I'm
sure the title alone will raise some
feathers with life insurance agents but
it's a legitimate question and I still
haven't heard a convincing answer. In
fact, if anyone can successfully answer
the above question, I will list their
answer below but I'm not expecting
additions anytime soon. In light of the
cost for term life insurance and more
importantly, the purpose of insurance in
general, it's hard to argue for whole
life. Let's take a quick look at the
usual explanations and why they don't
wash. We'll then look at the only
reason I can come up with and again, I
look forward to any clarification of my
somewhat pessimistic basis for why whole
life insurance is sold at all.
A
real quick intro to whole life versus
term life insurance is in order. With
term life, you buy protection for a
fixed period of time (usually 5 - 30
increments) at a much lower premium or
cost to have that protection. If you
pass away during that time, the policy
pays out (with the usual limitations).
With whole life insurance, you are
purchasing life insurance which is
guaranteed to pay out. There is no term
limit as long as you pay the premium as
required. The cost for this insurance
is much more than term life...usually
about 10 times more expensive. Now
think of life insurance is really there
for...to cover a risk of lost income due
to the passing of a loved one. Let's go
through some of the "selling" points of
whole life insurance.
The
first is that you'll build cash value in
the policy. Yes...you will build cash
value WITH THE EXTRA CASH YOU"RE
PAYING. Actually, you'll get less
"value" than the extra cash because the
carrier has a profit (not to mention the
broker).
Next,
they sales pitch focuses on an inherent
flaw in people's intuition and/or
preferences which touches on the role of
insurance in the first place. What
they're really selling with whole life
is you'll get "something". The problem
with insurance (life, health, property
and casualty) is that people want to
receive something now for money they're
paying now. The concept of protection
against a potential risk doesn't ring
right with most people. Whole life is
capitalizing on the quirk in our world
view. It reminds me of dental
insurance. We deal with health
insurance for groups and individuals as
well. Employees will glaze over (unless
they have health issues) when we discuss
the health benefits but become real
animated about dental insurance. Dental
insurance is really a commodity and it's
paying a pittance versus the cost but
people USE IT. They use it a few times
a year. They perceive value but if
they're healthy, the health insurance
just looks like a cost. That's the same
issue with term life and whole life.
The life insurance company is getting
you to pay much more to address this
misperception we all hold deep inside
about paying something for nothing.
Don't be fooled.
This
explains why the life insurance
companies and life insurance agents sell
whole life. They both make a lot of
money in doing so and they can point to
the buyer's satisfaction with the
product (based on the nonsensical need
described above). The only real reason
I can see to buy whole life insurance is
an illegal one. Basically as a vehicle
to shelter income as a paid benefit for
self-employed and corporate officers to
take the cash value out of the policy.
Again, that's illegal and the IRS will
find you. Otherwise, why would anyone
buy whole life over term life
insurance? We're listening... |