Understanding If Your 'Permanent' Life Insurance Is Really Permanent

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.
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.
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.
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.

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.
It’s okay to buy universal life insurance. There are
times that it’s useful, just like any other financial
tool.

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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