What is the Third Side to This Story?
May 2nd, the day before distribution of this article, is known as National Life Insurance Day.
Any insurance, in general, is a bet. The consumer (you) is betting you’ll experience a loss, and the house (the insurance company), is betting that you won’t.
Like a casino, the house always wins.
But that’s only if you reduce the analysis to a “dollars in versus dollars out” scenario.
If you have life insurance and you live, you lose money because you have paid dollars in the form of premium for an event that didn’t occur (death).
We need to remember one of the primary purposes of life insurance – to replace the income of someone who passes away.
And if you read the advice of the mainstream financial stalwarts, you’ll be indoctrinated with the idea that it’s cheaper to “Buy Term and Invest the Difference.”
In a previous article you can read here, we discuss objectivity as it relates to researching and evaluating something on your own – and we call it the “Third Side of the Story.”
What is the “Third Side” to this story? Read on.
True – Term life insurance is the least expensive form available.
But I have problems with this way of thinking:
- Humans generally don’t “Buy Term and Invest the Difference.” “The Difference” in cost between term and, say, a whole life policy, is usually consumed by other expenses that materialize in life.
- Term Life Insurance is like “renting” coverage. If that serves the purpose and satisfies your need, then great. I have had term policies required by banks (with further stipulation that the bank be identified as the “loss payee”) financing my projects because the bank was concerned that if I died, they needed extra assurance that they would be made whole. Once the project reached a certain amount of equity, the requirement disappeared. I still maintain some term policies (with an option to convert).
- At least 99% of term policies never pay a dime.
- Variable, Universal, or Indexed life policies are marketed and sold as a way to increase the “investment value” of life policies. While your mileage may vary, I have not found these types of life coverage to be a prudent way to allocate my cash flow. They are generally very inefficient vehicles in which to attempt to amass value.
- Whole Life has been viewed as an expensive way to purchase life insurance. Everyone who has articulated this opinion to me was also part of the “Buy Term and Invest the Difference” crowd.
The problem is, they don’t know what they are talking about. Because when I asked the simple question, “But what about a PUA rider?” they only gave me a blank stare.
Q: What is a PUA rider?
A: PUA stands for paid-up additions. This is a provision in the life insurance contract/policy that allows you to accumulate more cash than the cost of the underlying insurance. The cash purchases more insurance and also earns a dividend that is far in excess of what a bank pays on your deposits. Further, it slashes the agent’s commission by up to 70%.
Q: If something may be in my best interest yet it reduces the commission of the individual selling it to me, why would they even bother mentioning it?
A: The good agents do. They also use whole life insurance as a vehicle to accelerate their own net worth.
Q: What other things do I need to know about a PUA?
A: You need to have a policy with a mutual life insurance company, or one that is owned by the policyholders – as opposed to one that is owned by shareholders.
Q: Why else is cash value Whole Life Insurance worthy of my attention?
1. It allows you to pay tax on the seed, not the harvest. In other words, you’ve already been taxed on the money you put in, and you’ll never be taxed on the proceeds. This is infinitely better than “paying tax on the harvest” which is the philosophy employed by most investment professionals. If you expect your investments to grow in value, why wouldn’t you want to pay tax on them before they do?
2. You can be your own bank. You can borrow from the life insurance company and use your policy cash value as collateral. No credit checks or application fees.
3. It provides a vehicle for uninterrupted compounding. This, not compound interest in general, is one of the wonders of the world according to us. Compound interest is great, but when you borrow money collateralized by the accumulated value of your policy, your value continues to earn compound interest even though you may have borrowed against it to, for example, make a real estate investment.
Q: But I’ve been told that life insurance isn’t a good “investment”. What’s your take on that?
A: We proposed our definitions of “Investment” in one of our very first articles. You can read it here.
We feel that an investment is either:
1. “Resources, financial or otherwise, allocated to an asset or an objective, in anticipation that the resources will produce a return consisting of an increase in value, stream of income, or both.”
2. “An asset or objective into which resources have been placed or allocated.”
With respect to those definitions, then cash value Whole Life Insurance is definitely an investment. However, it belongs to a different asset class than an apartment building or 1,000 shares of a security.
The best definition of cash value whole life insurance, in my opinion, is a store of value, a place to park your cash (where you can actually watch it grow), and from which you can derive capital to make future investments.
I don’t have a dog in this fight:
Like I always say, I give ideas, not advice.
I don’t sell life insurance nor do I receive a commission from anyone who does.
I’m simply a proponent of education, and the “Buy Term and Invest the Difference” crowd (yes, this means you, Uncle Dave and Aunt Suzie) will never tell you about the attributes of something they speak out against.
As you think about that, always remember to do your own research and due diligence whenever and wherever you consider parking your hard-earned money.
And if you need more information about any topic referenced here, simply reach out to me at any time to Lee@CEassets.com.
Happy National Life Insurance Day.
Until next time,
Dr. Lee Newton
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