Modern medicine more enhanced nutrition has increased the life expectancy of the majority of folks. Increased life expectancy has facilitated a sharp decrease in everyday life insurance premiums. In several cases, the price of insurance is merely pennies per thousand. Modern
There‘s really only one kind of life insurance, and that‘s Term Insurance. That implies that somebody is insured for a particular time period, or perhaps a term. All the other life insurance products have term insurance as their main ingredient. There isn‘t any other ingredient they could use. However, the insurance companies have invented many, many other life products that are likely to obscure the reasons forever insurance. Additionally they vastly enrich the insurance companies.
Term Insurance
The foremost basic life insurance is definitely an annual renewable term policy. Every year, the premium is just a little higher as somebody ages. The insurance companies designed a level premium policy, which stopped the annual premium increases for policyholders. The insurers basically added up all of the premiums from age 0 to age 100 after which divided by 100. That implies that in the first many years of the policy, the policyholder pays in additional money it takes to finance the pure insurance cost, after which in later years the premium is lower than the pure insurance cost.
A similar level term product could be made for terms of any length, like 5, 10, 20, 25 or 30 year terms. The tactic of premium averaging is much a similar in each case.
However this new product caused some problems. Insurers understand that most policyholders don‘t keep a policy forever. Consequently the level term policyholders were paying future premiums after which cancelling their policies. The insurance companies were delighted simply since they got to stay the money. But as time passes, they developed the idea of Cash Value.
Cash Value Insurance
With Cash Value insurance, a portion from the unused premium you spend is credited for an account associated with your policy. The money Isn‘t yours... it belongs entirely towards the insurance company. In case you cancel your policy and request a refund, they‘re going to refund that cash for you. Otherwise, you‘ve other choices :
1. Utilize the cash value to purchase more insurance
2. Utilize the cash value to pay out existing premiums
3. You‘ll borrow the money at interest
4. In case you die, the insurance company keeps the cash value and just pays the head level of the insurance policy.
So, does that cash value product make sense? My response is
Cash Value Life Insurance is available in many other names, for example :
- Whole Life
- Universal Life
- Variable Life
- Interest Sensitive Life
- Non-Participating Life (no dividends )
- Participating Life (pays dividends )
Many life insurance agents and corporations tout their products as a good investment product. But cash value insurance Isn‘t a good investment. Investment dollars and insurance premiums should never be combined into one product. And investment dollars should NEVER be invested by having an insurance company. They‘re middle men. They‘re going to take your investment and invest it themselves, and keep your difference.
Take into consideration the methods that agents use to sell life insurance, and compare them to be able to other kinds of insurance. What you will see is life insurance sales tactics and methods are ridiculous when compared with other insurance products.
Can you ever consider purchasing a car insurance policy, or homeowners policy, or business insurance policy during which you paid extra premium the insurance company kept, or made you borrow from their store? But, curiously, life insurance agents happen to be wildly successful convincing otherwise intelligent those who cash value life insurance is an effective product to purchase.
Care to guess why insurance agents have aggressively sold cash value insurance and eschewed term insurance?
Commissions.
The insurance companies became vastly wealthy on cash value insurance. So, to encourage sales, they pay huge commissions. Term insurance commissions can vary from 10% to 50%, sometimes even 100%. But cash value insurance commissions could be as much as 100% of the very first year's premium, and handsome renewal commissions for a long time after.
But it is not only the commission rate that matters. It is also the premium rates that enter into play. Term insurance is FAR CHEAPER than cash value insurance.
Here is an example of the 30 year old male, non-smoker, buying $100, 000 of coverage :
Term insurance costs $0. 50 per thousand for any premium of $50. 00. At 100% commission, the commission could be $50. 00.
Cash Value insurance costs $12. 50 per thousand for any premium of $1, 250. 00. At 100% commission, the commission could be $1, 250. 00.
So you observe that it may be easy for the agent to position his own financial well-being before the well-being of his client. He would need to sell 25 term policies in order to make a similar commission as just one cash value policy.
But, for me, that agent would have violated his fiduciary duty towards the client, which happens to be the duty to position the client's needs above his own. The agent would also need to put aside his conscience.
My estimation is life insurance agents operate from one among three positions :
1. Ignorance - they simply do not know how cash value insurance works.
2. Greed - they know exactly how cash value insurance works and sell it anyway.
3. Knowledge and Duty - they sell term insurance.
Which agent do you wish to do business with?
How can I do know this stuff? Because I sold cash value life insurance early inside my career.
When I started being an insurance agent in 1973 I knew absolutely nothing about how life insurance worked. The insurance company educated me in to sell whole life insurance, and also to discourage clients from term insurance. But, after some time of reading and research, I learned that cash value insurance is really a bad deal. I began to sell only term insurance. I refused to line aside my conscience. I additionally went to some early clients and switched their policies from cash value to term.
The insurance company fired me for the decision.
I found a brand new insurance company which sold term insurance and likewise paid high commissions. I made a very good living selling term insurance, so I do know it could be done.
So, while you shop forever insurance, please accept the advice in an old agent. Never, never, ever buy cash value life insurance. Buy term insurance.
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