Friday, February 18, 2011

Slander Lies and Insurance

Slander, Lies and Insurance

If you are currently in the market for life insurance, you have seen the epic battle; Permanent Life versus Term Life Insurance. You have heard the commercials; “I can get you a quote for $X/ month for 10 years!” “Term is cheaper than Permanent Life Insurance; Permanent Life is a rip off!”

This is the battle that polarizes agents, experts and clients. Many famous TV personalities and Radio celebs say that Term is cheaper. Why challenge the experts? They should know what is best for us, right? And, we all know the nefarious insurance companies are attempting to rip us off with their ubiquitous, intrepid agents full of avarice forcing us to buy these “rip off” polices. Once we purchase one of these rip off contracts, they walk away with a large commission! While hearing the vituperative rhetoric, it makes it extremely difficult to provide a good fit for your family. Quotes like: “Term is cheaper than Permanent Life Insurance.” Is this really accurate? Let us explore the validity of this claim.

Term is Much Cheaper than Permanent Life

This statement is correct under these conditions: First you know EXACTLY when you are going to die. Secondly, you die during the term period. Otherwise, this statement is false. If we all know when we are going to die, why would we buy life insurance? If you knew the exact date, time, minute, second of your death; the need of Life insurance would be unnecessary. A Muni-bond with a tax free payout at death would be the product of choice.

Since we do not know this date when the Grim Reaper will be knocking on our door, one must purchase life insurance. It is not the probability of IF you are going to die, but salient question is when? Here is an absolute FACT: If you take the average life expectancy for a male from age 30 to age 80, Term Insurance is not cheaper than Permanent Life insurance.

Term Insurance

Term Insurance is a form of life insurance that is aggressively priced for a period certain: e.g. 10, 15, 20, or 30 years. However, the actuarial engineering of the policy is still based on the endowment or payout of the policy at the age 120. Based on the term policy type (10, 15, 20, 30 yrs), the insurance companies “discount” the rate further. So in comparison a 10 year term is cheaper than a 15 year, 15 year cheaper than a 20 year term, and etc. The rates are low during the term period simply because the probability of death is lower. And, the younger the age of the insured, the cheaper the rate simply because they are further from the eventual walk to glory. Think about it: The odds of a 30 year old dying in 10 years are lower in probability than a 30 year old dying in 100 years. That is the real reason for term being “cheaper”.

What happens if you don’t die during the term period? The rates ramp up exponentially, since the insurance company “discounted” the rates during the term period. Each year after the policy term has expired; the rates will increase after the term period is expired.

Permanent Life Insurance

Permanent Life Insurance is priced up to age 120. If you live to be age 120, the life insurance company will pay you the face amount, Tax Free! The premiums are averaged out based on the age of the insured at the time of purchase up to age 120. Since the probability of death at age 30 is lower than at age 80, the cost of insurance is cheaper. And, since the premiums are the same during the age of entry up until age 120, the overpayment is placed into a cash value account. This cash value account has a farrago of options on how this capital is expanded and grown depending on the policy type. Some examples are the use of equities, bonds, fixed options, Index options, participating dividends, etc. This cash amount is also allowed to grow tax deferred OR Tax free. The salient point with permanent life insurance is this: The rates are the same throughout the life of the insured.

So when someone states emphatically, “Term Life Insurance is cheaper than Permanent Life Insurance”, well if that is true, then 10 year term is cheaper than 20 year term, so does that make 20 year term a rip off? Keep in mind, the comparison is only done DURING the term period.

Here is further proof of the sophistry of this debate. Here is an example of a 30 year old male purchasing $100,000 of Term insurance for 30 years-He would pay approximately $327/year for 30 years. Let’s assume the male dies at age 80. He pays $222,878.00 for 50 years of life insurance and his beneficiaries would receive $100,000. He paid MORE in insurance that he put into the policy.

Let us take another 30 year old male. He purchases a $100,000 policy, but it is a permanent life insurance policy (Whole Life). His premium per year is $1,143 per year to age 120. If he dies at age 80, he would have paid $58,293 in premiums, AND his beneficiaries would receive $142,110 as a death benefit. You are saying, “Why is his death benefit now at $142,110?; see the next installment of this topic!

With a review of inequalities; we can simply deduce that $222,878 is GREATER THAN $100,000. We also can deduce that $222,878 is GREATER THAN $58,293. Finally we can deduce that $58,293 is LESS THAN $142,110. Term insurance is NOT cheaper for the average person living the full life expectancy.

In closing, now that you are armed with this new found info, does this make Permanent Life insurance better than Term Life? Absolutely not! Term Life insurance has a very good use, just like Permanent Life insurance. It is all about dealing with an expert who understands when to use these tools to assist you in your investment objectives.