Life insurance is complex. People purchase policies all the time and aren’t properly informed of what they’re buying into, or the person who sells the policy to them explains it all in detail but that was 30 years ago.
I had a client call me this week and talk to me a problem his mother was having. She’s been paying $200 a month for over 25 years for a what she thought was a permanent life insurance policy, but she received a letter in the mail saying her premium was going to increase to $600 per month or she’d lose her coverage. She doesn't have much money and this was the only way she was able to leave something for children and grandchildren.
Now she’s devastated.
This is not an isolated incident and it’s something we need to talk about.
Life insurance is complex. People purchase policies all the time and aren’t properly informed of what they’re buying into , or the person who sells the policy to them explains it all in detail but that was 30 years ago. How can you be expected to remember everything they said? So I’m going to give you a quick history of life insurance.
Traditionally, there was only one type of life insurance, whole life insurance. You paid one fixed amount and you had a guaranteed death benefit. The whole life insurance companies knew no matter what that one day they’d have to pay your death benefit, so there was a higher monthly cost.
Then, in the 1970s, Arthur William, a Pennsylvania gym teacher, had his father pass away unexpectedly. He had a whole life insurance policy that left his wife around $25,000. The problem is Arthur knew that was no enough for his mother to live on and realized what his father should have bought was a term life insurance policy.
Term Life insurance has a guaranteed death benefit and a guaranteed premium, just like whole life insurance, but since it’s only valid for a certain period of time , such as twenty years, the companies know they’re not likely to have to pay that death benefit out to everyone covered by them. This makes it much less expensive. Arthur began campaigning and encouraging people to purchase term life insurance with the slogan, “But term, invest the difference.” Meaning you could pay a low cost term life insurance policy and invest the money you saved compared to a whole insurance policy into the stock market. This began popular phrase at the time, mainly because people believe that no matter what, if you invested you’d become a millionaire. Of course, now we know better.
Once everyone began buying into term life insurance, the insurance companies realized they were in trouble because they weren’t getting the same income they received from the whole life insurance.
So they invented something new: universal life insurance.
It’s less expensive and allows you to invest in the product. The big difference is that it’s an annually renewing policy so the price would go up exponentially as you got older. To compensate for this, they show you a chart up front and estimate a consistent price you can pay through your policy as long as the market performs as expected. You could pay $200 a month, which is much more than you need to pay when you’re younger and that extra money would be invested and applied to the higher amount you would have been required to pay when you’re older.
The problem is, the chart and estimations they made for the market growth that your $200 payment depended on assumes the market would grow at 12%. In reality, the market didn’t perform anywhere near that well. The charts were complete nonsense. Now, decades later, everyone who bought into these is finding their prices are increasing because they’ve eaten up all the money that had been invested in the past.
It’s important to me that you understand the moral of this story.
It’s okay to buy universal life insurance. There are times that it’s useful, just like any other financial tool. The problem with it is that it was sold poorly to tons of people. You need to understand what you’re buying into.
If you have a life insurance policy and you don’t know how it works, read your documentation or call the company for a copy.
If you have questions you can even call me or come by for afree consultation. We’ll sit down and talk about what the best life insurance policy is for you. If you’ve bought into a policy that turned out to be something you didn’t expect, we can help too.
Don’t get put into a position like my client’s mother and put yourself and your family at risk.
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