What We Should Have Learned In School — Life Insurance
Welcome to the second episode in a series called What We Should Have Learned In School. Today we tackle the area of life insurance? “Life insur-what?” Exactly, you probably do not know much about it, and most of what you know about it is probably wrong.
First off, I believe that life insurance is actually mis-named. It should be called “income protection.” Gentlemen, let’s say your wife or girlfriend were sitting next to you and someone asks you how much, in dollars, they are worth. Obviously, you know that any answer that does not contain the word “priceless” is the wrong one. Nobody can put a dollar amount on their heads or the heads of your children.
The purpose of life insurance is to protect your most valuable asset to your family — your income. Life insurance is not an investment tool. The key to purchasing insurance is to get the maximum coverage for the lowest monthly price.
SIDE NOTE: If you have a spouse, kids and significant debt, but no life insurance — SHAME ON YOU! You are not taking on the responsibility of making sure your family is financially protected in the event you or your spouse passes away. This is going to sound harsh, but I’m all about tough love. You need to get your butt out there and get yourself protected. But before you do… read on so you know exactly what to get!
There is one and only one type of insurance that accomplishes the most coverage for minimum dollar. And it is called Term Insurance. Many, and I mean MANY, insurance sales representatives will attempt to sell you over-priced insurance while calling it an investment. These fall under Cash Value insurance: Whole Life, Variable Life or Universal Life. Every single one of these are horrible investment strategies. Cash Value benefits the company and their sales force way more than you — the client.
Anything other than Term Life insurance is a RIP-OFF!
To illustrate this further and get you a little passionate about my passion (passion everywhere!), I am going to use something I have dubbed the Four Funny Banking Rules of Cash Value Life Insurance. And I don’t mean “haha funny” — I mean funny as in strange. Enjoy!
Out of what’s being sold, about 86% is Cash Value and 14% is Term. So, if we just talked about Cash Value being the worst, why do so many families own it? One reason: charismatic sales people who want to make tons of money.
The main difference is this:
Term – just protection (similar to auto, homeowner’s, renters, etc.)
Cash Value – Protection plus Savings Account (for retirement supposedly)
To make this easier, let’s take life insurance out of the picture. Pretend that I am a bank.
The Bank of Weirdo
Now, you’re going to invest $100 a month into my bank. You want to build up a nice savings account. Well as you’re banking with me, you start to notice these weird rules (four, to be exact) associated with my bank.
There is no money in your account in the first 1-4 years.
Let’s say that it’s been about three years. Saving $100 a month, you assume that you have about $3,600 in the bank. You walk in, so up to Suzie the Teller and tell her you need to get some money out. Maybe you lost your job and are using it to buy Christmas gifts; emergency house repairs; or even an unforeseen hospital visit.
Suzie the Teller tells you, “Well John (maybe your name is John… I don’t know) we actually put in that really nice crystal chandelier and I had to give myself a raise this year. We used your money to do those things so there is actually no money in your account right now.”
Would you be happy with my bank at that point? I assume NO.
They will guarantee you a minimum rate of return (ROR) of 2%-4%.
First of all, if you ever find a bank that gives 3% or more in a savings account, please leave the name and address in the comments section and I will visit it. I’ve never seen nor heard of one… ever.
But let’s say I run a rare bank and am giving you 4% ROR. Well, what’s 4% of zero (Rule #1)? Before you must out those magic calculators, anything multiplied by zero — is ZERO.
It doesn’t matter what kind of ROR I am giving you if no money is building up in your account. Not to mention, that if you are not getting AT LEAST 4%, you’re money is not even keeping up with U.S. inflation! You are LOSING purchasing power at the bank! Visit the earlier post about the Rule of 72 to learn how rate of returns affect your investment.
Would you be happy with my bank at that point? Probably NO.
Borrow your own money at 6%-8%.
After 1-4 years (remember Rule #1) you might have a little bit of money built up… maybe… hopefully. So you come back in to the bank with statement in hand that shows a current balance. Finally! After all that waiting! You go back up to Suzie the Teller… she’s still working there (of course she is, she’s giving herself a raise every year!). You tell Suzie not to pull that crap she pulled on you a few years ago. You have an emergency and need to get that money out right now.
Suzie says, “Whoa John, calm down. I just need you (and your spouse) to come back in, sign the bottom of these forms and you can borrow your own money at 6%-8% interest.”
Wait a second. If you have to borrow money, does it really make yours to begin with? Answer: NO.
And if I’m charging you 6%-8% interest, but only giving you a 2%-4% ROR… does that make any sense?!
Would you be happy with my bank at that point? I’m guessing NO.
Now people… you’re smart (I hope). If this was happening to you, you would be running out of the bank with your money at this point. Putting it under the mattress is better than this! Maybe I’m your best friend and you really want to give me the business. Perhaps you’re afraid of change. If those three rules didn’t send you packing, this last one will.
If you die, your family loses $$$.
In this illustration, you (John) have two kids, Charlie and Mary. You pass away unexpectedly all the while still saving $100 a month in to my bank. In your will, which everyone should have, you said that you want your kids to come in to the bank and get the money out if you pass away.
So Charlie and Mary stroll to the bank after your funeral and sit down with me, Weirdo… the owner.
“Mr. Weirdo. I am sure you heard our parents passed away. It was in their will for us to come in a get the money out of their savings account. So we are to get that,” says Charlie.
I sit up at my granite-topped desk and say, “Kids, your parents were very loyal customers of ours. We’ve grown to care about you and your family so much. I am sorry for your lose and understand that mourning takes a toll. We don’t want to do anything to add to that pain. And we know that families tend to fight over money in situations like this. So because we care about you guys so much, we are going to keep that money for ourselves so you guys don’t fight over it.”
I’m not even going to ask you if you’d be happy with my bank at that point.
But I will ask you this: would you open a savings account at a bank that did business this way? Absolutely not, right?!
So why do you think 86% of people are investing their money in a bank that does business just like this? Because the charismatic sales force does not take time to educate. The above rules are how the savings side of a Cash Value policy work! There are but a handful of companies that market Term Life 100% of the time and take time to educate clients on exactly what they are getting. Email me and I can provide you with that list of companies. You will be glad you did.
Remember this phrase:
Buy Term and Invest the Difference!
Long story short. Buy Term Insurance 100% of the time. It’s the most protection for the least amount of money. If you currently have Cash Value (consult the free downloadable guide above), then you need to switch to Term Insurance. Email me for a free quote on those income protection needs.