If you buy the wrong life insurance policy you could waste a ton of money and still leave your family woefully unprotected. Despite these perils, some agents still try to cram this coverage down your throat. Sometimes they do this because they make a ton more commission when they sell you whole life or other types of permanent life insurance as opposed to term insurance. Other times they try to sell this monstrosity because they actually believe their own misguided sales pitch.
At the end of the day, their motivation does not matter. What matters is that you don’t fall into this permanent life trap if you are like the vast majority of people who don’t need it. Let’s deconstruct three main pitches some agents use on unsuspecting clients:
1. “Don’t You Love Your Family?”
Permanent life insurance agents can use guilt to get you to buy. They claim that if you have dependents and don’t buy their insurance, you are irresponsible.
Well, if you have dependents you certainly might need life insurance. But even if you do, that doesn’t mean you need their expensive malformed “schlock”. You can buy a heck of a lot more term insurance (often 10 times more insurance) for the same premium you get with permanent coverage. That being the case, you might say that people who buy term life care 10 times more about their family than people who buy whole or universal life. 🙂
2. “It’s Forced Savings”
This is a true statement but that doesn’t mean it makes sense. I’ve already explained how terrible the guaranteed rates usually are for permanent insurance. If you need a guaranteed savings plan, why not just automate monthly drafts into your investment account instead? You have more control over the investments and save a mountain of cabbage on lower fees. As I’ve said, permanent insurance has historically rendered paltry returns. The feature of being forced to make lousy investments is no benefit in my book.
3. “It’s Always There”
Agents sometimes argue that unlike term, permanent insurance is always there. That’s not always the case. First, because the premiums are so extraterrestrial, many people cancel the coverage well before they make a claim. According to Market Watch, 40% of permanent life insurance buyers junk their policies within the first 10 years.
And who’s to say that the people who hold on to these policies actually need it? According to the Consumer Federation of America life insurance is really most important between the ages of 25 to 40. After that, the need dissipates for most people. Sure, you might be one of the few who still need it. But why bet on that? The odds say you probably won’t.
4. Bonus Trick “You may not be insurable in later years”
While this is true it’s no argument for whole or universal life. As I’ve said time and time again, if people depend on you and you can’t self-insure, you might really need life insurance. But that doesn’t mean you have to throw good money after bad coverage. A 45-year old buying $500,000 in coverage would save over $130,000 over 20 years if she buys term rather than whole life. If a 45-year old buys a 20 year term, that keeps the insurance in place until she’s 65. Hopefully, that’s long after the kids are out of the house, the mortgage is paid off and her other assets are sufficiently large.
Agents get really steamed when I point this out. They try to argue that beneficiaries are always glad to get more money after the insured passes away.
I’m sure that is true, but so what? From a financial standpoint, my beneficiaries are far better off if I go live in a hut somewhere if it means I spend less money now and therefore provide a greater inheritance. Does that mean I should do it? Of course not.
There is a trade-off with life insurance and this is something agents who are hell bent on selling this permanent insurance junk rarely acknowledge. When you buy life insurance the goal is to balance your responsibilities while maintaining a good standard of living.
If you can cover your responsibilities for less and enjoy your life more, why not? I don’t like seeing clients going without just so they can leave more to their kids. Usually, the kids don’t like it either. If you buy permanent life insurance and find it difficult to keep up with those sky-high premiums, you’re going to have to do without in order to hold on to the coverage. No Bueno.
Oh…and by the way, don’t fall for that “guaranteed premium” story either. One of my clients paid into a universal policy for 30 years. At 86 years old, he had to cough up an extra $15,000 per year in order to make sure the policy would stay in force. This might be a unique case, but I don’t think so. Make sure you really understand your policy – term or permanent. As with everything, the devil is in the details.
I get about 5 comments a day from angry life insurance agents extolling the virtues of whole and universal life. I guess lots of readers are sending these posts to their agents and grilling them for it. Bravo. Keep it up.
Why do you think I’ve never gotten a single pro-permanent life insurance comment from a non-agent?
Permanent life does have its place for the right person. But it’s sold to the wrong people far too much. My goal is to make sure this doesn’t happen to you.