There are No Deals in the Life Insurance Industry

In most industries, shopping for a deal makes sense. You want a good service or product, with an affordable price point. Even so, sacrifices must sometimes be made. Cheaper goods are often – though admittedly not always–made with lower-quality materials, and cheaper services usually have fewer benefits. It’s up to individuals to decide what is worth the trade-off. And sometimes, you get lucky and you get a “deal” that allows you to get the better service or product for less. The exception is life insurance. There are no deals in the life insurance industry… and we’re going to unpack why that’s a GOOD thing.

The Real Cost of Life Insurance

If there are no deals in the life insurance industry, why would anyone want life insurance? When you’re trying to make the best possible financial choices, it’s a logical question. After all, if you could get decent coverage for less, why wouldn’t you?

The answer is simple: when it comes to life insurance, you cannot take shortcuts. The price of your insurance is a direct result of the features you want.

Whole life insurance is considered the priciest form of life insurance, and yet it comes with many features that make the price tag valuable. It’s permanent, your premiums are guaranteed not to increase, you get a cash value account that’s guaranteed not to decrease, and many other benefits besides. Meanwhile, term insurance is not permanent, does not always have a fixed payment, and there is no cash value component. 

The price of insurance is a direct result of the risk to the company. When you insure your life, you’re insuring a guaranteed event, unlike car or home insurance. It is 100% certain that someday we will all die, whereas you can go your whole life without totaling your car or losing your home. When insurance companies insure your life, that’s a guaranteed claim that they have to pay—at least when you buy permanent insurance. And so, they have to do some very precise math to make sure that it’s a payment that they can afford. 

When you buy whole life insurance, your premium is based on a “rating” from the insurance company. The longer the insurance company expects you to live, the better your rating is. A better rating means a better price per dollar of death benefit. This isn’t a personal thing, it’s actually the most objective and unbiased way for insurance companies to charge people because they can determine exactly how much money they need you to pay to afford your claim. And if you add PUAs (paid-up additions) to your insurance policy, they’re making calculations on an increasing death benefit, too. It’s complicated math, yet math that has worked for decades upon decades.

Just look at term insurance. Even though death is a guaranteed event, it’s NOT guaranteed that you’ll die while you have term insurance because it’s only temporary. Thanks to actuarial math, insurance companies are pretty good at determining risk, which is why so few term insurance policies ever pay out. The companies know that the greatest risk for most people is above a certain age. That’s why, if you look at an annually renewable term insurance policy, the price skyrockets from pocket change to thousands of dollars when you hit age 60 or 65.

You may feel like term insurance is a “deal,” but it sure won’t feel that way when you lose your coverage when you need it most, and have no cash value to show for it. 

The Trade–Off

There are no deals in the life insurance industry because everything is a trade-off between cost and risk. The higher the risk to the company, the higher the price tag, because the insurance company has to foot the bill not just for you, but for every customer they have. The lower the risk to the company, the lower the price tag. This doesn’t mean high price is bad and low price is good, or vice versa. It just means that you can’t evaluate life insurance policies on price alone. You have to look at all the features to ensure that you’re getting what you WANT.

It may sound like we have a low opinion of term insurance, yet we actually think it’s a great product. We just prefer it as a supplement to a whole life insurance policy, as opposed to the only protection you have. When it’s the only thing you have, you lose the ability to save money into a cash value account, and you lose affordable coverage later in life. When your term insurance is supplemental, you increase your protection during a time when your passing may leave your family more vulnerable. 

Understanding this trade-off is important when shopping so that you have the knowledge to arm yourself against offers that seem “too good to be true.” Many people see universal life insurance as the “best of both worlds.” They believe that it’s more flexible, it’s cheaper, and it’s permanent. But what is the trade-off? If you’re getting good coverage for less money, what are you giving up?

In the case of universal life insurance, it’s critical that you ask this question and proceed with caution. What appears to be permanent insurance is not because it is not sustainable. You cannot have all the bells and whistles for cheaper without taking on some risk. And in this case, the risk is the stock market and variable payments. Many people mistakenly think that because their account has a 0% floor, they cannot lose money.

The unfortunate truth is that if the insurance company loses money, it can increase the cost of maintaining your policy. When they do this, many people find that their “flexible” premium payment is not covering the policy costs, and so the cash value begins to shrink. 

The benefit to whole life insurance is that you know exactly what your policy trajectory looks like, and because it’s unrelated to the stock market, the policy costs are calculated upfront. These costs are a part of your premium and are higher in the beginning, which is why your cash value growth starts small. As the costs fall away, more and more of your premium contributes to your cash value, with your cash value representing the equity of your death benefit. 

If you’re looking for deals as you shop for insurance, you’re only going to find that you’re losing out on features that may be important to you. 

Is Whole Life Insurance Really That Expensive?

If you’re shopping for the best price, you’ve got to look at the big picture. By that, we mean you have to consider the value you’re getting. Many people have a misconception that whole life insurance is too expensive, mostly because they don’t understand the value that they’re getting. 

When you buy whole life insurance your premium isn’t just disappearing into thin air. Part of your premium is pure cost. This is what the insurance company takes in order to pay their bills and overhead. As we mentioned above, this amount decreases over time, because the risk to the company decreases over time (aka, the amount of money they would pay out of pocket on a claim decreases over time). The rest of the premium goes to your cash value, which you can use even while you’re alive. It gets even better, though. If you look at life any whole life insurance illustration with PUAs, there’s a point at which the cash value begins to exceed the premium dollars paid, which means you’re also functionally growing your wealth. 

So, sure, the premiums on whole life insurance are higher than term insurance or universal life insurance. Yet you’re also getting benefits beyond either, and in the long run, you’re actually gaining money as opposed to losing it. That’s why we consider whole life insurance a savings vehicle. 

The Other Side of the “No Deals” Debate

If this article impresses anything upon you, let it be caution against seeking deals or shortcuts in whole life insurance, and also be cautious of “sales gimmicks” when shopping. Many insurance agents will use language akin to “get rich quick” to nab clients, yet that’s not what’s happening here. Whole life insurance is a good product–full stop. It’s not magic, and it’s not a get-rich-quick scheme. In fact, whole life insurance alone CAN’T make you rich. It’s all about what you do with it. There are simply guarantees and contracts, and you get exactly what you pay for with life insurance.

If there are agents out there peddling the idea that you can get rich with life insurance, or that you can somehow make it big on a product alone, dig a little deeper. From our perspective, whole life insurance works exactly as it’s meant to—that trade-off of cost and risk provides the balance that makes it a win-win-win for all parties involved. There’s no secret. 

There is, however, an advantage to owning whole life insurance when you have an entrepreneurial mind. Those who do find that they make great use of the capital they build within their whole life insurance policies. By creating cash flow, they can build their wealth effectively, using the cash value account as the place through which everything flows. That requires discipline, diligence, and savvy thinking. It’s not magic, and it’s not a product of whole life insurance on its own. It takes YOU to make your wealth. 

Ready to browse your options? We’ll help you identify the right life insurance policy for YOU today, just book a call with our team or email us your questions at welcome@prosperitythinkers.com.