The Problem with Term Life Insurance – Episode 128

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[00:00] Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, I have my co-host and best-selling financial author, Kim Butler with us today. And today we’re going to be addressing some more of the financial planning lies. Specifically, we’re going to be talking about buying term and investing the difference. This is a really, I have to admit, it’s a great marketing phrase. I love the way it sounds, but it doesn’t turn out to be true, does it? Well, hello, Todd, and no, it doesn’t. It’s amazing how long this thing has been around in our society and how ineffective it is. And those of us that are in the industry have a change up of the wording.

[00:49] We say buy term and spend the difference because that’s truly what’s going on is people are not saving the difference and they’re also clearly not investing the difference. And we’ve done other podcasts on the difference between saving and investing, but if you just stick with the language, which is buy term and invest the difference works, there are a host of challenges with it. It’s really one of the most pervasive lies that’s out there and you said it well. It sounds cool and people parrot it, meaning they just kind of repeat it even though they don’t even understand what they’re saying. And to me, it’s especially comical because we know that whole life insurance specifically, which you could say is the opposite of term insurance, isn’t an investment to begin

[01:40] with. And yet here we have this idea that you could split up the deal, the term insurance with the quote investment and have it be effective when in actuality the opposite of the deal. The term insurance and the investment isn’t even an investment. It’s a savings, but you don’t ever hear it worded as buy term and save the difference, do you? No. And you know, I have to ask you right off the top. What is the most profitable product to the life insurance agent and the life insurance company? Oh, that’s a great question. Now I’m going to split the answer. The most profitable product to the life insurance company is term insurance. Exactly. So I mean, you know, I’m not sure that the motivation is so much consumer oriented

[02:33] as it’s profit oriented, isn’t it? Yeah, that’s very well said. Now I’m curious what made you say or imply anyway that the term insurance was profitable to the agent as well? Or were you thinking that the answer to that was whole life? Well, no, I mean, I’m thinking if you know, literally when you’re selling life insurance, if you look at the amount of commissions that are paid to the agent, I would say as a percentage of the initial premium that’s paid, the most profitable product to the agent is also term insurance, wouldn’t you say? It’s very possible. You know, I’ve never thought about it that way, but when you think about the time that the typical life insurance agent spends helping somebody understand and buy whole life

[03:27] insurance, I would tend to agree that that agent could make more, if you included the time, a more profitable transaction with the selling of term insurance. Now, thankfully over time, and especially for our clientele, because the Live Your Life Insurance book has been so helpful to people, the Palm Beach Letter, there’s a lot of other sources out there now that have caused our clients to understand life insurance before they get in touch with us. But my gosh, in my past, I, like many life insurance agents out there, have spent ridiculous amounts of time helping potential clients understand whole life insurance. So that’s a really interesting look at it, is maybe this recommendation is more about

[04:18] profitability, and gosh, so often when things are parroted in the media, when the financial institutions are making the recommendations, just like when the banks say that a 15 year mortgage is better for you, if the life insurance companies are saying buy term and invest the difference is better for you, then we can know that that is a comment made based on profitability for the financial institution. And also for the financial entertainers, because when you take somebody like Dave Ramsey as an example, he is compensated by Zander Insurance Company, which sells term insurance, and it says that right on his website, that there’s a connection there. And so of course, there is again a profit motive, but if we look at the client side

[05:12] of things, and how the client can be the most profitable, we can understand that less than one half of one percent of all term insurance policies ever pay a claim. And so clearly from a client standpoint, even if they viewed whole life insurance as an investment, and again, I don’t think that it should be, but even if they viewed it as just getting their principal back with a small rate of return, it’s it, whole life insurance is going to be a more profitable decision for the client than term insurance, because what typically happens with term insurance is not only do they never get the death benefit, because they’re going to outlive the term of time that the life insurance is in place, but they have paid out premium, of course, and a big missing

[06:09] piece, they have lost the opportunity to invest or save that premium anywhere else. So we have a full and whole truth calculation of term insurance premium plus the lost opportunity cost plus the lost death benefit to be compared to whole life premium, plus even a very, very small rate of return on the cash value, plus a permanent death benefit that is going to be there. And if their whole life insurance is stayed at full premium for a long, long time, that death benefit is going to rise. If they are not able to pay their life insurance premium for a long, long time, that death benefit could be flat or it might even be purposely shrunk. But the fact is they are going to get it. So this buy term and invest the difference is just a lie, no matter how you look

[07:19] at it. I think one of the things that we kind of went over quickly was is just to clarify. So you’re saying ninety nine point five percent of the life insurance premiums that are collected on these term policies never pay a death benefit, correct? That’s right. That is the the inverse of the statement that I made, meaning that what you just said is a hundred percent accurate. So, I mean, I mean, this is I mean, you know, whole life is guaranteed to pay out for your whole life, whereas term insurance, which, I mean, I think it’s important to understand that there is a purpose for term insurance and we definitely are not against term insurance. It’s just this idea that term is all you need that we’re trying to address.

[08:15] Absolutely. And we’ve made that clear, but I’m so glad that you brought that up because we didn’t make it clear today. And that’s that it shouldn’t be buy term and invest the difference. It should be buy term and buy whole life because whole life absolutely has a decent return. The problem is it’s just looked at as an investment instead of a savings account. If we look at it as a savings account and today in the middle of 2016, whole life insurance is probably paying three, four, maybe four and a half percent. That’s a decent, in fact, quite impressive saving account equivalent. And yet people out there are trying to make whole life insurance do all of the life insurance work in their family.

[09:02] And that’s not the right thing to do. People should buy whole life insurance and term insurance. The term insurance will fulfill their human life value. And just in case our listeners are not remembering what human life value is, human life value is the maximum amount of life insurance that you can get on your life. And it is typically estimated as 15 to 20, sometimes even 25 or 30 if you’re younger, times your income or one times your gross worth, not net worth, gross worth. So if you have a hundred thousand dollar a year income, and remember life insurance is done on an individual, not a family. So if you have a hundred thousand dollar a year income, you multiply that times 15 or 20, that’s obviously a million five or two million

[09:54] dollars of life insurance. And yes, you should have a million dollar term policy, maybe even a million five of term and then have a quarter million, a half million, three quarter million, whatever you can handle of whole life insurance. And understand that your whole life insurance is your emergency slash opportunity fund. It is your savings account equivalent. And when you do it that way, you’re buying term insurance and whole life and the two things work beautifully together. And your whole life is your emergency opportunity fund again, earning three and a half to 4% without taxes and doing a beautiful job of providing for again, not only emergencies, but opportunities as well. And when you look at whole life insurance as your savings account

[10:43] equivalent or your emergency slash opportunity fund, and I really emphasize the opportunity fund because opportunity funds are fun to save into. They’re exciting. They bring opportunities. Whereas of course, emergency fund, that’s no fun. You want to just get done with that as soon as you can. But the opportunity fund is the environment that says, Hey, keep paying that life insurance premium. Keep putting in pay to petitions. Understand that this is a liquid account that you control. Remember our clue acronym, control liquidity use and equity and use it as the savings equivalent that it is. And Kim, just real quickly, um, I want you to, if you would explain that not all term policies are equal, um, and particularly convertible term.

[11:36] Yeah, that’s a really good point. So when you look at term insurance, there’s what I call cheap term insurance, which you can buy on the web and it pays a death claim period. That’s all it’s going to do. And there’s nothing wrong with that. When you know what you’re doing, that’s a perfectly acceptable product to buy, but people need to be aware. There’s also something called convertible term insurance, which I wouldn’t call cheap. I don’t know that I would call it expensive because it’s all very relative, but it clearly costs more. And that’s because it truly is convertible into whole life. And one of the benefits of that, or one of the values I was trying to mix those two words is that you have the ability

[12:18] to protect your health. When you have convertible term insurance, you can have a change in health and you can still make that term insurance convert or turn into whole life insurance. Whereas when you have the cheap term, you typically cannot do that. That cheap term is cheap for a reason. And again, there’s nothing wrong with it. So back to my earlier example of, let’s say somebody’s going to have two million, maybe they have a half a million of cheap term, a half a million of convertible term. And then over time, they’re going to get up to two million, excuse me, up to one million of whole life. And the beauty of course of whole life is that the death benefits growing all the time. But guess what?

[13:01] Your income’s growing all the time too. So your human life value is most likely rising every single year. And your whole life will keep pace with that typically, unless it’s taking big jumps, in which case you need to go get some more either convertible term insurance or some more cheap term insurance to maintain your human life value. But it is important to be clear on those differences. Convertible term is going to be a little bit more expensive, but it protects your health and it enables you to convert to whole life. Whereas cheap term is just cheap term. That’s all it’s going to do is pay a death claim. If you die within that timeframe. Well, and I think, you know, just to give an example of, you

[13:40] know, protecting your health. You know, if you’re 30 years old, you can buy term insurance relatively inexpensively. But if it’s convertible term, you know, five years later, if you’re diagnosed with cancer, you have a heart attack, it really doesn’t matter. You still are able to convert that into a permanent policy. And I think, you know, typically it’s so attractive for people in their thirties and forties to buy term insurance and even a 20 year term policy is relatively inexpensive. But then all of a sudden, 20 years later, when you go to renew that policy, not only do the premiums increase, they increase incrementally, don’t they? Absolutely. We’ve seen massive, massive jumps and it’s something that

[14:26] people just are not aware of. Super. Well, Kim, I know that, you know, as always, you try to provide additional value to our listeners. So I know you have a gift that you want to offer. Absolutely. There’s two things. One is something that they can get right now. And then one is a hint to something coming down the road in the future. We’ve got a new book, Busting the Life Insurance Lies, and it’s probably still two or three months away, I want to say, but I’m super excited about it and you know, I just listened to and read some information that came from a source I’m not going to name that was supposed to teach people about life insurance and it was teaching life insurance agents about life insurance.

[15:12] It was the most convoluted, uncanny, impossible to understand material that I’ve ever seen. And so I think our Busting the Life Insurance book is going to do a lot, lot better at that, even though it’s designed for clients. I think it’ll be helpful to agents, but what’s available right now is an ebook that’s also in the form of an audio book and it’s called Financial Planning Has Failed. And I just looked at it recently and it has the greatest history of our America’s work with finances, starting from about the 1920s till today, a really interesting piece of history on finances and some of the laws and things that are around our finances right in the middle of the book. So Financial Planning Has Failed is available in only one location

[16:07] and it’s partners, number four, Prosperity.com slash ebook. There is both a PDF and an audio version available. Awesome. And I encourage all of our listeners to take advantage of that. Again, keep your mind open, ask a lot of questions and continue to ask questions of us. We are glad to address anything on our podcast. And once again, this is No BS Money Guy Todd Strobel, special thanks to Kim Butler for today. And we’ll see you all again soon. Take care. And Shopify.com.