For those of you that have ever had the “pleasure” of sitting down with an insurance agent, you may have fallen victim already (don’t get scared, you can fix your situation still). Those that have NOT, heed this warning!
Now that I have your attention, I want to share with you my background. You see, I’m an insurance agent myself, and I’m going to let you in on an industry secret.
Insurance agents are told by their home offices that they need to sell life insurance and tons of it, or they can kiss their careers goodbye.
Out of this fear mongering most agents will “sell” the cheapest policy they can to their clients, which up front, is always term insurance. The home offices love this because of the following information…
In the spring of 1993, Penn State University completed a study regarding the fate of term life insurance policies. The study includes over 20,000 term policies with an aggregate face amount of $4,000,000,000. It includes 1-5 year, 10 year, 20 year, and term to age to age 65 contracts which contained renewal and/or conversion features.
Here are some interesting results of the study:
1. More than 90% of all policies are terminated or converted.
2. 45% of all policies are terminated or converted in the first year.
3. 72% of all policies are terminated or converted within the first 3 years.
4. The average duration before termination or conversion is 2 years.
5. Less than 1 policy in 10 survives the period for which it was written.
6. After 15-20 years exposure, less than 1% of all term life policies are still in force.
7. Only 1% of all term insurance resulted in death claims.
Considering the above findings, the odds are 100 to 1 against term insurance ever being a death claim!
So what should you make of this study? Term Insurance is about as close to a guarantee of 100% profit to the insurance company as possible!
Does this mean that I don’t believe in term insurance? Absolutely NOT! Term insurance definitely has appropriate uses such as covering a mortgage or paying off debts and should be purchased if that is all your budget permits. It is always better to have something than nothing.
When evaluating your needs for life insurance, permanent insurance should be considered.
A sad fact is that many insurance agents don’t fully understand the benefits of permanent insurance, which is the other kind of life insurance. I’ll admit that I was one of them my first few years in this business!
Permanent insurance comes in a few different varieties, the kind you choose depends on your goals and risk tolerances. All permanent policies build up cash value with interest (and tax deferred growth), can be used as collateral on a loan, cannot be raided by creditors in a lawsuit, and passes tax free to your heirs. Some policies will even pay dividends!
What about buy term and invest the difference?
That philosophy can work if you are disciplined enough to consistently invest each month. The problem is most of us will choose to spend that money on a new car, vacation, or a Nintendo Wii instead of depositing it into an investment account. And even if you are the disciplined type, market returns are never guaranteed…the returns in a cash value life policy are guaranteed!
Permanent insurance should be the fixed asset that is part of an overall financial plan including other investment options.
What about the cost of permanent insurance?
Permanent insurance may be more expensive up front as compared with term insurance, but when you compare the long term costs along with the effect on your net worth, term is the worst option.
There are also ways to “find” money by repositioning spending and making changes to current budgetary items. I routinely help people to free up anywhere from $50 - $500 per month without making a single sacrifice to their current lifestyle or asking them to spend any extra out of pocket.
What do you do if you have already purchased a term policy?
Check to see if it has what is known as a conversion privilege with your insurance company. This feature will allow you to “convert” all or part of your term policy into a permanent policy without having to go through another exam or prove that you can qualify for coverage. Many companies will also give you a credit of your term premiums toward the new permanent policy.
If your policy does not have the conversion privilege, check to see how old your policy is. Depending on the age of the policy, it might make sense to completely replace it with permanent or simply supplement your term policy with permanent coverage.
Before you make any changes to your current coverage, you need to re-evaluate your wants and needs with a trusted, knowledgeable professional!
For a free, no-obligation consultation contact The Net Worth Doctor.
Jason Hornung – The Net Worth Doctor
www.thenetworthdoctor.com
Jason@thenetworthdoctor.com
1-866-514-8884 Toll Free
520-514-8884 Southern Arizona Local
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