This is a question I was always asked when hosting my radio show. People, of course, were always curious if it was term, whole life, universal life, variable life, or some other concoction.
My answer………
a policy that’s in-force with the right amount of insurance in place to get the job done!
When my father died of a sudden heart attack at the age of 42 he left behind my mother and two teenage boys 14 (my brother Mark) and 16 (me). Dad had purchased a really good high quality $50,000 whole life insurance policy from a trusted friend and advisor from church. In fact, the insurance company is a church affiliated company with a 100-plus year history.
Needless to say, this was a woefully inadequate amount of life insurance for our family. My mother should have had life insurance benefits coming to her of at least $1 million. This would have given her the option of continuing the family business or remaining a stay-at-home mom for two teenage boys. Because there wasn’t enough life insurance on my dad, my mother did not have this option. She was forced – like it or not – to continue the family business. Years later I was shocked to learn – but somehow not surprised – that for the same premium dollars my dad was paying for that super dandy $50,000 whole life policy he could have purchased well over $1 million of term life insurance. Why hadn’t the agent, our family’s trusted advisor, made him aware of this?
I’d like to think the agent, as I choose to think most people in general, truly are honest, ethical, well intentioned people. However, sometimes they get influenced by the wrong people or in this case the wrong companies. To this day I’m convinced the agent is still an honest, ethical, well meaning agent, however he was poorly trained by his company which has served the company’s interest quite well, to the expense of my family. I can’t help but wonder how many thousands other families there are like us.
Think about it, spend the same premium dollars, put the insurance company at risk for a $50,000 claim or same premium dollar, put the insurance company on the hook for a $1 million-plus claim. Which is a better deal for the insurance company? Why didn’t the agent know any better? Maybe it was his training, maybe it was the compensation system the whole industry has and to this day still does support.
The typical life insurance agent gets paid a percentage of the first-year premium. This percentage amount changes depending on the type of insurance policy – term, whole life, universal life, etc. Again, as I became knowledgeable about the financial industry I was shocked – but somehow not surprised – to find out that the agent commission on a typical whole life policy is anywhere from 100-150% of the first-year premium compared to a commission of 25-50% of the first-year premium for a term policy.
So the industry has the odds stacked against you! They make these things almost impossible to understand except in the case of a simple term policy, and they pay their agents substantially more to recommend policies that I will argue are way better for them, not you.
Does this make life insurance bad? Absolutely not. I am still a big believer in life insurance and have several million dollars on my own life – yes, I’ve learned from experience. With rare exception do I see a need or reason to purchase any other type of policy except term.
I know, I know, as you get older term insurance gets more expensive and at some point perhaps a cash value type policy might make sense. If you are tempted to purchase a cash value policy or trade a current policy you have for a “new and improved” policy the only kind of policy I would encourage you to consider is what is often referred to as a low or no-load policy. This is a policy that pays no agent commission, instead you will be expected to pay a fee to the agent for their assistance. As you might imagine, this is not a very popular policy with most agents. However it is gaining wider acceptance with “real” Financial Planners who act as their clients fiduciary. Putting the needs of their client ahead of their own!
If you can’t find such a policy on your own by ‘Googling’ no-load life insurance, I would encourage you to work only with an advisor who is willing to use a no-load policy. Be prepared to pay them a fee, rest assured it will be many times lower the commission a traditional insurance agent would have collected, which by the way is a commission that you the buyer ultimately pay.
Don’t let anyone tell you the company pays the commission – this is simply not true, they just price the policy either with higher premiums or lower cash values or some combination of the two to allow them to pay the agent commission from your premium dollars. So at the end of the day, like it or not, you are paying. You now have the option and choice of deciding whether or not that fee or commission is fully disclosed to you up front in advance or if you prefer to have it kept a secret, shared between only the agent and the insurance company.
