The Insurance Rebuttal Part 2 – Episode 011

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, best-selling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel, again with co-host and best-selling financial author, Kim Butler. Today we’re going to be picking up on the second part of the term versus whole life debate. Again, we had someone write in a letter just basically explaining their position of how buying term and invest the difference makes so much more sense for the clients that they particularly advise. Again, if you go back to some of our previous shows, you can kind of see that we kind

[00:55] of recommend that term insurance has a role as well as whole life. Kim, I want you to just kind of give us a quick summary of what we talked about in the last one and we’ll move on. Sure. Well, we love comments on our blog and we’re grateful that somebody took the time to express their opinion. There’s nothing wrong with it. And in this case, it gave us a beautiful opportunity to point by point rebut, if you will, their thinking. And I appreciate that there are people out there that think term insurance is the only way to go. I reiterate that we love term insurance and we have our clients buy it and we have lots of ways to buy it and we want to make it available to clients. But the idea that you can get ahead by buying term insurance and quote,

[01:40] investing the difference is where I have a challenge. In other words, a lot of people think you can get ahead by buying term insurance and investing the difference versus buying whole life. And so first of all, we need to reiterate that we call whole life insurance a savings vehicle, not a investment vehicle. And we also want to reiterate that we want to have both and that anybody should be saving money when they have an income. I mean, your typical kid straight out of school should start off saving 10 to 20 percent of his income. And he should do that first in just a money market account or a savings account at a bank. But as soon as three to six months of money is accumulated in there, three to

[02:26] six months of expenses of money is accumulated in there, they can benefit from buying a small whole life policy. Doesn’t matter whether they have a family or not. And then as they progress and they do get a family, then yes, term insurance should be added to the picture. But I think the writer had a couple other points that they made that we wanted to address on this second portion. Yeah, got it. And one of the questions that has come in that is a good one we have not addressed is why is term insurance cheaper than whole life? So term insurance is, quote, cheaper because it is temporary. And so that’s where the challenge comes up. Of course, in the short run, because that’s what temporary is, term

[03:10] insurance is going to be cheaper. But the two cannot even really be compared because whole life insurance is permanent. It will exist until that person dies, even if it’s at age 100 or 120 or whatever it is. And that’s something that we should sidetrack on real quickly. A lot of people think that in order to keep whole life for your whole life, you have to pay for it for your whole life. And that’s not true at all. You can pay for life insurance, whole life insurance for seven or ten years, seven to ten years, I should say, and keep it for the rest of your life. Now, ideally, you’re going to continue to save money. And so you’re going to continue to save through that policy and you’ll contribute to it until you stop working.

[03:52] But that may change. So the idea that it’s cheaper is similar to saying that renting is cheaper than buying a home. Sure, in the short term it is, but in the long term, it’s not. And those those two analogies of the term insurance to renting and the whole life insurance to buying are really, really accurate. Got it. And I will say that one of the, I guess, most difficult parts of being a financial advisor is to working with someone who’s had, say, a 20 year term that they purchased in their fifties and again, still relatively inexpensive, they get to their seventies and that term, you know, now they’re getting to the point where they have health issues or they’re really starting to contemplate their mortality.

[04:42] What happens to those premiums then? Well, the term insurance premiums can skyrocket once the initial term of time is over. So let’s say you buy a 20 year term when you’re 40 years old, when you hit 60, the jump is going to be astronomical and the game that most people play is they get rid of that particular term policy and they go buy another one. Thereby dropping their premiums down, not as low as they were when they’re 40, but certainly lower than they would have in the second term of time, the challenge with that. Number one is you have to be as good a health as you were, or at least in decent health to be able to get approved and number two, now you have this higher amount of money that if you’d paid that initially,

[05:30] you probably would have had your whole life insurance paid up and been able to have insurance with zero outlay. So again, anytime you’re trying to develop something for long-term, you have to look at a long-term strategy. And since life is long-term whole life insurance makes a better match. If all you care about is the short-term and sometimes that’s the case. Let’s say the bank says, Hey, you have a five-year loan. You have to have coverage for five years. Well, getting a five-year term insurance policy might perfectly match that. But if you’re looking at protecting yourself and your family for the rest of your life, then you’ll want to have something permanent to go with that desire for protection that lasts the rest of your life.

[06:16] Super. All right. We’re going to directly read a quote off the letter. It says, I always advise all of my clients to buy term insurance and invest the difference outside of an insurance product. When you unbundle the two, you give the client more power over their money and more options on investing. Now we’ve talked a lot about the insurance side of buy term and invest the difference. Let’s talk about the investment side. You know, what are the rates of return that are inside the whole life in policy and what is it that we would be advising or what do you think this person would be advising their clients to invest that difference in? Yeah, great question. I’m glad we’re switching sides there because I think it’s probably the

[06:59] more important point in actuality. First of all, I have to say I’ve been advising people for 25 years and I’ve never seen buy term and invest the difference work and it’s because the invest part doesn’t work. So let’s first again, restate that we don’t believe that whole life insurance is an investment. We believe it’s a great savings vehicle, a great place to store liquid cash and the internal rate of return. I mean, net, net, net after the cost of the death benefit, after the cost of running the company, after the cost of paying the insurance agent, in other words, the commissions is around four to five percent in today’s marketplace. So this is 2015 and whole life insurance has a net, net, net

[07:42] gain of four to five percent per year every single year. And you’re going to see gross dividends in the six percent range. But again, those net out to four or five doesn’t matter what company you’re talking about. The only way to identify that net, net or internal rate of return that I’m aware of is via software available at TruthConcepts.com. So TruthConcepts.com that anybody can go look at can help you prove the internal rate of return on any life insurance policy out there. So if we take a look at what we know cash value is liquid savings and we say, OK, let’s even pick the low number, we can get four percent on our liquid savings in the year 2015. Go compare that to all the liquid savings accounts that are out there.

[08:31] Savings account at a bank, money market at a brokerage firm. You could even go to like a Muni Bond Fund or something like that. Sometimes people use that as their quote savings account. And all of those are paying less than one percent and most of them are taxable. And so here we have whole life insurance that’s not taxed paying four percent being compared to cash and money markets at less than one percent taxable. There’s no comparison and people will always get better return on their savings and a life insurance policy than they will at a bank. I use the rule of thumb that insurance companies always pay two to three points above bank rates, two to three points above bank rates for liquid cash.

[09:16] So if a bank is going to pay six or seven percent on its savings accounts, then an insurance company is going to pay eight or nine percent on its internal rate of return of cash value. So that covers the cash portion. Now, switching to the investments, typically an advisor is going to recommend investments that have an average rate of return of, let’s say, eight or nine or 10 percent. I think most people, when they use the definition of investment, that’s what they’re seeking. Now, I personally seek double digits and no loss of principle. But a lot of advisors use mutual funds or the stock market in some form. And they’re going to quote history of an eight or nine or 10 percent average. And that’s what they’re talking about investments.

[10:04] And that’s fine. Those are typically going to be taxable investments. And so, again, you have even the whole life proponents talk about whole life as an investment when they do. One could argue that after taxes and fees on investments, that whole life net, net, net is about the same as a mutual fund that, say, averages eight percent. But then you have to pay taxes and fees. Now, again, I don’t prefer to argue that way. I don’t think it’s as valid as the cash comparison. But if you’re going to invest money and you are clear about the fees and the taxes that you’re paying, I think your net rate of return on that investment is likely to be five, six, seven percent. And that’s why that invest the difference conversation

[10:59] comes up all the time is that the the more conservative investments are going to be compared to whole life and frankly be about even. Whereas I think the by term invest the difference, people think that they can get more on their investments. And I would hope that they could. But yet we have to be careful about taxes and fees and what goes on and fluctuations, because if that quote investment goes through 2008 again and gets cut in half, then I would question who has more money, the cash value person or that by term and invest the difference person. Got it. And again, we are in April 2015. And just preparing for the show, I checked the 10 year treasuries right now are currently yielding one and a half percent annually,

[11:47] which I guess would be a comparable safe investment, although you do not have the liquidity of the whole life insurance policy. One of the things I would like to point out is that the sale of the term insurance actually helps the insurance company to meet those four to five percent net figures to the whole life policy owners. How does that work? Well, the insurance company looks at everything all together and they pay dividends based on the profits of the company. And one of their big profit generators is the term insurance. Think about all of the group term insurance, all of the individual term insurance out there. And think about how many people, you know, that quote die early. You know, the numbers just don’t play out.

[12:32] So term insurance is a huge profit generator for the company. And as a whole life owner, I want the company to make a profit because that turns into dividends for me, not dividends for some generic stockholder, because a lot of the whole life companies that are out there are known as mutual companies, which means they’re not public companies. They don’t have stockholders. They only have policyholders. And those dividends are paid to the policyholders without taxes and benefit the whole life products that exist. And we just have to think holistically as buyers. If term insurance is a profit generator for the insurance company, that probably means it’s a cost to me as the buyer. And again, there’s nothing wrong with it,

[13:16] but I don’t think you can get ahead by having only the term insurance. Super. We’re going to kind of wrap things up here with the final comments on here is that the simple truth is that insurance agents sell whole life for only one reason. They want to make huge commissions. Well, you know, everybody that’s in business needs to make a profit. And an investment advisor that sells mutual funds with fees makes huge, quote, commissions also. And they may be called fees instead of commissions, but it’s all income. So nobody wants a financial advisor that doesn’t run a good business and good businesses make a profit, whether they’re insurance companies or financial advisory companies. And so the idea that somebody could actually work with a product,

[14:08] a product that’s been around for close to 200 years and have only the goal of high commissions is ludicrous because they would never have a consistent inflow of clients. We serve our clients the best that we can. And I’m sure everybody tries to. But everybody also has a goal to make a profit. And everybody knows that there’s no way that the goal to make a profit can overrun the goal to serve people or that business wouldn’t exist. Super. Well, I would encourage everyone to go to partners. The number four prosperity dot com. That’s the website that we’ve been referencing today. We’ve also talked about truth concepts dot com, which is a calculator website that has some fantastic calculators available to agents and consumers alike.

[14:57] And Kim, we have just a few seconds here before we wrap up. Anything you’d like to add? Well, I appreciate the questions. I think it is great for people to get involved and to be passionate about things and to learn and be open minded. And that’s what we’re seeking is people that are open minded, willing to learn and willing to hear both sides of the table. Awesome. Well, this is no BS money guy Todd Strobel for the Prosperity Podcast. Once again, welcoming your questions and comments. Would love to get your questions and comments on the show. So keep sending them in and take care of everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you.

[15:37] Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.