What Insurance Companies Won’t Tell You

Buying the wrong kind of life insurance is one of the major reasons people fail to become financially independent. The other major reasons: Investment procrastination, Lack of Financial Goals, Ignorance of what to do with money to accomplish those goals, Failure to apply tax laws to advantage.

Life Insurance Traps To Avoid:

• A policy that doesn’t use a current mortality table. Many premiums are still being paid and policies are still in force based on mortality tables drawn in the 70s, which are all out of date, as life expectancy has risen over the decades. If you have a policy that’s based on an old table, you may be paying as much as 300% more than you need. Ask your insurer when the mortality tables for your policy were drawn.
• Cash surrender policies. Many consider them one of the greatest financial frauds in history. People are convinced by insurance companies that these are worthwhile because the company gives you a level premium on a whole-life policy and you can borrow your cash value. That may sound attractive. Reality: Insurance is based on a mortality table, and all the funny banking in the world won’t change that. The companies are willing to give you a level premium on a whole-life policy because your are paying until age 70. Then you can underpay when you don’t need the insurance anyway. Parallel: Would you go to the phone company and say: “Could I overpay my bill for each of the next 30 years for the privilege of underpaying at age 70?”
• On the cash-value side, you would never go to a bank that takes away everything you deposit the first year and then charges you to deposit money in the account. Then if you want to borrow, it charges a % for your own money. And if you die, the insurance company can keep the money. No one would open that kind of bank account. Neither should you accept such terms from an insurance company. Principle: People are willing to believe they can combine a living estate and dying estate. In reality, they are incompatible. Insurance should be bought as an umbrella in case you die before building up a life estate. Don’t ever consider it a method of building up your net worth (or “living” estate).
• Dividend participating policies. These are not really dividends. They are partial returns of an overcharge that you paid the insurance company. Again, people are victims of the belief that they can combine nest eggs for life and death. A controversial report says that if you keep a policy for an average period, you would receive 1.3% of your money. That means it takes 55.4 years for your money to double. Worse: if you hold the policy under five years, you could have as high as a negative 18% interest. Holding for 10 years could produce a negative 4%. Easy way to check: consult the payout table that comes with your policy and compare the amounts you have paid the insurance company to the “living benefit” that you would receive at any given point in time. For most of the policy life, your payments far exceed the “living benefit”.
• Insurance that’s in your pension. The incidental costs are much higher than most people are led to believe. After all, your pension is for living, not for dying.

Better methods of insuring:

If you can pass a physical, you get a lower price per thousand on insurance if you switch to annual renewable term or 10-year deposit-level term.

Which to choose: If you know you are going to need insurance for the next 10 years, there is merit in the 10-year deposit-level term, since you premiums will be level for 10 years. However, realise that you are being overcharged in the beginning and undercharged at the end. But by making a deposit, you do get a discount on the rates you pay.

Best: If you believe you will soon start making enough to take care of your family out of your living estate (the money you build up out of investments over a lifetime), you will want to drop your insurance incrementally as your estate grows.

Insurance should be viewed as a way to buy time before you build up your own future.