Bank on Yourself by Pamela G. Yellen

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Published in 2009.

Here is a little interesting conersation between the couple Paul and Katie and their advisor Jack.

“Frankly,” Paul said, ” I’ve been a little uncomfortable about this insurance business ever since Rob mentioned it. A lot of people said that life insurance is a bad investment.”

Jack explained, “A B.O.Y life insurance policy isn’t an investment at all, thankfully. If it was, you’d have to worry about whether your money was even going to be there when you needed it. You made it clear to me that you feel you already have enough of your money at risk in investments you can’t count on.

“Let me ask you both a question : if you were buying a life insurance policy for the reasons most people buy them – the death benefit, in case something happens to you – and you wanted to get $250K worth of coverage, for example, you’d want to pay the lowest premium possible for it, right?”

Paul spoke up,” Yeah. Why would we pay any more than we had to?”

“That’s exactly how almost everybody thinks about life insurance – they want the maximum death benefit for the least amount of money. But I’ll bet you didn’t know that buying a policy that way causes your equity or “cash value” in the policy to grow at the slowest possible rate.”

“When you borrow against your cash value, the money doesn’t acually come out of your policy. It comes out of the company’s general fund. Life insurance is a kind of group effort- all the money is pooled together. The difference is that when you borrow against your cash value in your policy, you’re the place where the money is being loaned. Loans the insurance companies make to any source will ultimately increase the cash value of all policies, including yours. Either way, your cash value will continue to grow at the same preset and guaranteed amount every year.

Katie chimed in, “Suze Orman says the same thing on TV. She says that you should buy term insurance because it is cheaper and if you invest the difference in the stock market, you’ll come out ahead.”

“Most of these gurus including Suze and Dave, say you shouldn’t buy whole life insurance because it is more expensive than term life insurance. But Suze admits in her books that the reason term policies are so much “cheaper” than whole life policies is that the insurance companies know there’s very little chance you’ll ever receive any benefit from them. In fact, a study done by a professor of insurance at Penn State University showed that fewer than 1% of term policies ever pay a claim. Is there anything more expensive than paying for something you most likely won’t get benefit from?

If you look at it this way, no financial expert I’ve ever read or heard tells people to rent their home if they can afford to buy one, because every penny you pay for rent is money out of the window. Yet buying a term insurance is just like “renting” insurance and 99% of the time, you’ll have to zip to show for it.

The type of term policies most experts typically recommend don’t even come with any protection against inflation. This could result in a fianncial suicide. Let’s say you buy a 20 year term policy at 40 years old, with a $250K death benefit. If inflation averaged only 4% a year in that time, how much of that $250K do you think you’d lose?

Paul ventured a guess. “Maybe 30%?”

“Actually the term policy would lose 56% of its value. More than half! So you might not end up getting anything close to the financial security you signed on for. And what happens if you outlive the 20 years term of the policy, as the insurance company knows you most likely will? “Then every penny you paid is down the drain,” Katie answered. “But that’s the point of insurance, isn’t it? You spend money for protection that you hope you’ll never need.

Suze’s solution is to get a term policy that guarantees you’ll be able to continue renewing it, even if your health has slipped. What she doesn’t mention is that the premiums for those kind of policies get so high that most people in that situation are forced to drop the policy, just when they need the protection the most.

Katie laughed, “It sounds like they call it “term insurance” because it is really designed to terminate before you do!

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