Wednesday, January 8, 2020
It really should be called "Death Insurance," but people do not like that name. But it insures the death of a private . Actually, what's insured is that the economic loss that might occur at the death of the person insured.
Those economic losses take tons of various forms, such as:
- the income stream of either "breadwinner" during a family
- the loss of services to the family of a stay-at-home-mom
- the ultimate expenses at the death of a toddler
- final expenses of a private after an illness and medical treatment
- estate planning insurance, where an individual is insured to pay estate taxes at death
- "Buy and Sell Agreements," during which life assurance is purchased to fund a business transaction at the untimely death of parties within the transaction
- Accidental death insurance, during which an individual buys a policy that pays just in case they die thanks to an accident
- Mortgage life assurance , during which the borrower buys a policy that pays off the mortgage at death - and lots of more.
Life insurance has been around for many years, and in some cases, has become a way better product. The insurance companies are ready to develop mortality tables, which are studies of statistical patterns of fatality over time...usually over a lifetime of 100 years. These mortality tables are surprisingly accurate, and permit the insurance companies to closely predict what percentage people of any given age will die annually . From these tables and other information, the insurance companies derive the value of the policy .
If you wanted to shop for $10,000 of coverage, and therefore the cost per thousand was $10.00, your annual premium would be $100.00.
Modern medicine and better nutrition has increased the anticipation of most of the people . Increased anticipation has facilitated a pointy decrease in life assurance premiums. In many cases, the value of insurance is merely pennies per thousand.
There is really just one sort of life assurance , which is insurance . meaning that an individual is insured for a particular period of your time , or a term. All of the opposite life assurance products have insurance as their main ingredient. there's no other ingredient they will use. However, the insurance companies have invented many, many other life products that tend to obscure the explanations for all times insurance. They also vastly enrich the insurance companies.
Term Insurance
The most basic life assurance is an annual renewable term policy. Each year, the premium may be a little higher as an individual ages. The All insurance companies designed A level premium policy, which stopped the annual premium increases for policyholders. The insurers basically added up all the premiums from age 0 to age 100 then divided by 100. meaning that within the early years of the policy, the policyholder pays in additional money that it takes to fund the pure insurance cost, then in later years the premium is a smaller amount than the pure insurance cost.
The same level term product are often designed for terms of any length, like 5, 10, 20, 25 or 30 year terms. the tactic of premium averaging is far an equivalent in each case.
But this new product caused some problems. Insurers know that the overwhelming majority of policyholders don't keep a policy for all times . Consequently the extent term policyholders were paying future premiums then cancelling their policies. The insurance companies were delighted because they need to keep the cash . But over time, they developed the concept of money Value.
Cash Value Insurance
With Cash Value insurance, some of the unused premium you spend is credited to an account tied to your policy. the cash isn't yours...it belongs entirely to the insurance firm . If you cancel your policy and request a refund, they're going to refund that cash to you. Otherwise, you've got other choices:
1. Frist. Use the cash value to shop for more insurance
2. Then, Use the cash value to pay existing premiums
3. you'll borrow the cash at interest
4. If you die, the insurance firm keeps the cash value and only pays the face amount of the policy .
So, does this cash value product make sense? My response is "NO!"
Cash Value life assurance comes in many other names, such as:
- Whole Life
- Universal Life
- Variable Life
- Interest Sensitive Life
- Non-Participating Life (no dividends)
- Participating Life (pays dividends)
Many life assurance agents and corporations tout their products as an investment product. But cash value insurance isn't an investment. And Investment dollars and insurance premiums should never be combined into one product. And investment dollars should NEVER be invested an insurance firm . they're middle men. they're going to take your investment and invest it themselves, and keep the difference.
Think about the methods that agents use to sell life assurance , and compare them to the other sort of insurance. What you will see is that life assurance sales tactics and techniques are ridiculous in comparison to other insurance products.
Would you ever consider buying a automobile insurance policy, or homeowners policy, or business policy during which you paid extra premium that the insurance firm kept, or made you borrow from them? But, curiously, life assurance agents are wildly successful convincing otherwise intelligent folks that cash value life assurance may be a good product to shop for .
And, 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. But cash value insurance commissions are often up to 100% of the primary year's premium, and handsome renewal commissions for years after.
But it isn't just the commission rate that matters. it is also the premium rates that inherit play. insurance is way CHEAPER than cash value insurance.
Here's an example of a 30 year old male, non-smoker, buying $100,000 of coverage:
Term insurance costs $0.50 per thousand for a premium of $50.00. At 100% commission, the commission would be $50.00.
Cash Value insurance costs $12.50 per thousand for a premium of $1,250.00. At 100% commission, the commission would be $1,250.00.
So you see that it might be easy for an agent to put his own financial well-being before the well-being of his client. He would need to sell 25 term policies to form an equivalent commission as just one cash value policy.
But, in my opinion, that agent would have violated his legal duty to the client, which is that the duty to put the client's needs above his own. The agent would even have to line aside his conscience.
My opinion is that life assurance agents operate from one among three positions:
1. Frist, Ignorance - they simply do not know how cash value insurance works.
2. Then, Greed - they know exactly how cash value insurance works and sell it anyway.
3. Knowledge and Duty - they sell insurance .
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