One of my client's wives paid me a visit to ask about life insurance, a product I was well acquainted with. She told me that she and her husband were visited last night by a life insurance agent. "Jan, what did he try to sell you?"
"A $90,000 whole life policy with an annual premium of $500. Is that okay?"
Knowing that few people really understand life insurance, I asked her if she really understood what the agent was talking about.
"I thought I did last night," she replied, "but when I woke up this morning, I wasn't so sure. That's why I'm here. You once told me to never buy life insurance unless I talked to you about it. Well, I'm here. Could we chat about it?"
I was glad that Jan was here instead of Mark. I have learned that it is much easier to talk to women about life insurance than men. Women seem to better understand the financial consequences of their spouses' death, especially if they are mothers. Most men, however, don't want to face life insurance because they think that they will never die. Women know better.
I was no stranger to the murky world of life insurance. Throughout my 20 years as a CPA, I'd often locked horns with insurance agents and financial planners who wanted to sell garbage life insurance products to my clients. In my role as a CPA, I always believed that it was my job to act as a mother hen and protect my clients from the wolves.
I began by asking Jan a question that zooms to the heart of the matter. "Tell me Jan, why are you buying life insurance? What do you hope to accomplish?"
She answered, "To protect me and the children in case Mark dies."
That quickly established the fact that Jan knew about the key issue: that life insurance has but one purpose: protection in case disaster strikes.
Then I asked her another question. "Just suppose that you knew for sure that Mark was going to die tomorrow. How much life insurance would you buy on his life ---$90,000 or $450,000 --- assuming the premiums were identical?"
She looked at me as if I was crazy. "I'd buy the $450,000 policy. Who wouldn't?"
I then gave Jan a quick education about life insurance, explaining that there are only two kinds of life insurance, term and cash value. The problem is knowing which one of them is the better buy.
Term insurance is pure insurance ( protection) coverage. If you pay the premium and die , the insurance company will pay the face value of the policy to your beneficiary. It is available to age 95 and can be purchased yearly, or on a guaranteed level premium basis for 5,10,15, or 20 years. The product is uncomplicated and very inexpensive. The premiums, however, do increase each time the policy is renewed since the insured has grown older.
Cash value life insurance (sold as whole life, endowment, straight life, permanent life, universal, and a zillion other names) is the second type. It differs significantly from term because there is a savings or investment feature attached--the cash value. About 75% to 80% of every premium dollar goes to this cash value "kitty" and the remainder pays for the actual life insurance protection. These policies typically last to age 100 and the premiums remain level for one's entire life.
Thus, in one slick package, a cash value life insurance policy claims to accomplish two worthy goals: death protection and family savings. It was my job to convince Jan that cash value insurance fails miserably on both counts and that she must, for her and her children's sake, buy pure term life insurance and nothing else.
"Jan, there are two reasons why you must not buy that whole life policy or any other cash value product. First and most importantly, cash value life insurance is anywhere from five to ten times more expensive than the equivalent amount of term insurance. It's like paying $75,000 for a $15,000 automobile just because you went to the wrong dealership."
To keep their customer's attention away from the high cost of cash value, agents focus their sales spiel on the investment feature, usually with the aid of reams and reams of incomprehensible computer printouts. This sales tactic has literally duped the American public out of trillions of dollars in the last 150 years, ever since cash value was invented.
"Jan, how much time did the agent spend last night talking about the actual insurance protection versus how much money you'll earn from the cash value policy?"
She thought a bit before answering. "Well, he spent the whole evening going over a bunch of computer printouts that showed us how rich we'd be in fifty years when we retire, and how much we could borrow from the policy if we ever needed a loan."
"But what did he say about your protection needs?"
"Come to think about it, hardly anything at all. After we told him that we could afford a $500 yearly premium, he looked in a book and said that he had found a great $90,000 whole life policy that we could afford. But about protection, he really said very little." I could tell that she was starting to bristle in anger, a sign that I was doing a good job.
I then told Jan that people with children living at home should have, as a rule of thumb, about eight to ten times their yearly gross income in life insurance protection. For Mark and Jan, that translated into at least $475,000. The agent who met with them should have figured that out and done his utmost to assure such adequate protection.
"You see Jan, that agent's sole emphasis should have been on your financial protection in case Mark dies tomorrow, not about making you a rich lady in 50 years. The agent's decision to sell you the anemic whole life policy would literally rob you and your kids of $385,000 if Mark dies tomorrow."
"But Mark is not going to die tomorrow. Don't say that!"
"Jan, you don't know that. He could die tomorrow or in a week from any one of a thousand and one different causes. And so could you or I. That's why you must be fully protected right now. Life insurance is a today need."
I continued..."Jan, remember when I told you that there were two reasons to avoid cash value life insurance?"
"Yes."
"You told me Jan that the agent spent most of last night talking about the wonders of the cash value investment. Now I am going to give you the real scoop about that." This one always puts the final nail in the cash value coffin.
"The cash value," I continued, "is not like an ordinary investment such as stocks, bonds, or a bank savings account."
"But the agent said it was just like a bank savings account..."
"It resembles a savings account about as much as a shark resembles a goldfish. Tell me Jan, what do you think happens to the cash value---the promised pot of gold---if Mark dies? Who gets it?" The fun starts...
"That's easy," she replied, "I do...it's our money...our investment...right? Marsh...tell me I am right!"
"Sorry, you are wrong. If Mark dies, the insurance company keeps it. That means that all that extra premium you paid for so many years goes up in smoke."
"So what do I get if Mark dies?"
"You get the face amount of the policy...but you could have gotten that for a fifth of the premium with a term policy."
"Marsh...you can't be serious. In my worst nightmare, I would not expect something like this. Are you sure?"
"Very. But if you want some proof of your own, get the book What's Wrong With your Life Insurance by Norman Dacey. That's just one of many books in the library that echoes what I have been yapping about. Don't think I am the Lone Ranger on this."
Apparently she got fed up. Her voice rose as she said, "The agent never said word one about any of this! Are you telling me that he bent our ears off last night just to sell us a chump change policy that will leave me seriously underinsured just so he could make a bigger commission...and that they steal my investment to boot if Mark dies?"
"That about hits the nail on the head. And one more thing...when you tell the agent you want a term policy instead, expect another visit from him. Be aware that they are very well trained in changing minds. Plus, you might want to shop around for the best deal. Even among term policies there is a wide variance in price."
