Once the raw cost of insurance is | | | | not the case. And most agents are convinced |
| greater than your premium, the difference is | | | | that term is a waste of money and that |
| taken from the reserve. | | | | permanent life insurance is the better |
| | | | choice. I don't. |
| The difference between Whole Life, Universal | | | | |
| Life and Variable Universal Life has to do | | | | I believe that permanent life insurance |
| with the return you earn on that money while | | | | should only be used in special situations, |
| it's kept in reserve. Whole and universal | | | | such as to cover estate taxes due at death. I |
| essentially pay interest while variable | | | | do not think it should be used when you want |
| universal allows you to 'invest' that reserve | | | | to provide for your family in the event of a |
| in mutual-fund-like accounts. | | | | premature death. I don't think it should be |
| | | | used as a way to 'build wealth' or as a type |
| On the surface, it may seem that there | | | | of retirement plan. In my next article, I'll |
| shouldn't be a lot of difference between the | | | | explain why. |
| premium on 20-year term and a universal | | | | |