Back when I was a rookie life insurance agent, and before I got the fee-only religion, I routinely heard things like “you know, life insurance is a good investment” from my industry mentors. The indoctrination and ongoing Kool-Aid life was intense, and persuasive, and sufficient to convince many a financial planning neophyte that whole life was investment panacea, a divine gift that coincidently happened to generate very large and ongoing commissions.
Shazam! In the thoroughly Gomer Pyle sense of the exclamation.
Such was the cult that for many it could overcome, at least for a time, other things that might be heard in agent training and conferences, such as “the essence of estate planning? The orderly conversion of estate assets into commission dollars!”
So-called permanent life insurance was and remains one of the most controversial of financial products. The “permanent” part just means the products are structured to remain in force for the whole of one’s life, to age 100 or 95 or some other lofty target of inevitable demise.
For those cold-hearted and sober analysts who ascribe to the “economic value of human life” approach – as does this humble but heartless contributor – you don’t need no insurance if there ain’t no money gone when daddy (or mommy) dies. In other words, buying insurance designed to be in force past working/income years doesn’t make sense, since there is nothing, really, to insure. While we all might mourn daddy’s passing, once he’d retired there’s no family income stream to protect. It’s like keeping car insurance after you’ve sold the car.
Yes, I hear the loud protests of my erstwhile life agent brethren (and sistren). What about estate taxes! And pension max! You have to protect that pension!
I concede the points, but protest myself that there appear to be far more cost-effective solutions to these most uncommon problems than big-commission whole life, universal life, and variable life insurance.
Most of the permanent life controversy stems from the mysterious cash value component, and what a wonderful, profitable, remarkably tax-magical investment it is, or not. (In the unlikely case this was not already quite clear, put me in the decidedly “not” camp).
Here is an important news flash, likely unknown to most readers, and, sadly, many if not most life insurance agents: the purpose of the cash value is not to be an investment, but, rather, to reduce insurance company risk! Not that you would expect insurance companies to put their own interests before their customers, but there it is.
The cash value is technically called the “terminal reserve.” Its purpose is to reduce the net death benefit the insurance company is on the hook for since, gee, as we age the risk of death goes up, and these permanent policies could be around for long, long time when many customers may be a-dyin’. So the basic premises is that, using vanilla whole life as a simple example, the premium doesn’t go up as your odds of death increase, but the net death benefit – the face amount minus the terminable reserve – goes down, thereby helping the beneficent insurance company manage her risks.
And, yes, dear agents, I know there are many bells and whistles that make it appear the death benefit goes up with cash value. You can engineer many wonderful things with riders and other cash value black box math, but this does not alter the basic law: the odds of death increase with age, this increased risk must be paid for, and it ain’t gonna be the company who pays.
Every way I’ve sliced it, in the several decades since I excommunicated myself from the cult, cash value investments come up far less efficient that other alternatives, owing mostly to hard-to-spot agent commissions and deeply hidden but very expensive insurance company costs and fees. And unlike the touted tax magic, the reality can be rather tax-toxic.
So how can life insurance be profitable? Die young, before you’ve sunk a ton into premiums cum cash value. For that, you don’t need permanent, cheap term (amen!) will do. But from that perspective, who wants to make money on life insurance? – besides the agents, of course.