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October 23, 2014 at 07:49 AM
Even though there’s a polarizing debate among life insurance agents about the role of pure protection life insurance, the products in that arena are still growing in popularity. Some agents continue to be attached to the notion that whole life insurance is a good product for the consumer. The truth is, for the huge majority of the population, whole life doesn’t make much sense. There are a few reasons for this: it’s not a solid investment, it’s too complicated for the GenX digital consumer, and, at its foundational level, whole life is not meant for those that actually need life insurance.
It shouldn’t be a surprise that whole life insurance premiums can be as much as 10 times the cost of a term life insurance policy carrying the same death benefit. Life insurance is largely purchased by the middle class: consumers with mortgages, bills and kids to take care of. One of the most popular advertising tactics in the life insurance world is to compare the cost of a policy with a daily trip to the coffee shop. In reality, it will take more than cutting out that daily trip to afford a whole life insurance policy.
According to a recent article in the Wall Street Journal, the Society of Actuaries found that 20 percent of whole life policies are terminated in the first three years and 40 percent are terminated in the first 10. Consumers either don’t see the same value that a financial advisor does, or these policies are just too expensive.
In the words of Will Rogers, “The quickest way to double your money is to fold it in half and put it in your back pocket.” In the case of whole life insurance, this isn’t too far from the truth. Most times, a whole life insurance policy eats away a client’s returns in the first three or four years of the policy’s inception to cover agent commissions and company fees. In the majority of cases, clients can expect reasonable returns from between 2 percent and 4 percent. According to Blease Research, annualized cash returns from companies between 1991 and 2011 fit into this range. Personally, when clients ask me about the living benefits of term or no lapse universal life policies, my answer is that the living benefits are in the savings.
