“I Help People Make Smart Decisions About Their Money”

I will not try to settle the long standing battle that takes place between Permanent Life Insurance and Term Life Insurance but I will raise a few points that are key to making an informed decision when buying life insurance.One thing to think about is that there are thousands of insurance companies out there and if you are getting advice from a talking head on TV,  you can assume that the complexity of permanent life insurance and the variations among 1,000’s of companies, some A+ rated and others not, would make anyone a little hesitant to recommend it without guiding you to a specific company and product. These tv and radio experts are probably doing a service to the average consumer by guiding them to the most basic type of insurance.  It doesn’t hurt that this stance also provides more opportunities for advertising as well. The financial services industry has would rather sell you a mutual fund than insurance because that’s how they make their penny.Third, as the Wall Street Journal notes in Stocks in Longest Funk Since ’70s, stocks have historically gone through long periods with little growth.   

Over the past 200 years, the stock market’s steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.         

I put that in there to make the simple point that the “buy term and invest the rest” mantra is not always right for everyone unless you own a crystal ball. People still think that stocks owe them something because they were so good to us in the 90’s. So many people still imagine that as Suze Orman says in her extremely influential book “The 9 Steps to Financial Freedom”, that “9 percent was being conservative”. I bet a lot of people who are today getting less that 3.5% on a ten year t-bill might laugh at this but it was originally published in 1997 and revised in 2000 and things had been pretty rosy.  Now her assumption about what is conservative has been reigned in a bit to 5%, quite a reality check. Remember the Beardstown Ladies who “merely goofed when calculating their annual returns” and had to revise their numbers down to the point that they underperformed the Dow. My point being that assumptions about how easy it is to make a fortune investing in the stock market abound and it just isn’t quite as easy as it sounds. The article that follows aims to say that term insurance is a better value than permanent insurance. A couple of highly suspect assumptions are made. The first is that the client lives till 87, a full eight years longer than the current average of 79.4 and that it would be more wise to have the client have her inheritance go from $2,000,000 at age 65 to $672,465 at age 66. So ask yourself if you were 66, would you rather know that if you didn’t wake up the next day that your heirs would get $2,000,000 or would you rather they got $672,465? Sure the $672,465 may grow to be more if you make it to 87 but if you happen to be average like most people it will just grow to $1,331,434. The Orman article follows. 

And the Financial Fight Goes on… If you are still with me, I’d like to get back into the ring for a little longer and continue comparing term insurance with the other contenders. In one corner is the investment type of life insurance known as universal, whole life, or variable life. And in the other corner is level term insurance. My guess is that many of you would be tempted to place your bet on the investment insurance because of everything you may have been told about it in the past.But before you lay your money down, let’s walk through a scenario of what a healthy 35-year-old would pay on an investment insurance policy, such as universal life, versus a 30-year level term policy. My friends at Accuquote tell me at the time of writing this article that a $2 million universal life policy would run $11,640 a year, compared to the $1,945 for the 30-year term policy. Now at the end of the 30 years, assuming a policy contract with a 4 percent guaranteed rate of return, that universal life policy will have built up a “cash value” of nearly $430,000. Sounds great, doesn’t it? But wait a minute; before start celebrating, ask yourself this: if the insurance company is guaranteeing you 4 percent yearly, how come when you do the math $430,000 appears to represent an actual yearly return of only 1.4 percent? Did that hit you where it hurt? If you invested $11,640 a year for 30 years at 4% tax free, you should really have $653,000, not $430,000. What’s going on? The reason you have $223,000 less is that the rate of return you were quoted is before they subtract all the mortality charges, fees, and commissions that are part of the insurance policy. And don’t forget that as you get older the mortality charges go up and up and up – meaning your return will go down and down and down.But here’s where it gets really interesting. If you stuck with the cheaper term insurance, then invested the difference in the two policies on your own – we’re talking a yearly difference of $9,696 – you could do a whole lot better. Let’s assume that over the next 30 years you could easily earn 5 percent a year investing in tax-free municipal bonds. At 5 percent tax-free, investing the difference between the term and “investment” insurance policies would generate a $672,465 pot at the end of 30 years. Now most likely at the age of 65 you will still not need $2,000,000 of insurance. Your kids will be financially independent, hopefully your home is close to being paid off, your car is paid off, and you have ample assets in your retirement account. So with the $672,465 to replace your insurance, you should be just fine. But this is what you should really keep in mind: assuming you’re pretty healthy, odds are you’re going to live at least another 20 years. In fact, your life expectancy is going to be 87. And you need money to live on in those golden years, right?Well, if you just let the $672,465 continue to earn 5 percent a year for the next 22 years – without investing another penny – you’ll have $1,967,000. That’s very close to the $2,000,000 your family would have gotten if you had purchased the universal life policy at the age of 35.So why do I insist the term insurance is better? Remember my friends, for you to get that $2,000,000 in the universal life policy you would have had to continue to invest $11,640 a year for an additional 22 years. And if you are only getting the guaranteed cash value, we’re talking a mere $400,000 more. You get my point: stick with term for your insurance and do the investing on your own.        

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