Are the benefits of life insurance worth the high premiums?

No

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by William Bell

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This is not a yes or no question for the informed. It depends on the type of life insurance one considers or owns. Hence, my answer is no, simply because there are so many kinds of life insurance in which so many people are (1) overpaying for premiums and or (2) have purchased the wrong kind of life insurance in the first place, and (3) may no longer need life insurance because they are adequately "self-insured."

Moreo ver, it is wise to properly protect one's family and assets with proper insurance. However, it doesn't make sense to pay extravagantly for what can be purchased at a more reasonable cost. It doesn't make sense to pay for that which is unnecessary or unwise.

Here is what I mean. Most people are uninformed when it comes to purchasing life insurance. Others are sometimes overly trusting of life insurance agents who may be more motivated by the commissions they earn because of their need to put bread on their tables or gasoline in their cars. At today's prices that is a concern, right?

The first step to understanding how much is too much to pay is to understand what life insurance is in the first place. It is primarily protection against income loss wherein the purchaser purchases an immediate estate in the absence of having the equivalent in cash assets. So, while families are young and starting out, with small children, high education costs in the future, high debts from mortgages, car payments, etc, there is a great need for an immediate death benefit to replace income in the event of loss of the breadwinner(s).

The problem with insurance comes when people want a combination insurance/savings policy. This is good soup, but primarily for the profits of the insurance company. Think about it. How many people buy renters insurance with a savings account attached? How many people buy auto insurance expecting to receive a return on investments at the end of the policy? How my people buy property and casualty (homeowners) insurance so they can have a savings account at the end of the term? No one! Why? Because the premiums would be too high and people understand that they're only buying pure insurance protection.

However, all this common sense goes out the window when it comes to life insurance. Companies have great training programs and very high commissions to motivate agents to sell an inferior savings account attached to an insurance policy.

Buying the wrong type of life insurance, usually that which comes with some type of cash savings account attached as in whole life, endowment plans, etc., one overpays for insurance in the earlier years with minimal coverage, -the time most families are at greatest risk financially. In later years, one is actually underpaying for the insurance due to the fact that the cash values are paying a portion of the premiums. (This means the premiums have actually increased. There's no free lunch!) In many cases what is actually happening is that the value of the insurance decreases as the cash values rise to keep the death benefit level. It's a financial mirage.

The best and most simple way to protect the family is to buy low-cost guaranteed renewable pure term insurance without any so-called savings plan attached. These plans have level premium, level face amounts at 10, 15, 20, 25 and even 30 years. A family who plans well by properly saving and investing the difference in good investments outside of their insurance policy such as mutual funds, (index and otherwise) bonds, real estate, businesses, etc, should have no problem becoming "automatic millionaires" over the long haul. (See the Automatic Millionaire by David Bach).

This means that every available dollar needed for protection can be utilized to protect the family. And every dollar need for savings and investments can be maximized by utilizing better investment vehicles under the direction of personal financial education and a competent advisor.

Some companies have responded to this reasoning by saying that Americans are such poor savers that they need forced savings else they will have nothing in their old age. True, our savings rate is very poor. However, what is needed is better education and discipline with the right kind of savings.

Others say that saving money in an insurance policy is a good way to save on taxes. I am not an accountant, but I believe if one does the math, it is easier to pay the tax out of a huge nest egg than to have none at all except in a death benefit. Besides, I'm told that some people pay more estate taxes on insurance than on anything else in their estate. You may want to do some research on this with your tax, legal and financial professionals. There is also the option of a Roth IRA which is 100% tax free on all the returns once the conditions are met at the time distributions begin. See the proper IRS publications.

Insuran ce companies are very good at math. They can predict within 2 to 3 people out of a thousand who will die at every age. They use actuarial tables. This is how they know how much to charge for premiums for each age group. While it may be great to buy a policy when you're young and in your twenties and we certainly recommend it if you have loved ones to protect, it doesn't necessarily mean that if you still hold that policy 15 or 20 years later, that you're getting the best value for your money. Here's why.

As medical technology improves, health and wellness breakthroughs and other factors that result in people living longer, insurance companies take this into effect and update their actuarial tables which result in lower premiums. So it is possible that a person who bought a policy 20 years ago will be paying higher premiums than a 20 year old who buys the same policy today or perhaps even a 30 year old. As long as the person is insurable, they might find that they can get more insurance or lower their premiums by re-evaluating and upgrading their policy. It should be understood that no existing policy should be cancelled until a new one is issued and accepted.

I sold life insurance almost 30 years ago to friends and associates who were the same age and slightly older. Some bought term policies of 150,000 to 250,000 at $40 to $60 per month. Today, those same premiums would provide about 400,000 to $500,000 dollars of coverage for the same age brackets.

Some of the breadwinners died within a couple of years and others a several years later. I remember the joy and satisfaction the surviving spouses had because of what then were considered good coverage benefits. Had those same clients bought cash-savings policies, their death benefits would have been around 30,000 to 50,000 for the same premiums or they would have paid 3 to 5 times more per month in premiums creating a tough financial burden for the young families.

For the couple of empty-nester families who had a spouse to die in later years, all their debts were paid except a small mortgage. They easily paid those mortgages and had cash to spare, all because they did not overpay for the wrong kind of life insurance.

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