Why Buy Term Life Insurance and Invest the Difference

If you were to die tomorrow, who would suffer financially? This is the planning question you use to decide whether or not you need life insurance.

If the answer is no one, it’s simple. You don’t need life insurance. If the answer is someone – your spouse, children, parents or business partners – you do. When the answer changes from someone to no one, your need for life insurance just went away. So should the policy.

So, let’s suppose, at this point in your life, the answer is still someone. You need life insurance. But what kind of life insurance? Agents are showing you all kinds of exotic, enticing plans that have all kinds of bells and whistles. Should you buy them?

The title of this piece clearly tells you where we, at Snider Advisors, fall on this issue. To be clear, we are comparing permanent insurance, also known as a cash value policy, against term life insurance, for the purpose of providing a death benefit.

I’m not saying that it is never acceptable to purchase a cash value policy. Permanent insurance does make sense for a very small minority of people. A family with a special needs child will need to provide for that child’s care for the rest of his or her life; special needs trusts are typically set up with cash value life insurance policies to accomplish this. Wealthy individuals also utilize cash value life insurance policies to pay their estate taxes, and business owners often need permanent policies for their succession planning. These people are using the product to accomplish a specific goal, which is likely different than yours.

If you need life insurance, your goal is probably much simpler: to leave a check for your dependents in the event you should die. The death benefit that your family needs can be accomplished with term insurance for a pretty darn good value.

For example, a 35-year-old healthy male, who does not use tobacco, will pay about twenty dollars a month, for $1,000,000 of term coverage, for 10 years. A permanent policy premium for the same amount of coverage would be about twenty times that much!

Term insurance is pure risk management. It pays for the cost of insurance during the specified period of coverage. Wasn’t that your goal?

Permanent, or cash-value, insurance policies are meant to be a long-term vehicle that combines insurance with an investment account. A portion of your premium goes towards your insurance coverage, while the rest is directed to a separate savings account.

There are three types of permanent life insurance: whole life, universal life, and variable life. The difference between each of these policies is essentially how the separate savings account is invested.

Whole life is invested very conservatively in cash, money markets, and bonds. Universal life tracks an index, such as the S&P 500, and variable life is invested directly in the stock market. With variable life, the policy owner can self-direct his or her investment choices.

All the “benefits” of permanent, cash value life insurance need to be carefully scrutinized:

In the first three years or so of a permanent policy, the cash value is eaten up by commissions and expenses. Be aware that an insurance agent will receive 50-100% of your first year’s premium.

How about return? James Hunt, actuary for the Consumer Federation of America, who has analyzed thousands of these policies, notes that permanent policies hardly ever yield a reasonable return unless held for twenty years or more. And what exactly is “reasonable?” Be sure you are analyzing the internal rate of return of the policy, which is the return net of fees and expenses.

Most Americans cannot get by with a 4% withdrawal rate. In fact, the vast majority will need a low double-digit yield from their portfolio to sustain thirty or more years of retirement. This would be nearly impossible to accomplish with a permanent life insurance product.

The words “professional management” should scream high fees to the consumer. What are these fees? I can bet it’d be a surprise to the agent, if he or she could find out. These almost never get discussed because they are hidden and blurred in the product.

On top of these fees and the commissions paid to the agent, you will pay surrender charges to get out of the policy. These charges often apply for 10 years or more.

Add inflation to the picture, and it’s easy to see that the investment portion of these policies almost certainly do not match up well to your financial objectives. Moreover, the investment choices in these policies are usually lousy. In our opinion, you are much better off self-directing in an IRA.

Cash value life insurance does come with favorable tax treatment, often called a “turbo-charged Roth IRA” by agents. In theory, it is. You pay the premium with after-tax dollars and the earnings grow tax-deferred; however, the cash value is not always “tax-free” as many agents claim.

If you surrender or cash-in the policy, and the total amount of cash value returned to you is less than the total amount of premiums paid, it is considered a return of principal and is not taxable. If the cash value returned to you is greater than the amount of premiums paid, the amount in excess of premiums paid is considered a “gain” and is taxable as income. If the policy you surrender is considered a Modified Endowment Contract (the company can inform you if it is), cashing-in or borrowing against the cash value may be fully taxable. You should consult a tax advisor if this is the case.

You can take out loans from your cash value tax-free, but agents fail to mention that by doing this, you are greatly increasing the chances that your policy will lapse long before the nice illustration shows, meaning that the coverage you think you have to a certain age will expire unless you pay a higher premium (often prohibitively so). If you do not pay the loan back, it is subtracted from your death benefit.

Don’t forget one other potential tax trap. If you’ve borrowed from the policy and then let it lapse, the investment earnings you’ve withdrawn become taxable. So if you aim to use the policy for income in retirement, you could end up facing a substantial tax bill late in life when the last thing you need is to be shelling out the big bucks to the IRS.

Now, let’s talk about risk. Just because the premiums are invested in short-term money instruments does not mean there is no market risk. There is less market risk than, let’s say, a mutual fund. There is, however, substantial interest rate risk.

If interest rates are high, the cash value of the policy will grow accordingly. However, a low interest rate environment will diminish the cash value of your policy as company fees and insurance coverage costs are applied. If this happens for any prolonged period of time, you run the risk of losing the bulk of your cash value, if not all of it.

Another hidden aspect of cash value life insurance is that if you, the insured, die, the only death benefit your beneficiaries will receive is the face value of the policy.

But what about all that cash value? In most scenarios, the insurance company keeps the cash value to help pay out the death benefit, which wipes out all that hard-earned savings. Some policies specify that beneficiaries will get both the face value and cash value, but it comes with a price.

Now for a word that insurance agents love: guarantees. Most insurance agents only highlight the non-guaranteed illustration showing a return of 8.5% or so. They spend very little time showing the guaranteed illustration because it doesn’t look so hot and would likely kill the sale.

Put bluntly, insurance agents are salespeople. While they are noble in their efforts to protect families in the event of premature death, most permanent life insurance recommendations are more beneficial for the agent, in the form of generous commissions, than they are for you.

In our opinion, cash value life insurance is simply not the most efficient and effective way for you to manage the financial risk, to your family, of your premature death. The truth is the policies almost never work the way they are explained in the sales pitch and you’re much better off following the old saw, “Buy term and invest the difference.”

No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment advice unless specifically stated as such. All investments involve risk including possible loss of principal.

AIG Life Insurance – Agent Marketing Reflections

AIG Life Insurance Company, as part of the American International Group, was the global international leader in the financial services industry. This giant has various operations in over 100 countries with additional services that include property casualty insurance, asset management services, and purchasing and underwriting subprime loans. Without the massive and controversial United States bailout, it would be in bankruptcy.

AIG has lost their coveted super high insurance ratings, where the major rating firms annually miscalculated their business practices. Now they have begun a reorganization that will constitute major selloffs while refocusing on once again becomes a dominant insurance company. Stockholders saw stock prices plummeting from its high by over 90% before now starting to stabilize.

Your big AIG question should be: Has AIG learned their lesson? Moreover, if you now or previously represented them, Have You learned your lesson?

Five things contributed to the choice of many American insurance reps to sell their insurance products to clients.

1. GREED Selling term insurance offered by AIG Life Insurance provided representatives with commission payouts often 20 to 30% higher than other major competitors.

2. SIZE Insurance representative implied to prospective clients that dealing with the largest company, meant it had to be the best. Otherwise, how could it be the largest?

3. RATINGS Many insurance reps only will sell products of the highest rated insurers. They tell themselves and clients that means financial security. Well the atomic rating bomb has exploded, injuring millions.

4. PRICE The easiest way to sell term life insurance, is to offer your prospect the lowest price on the market. Do clients buying AIG Life coverage live longer so rates are lower? Are AIG internal expenses lower, so rates are lower? (Like an expensive resort meeting in Arizona funded by American taxpayers) Do they pay their reps less? (See #1) A full combination of these would be the only way rates could be lower then competitors.

5. BUYING BUSINESS The quickest way to jump the ladder to rise upward, is for an insurance company to “buy business”. As the insurance company, you attempt to give as many clients now by whatever it takes to get more policies sold, and worry later about when claims have to be paid out. Baiting the hook was easy. Sucker in agents with higher commissions, the lowest term insurance rates, and thinking they were representing the smartest insurer out there.

AIG Life Insurance is still “buying business” today, after all the turmoil of internal problems. Watch television and you will see a closely affiliated company offering term life insurance at rates up to 70% less than others. If you somehow catch the fine print, you will see AIG mentioned as the insurer. An excellent way for AIG Life Insurance to bypass insurance representatives, and still fool consumers. A slight twist, but business as usual for them.

Selling insurance to clients should reflect the conscience of an insurance representative in recommending the right product and the right company. There are over 600 life and health insurance companies offering products in almost every state. If you are selling based highly on commission rates, company size, ratings, or price, you are probably doing a disservice to your clients.


Finding Affordable International Travel Insurance

Most people enjoy traveling abroad, but there are some risks involved in the trips. No one wants accidents to happen but they do because we have no control over them. This means that you should never travel without international travel insurance which can be of great help in case you find yourself in trouble in a foreign country. The insurance policy should cover for any loss of baggage, illness and also death.

Some people feel strong and think that they can take care of themselves. However, you are wrong because you never know what will happen to you. Get cheap international travel insurance and you will be in a position to pay your medical bills when involved in an accident. People keep losing their baggage while on trips and you should not count yourself out. Keep yourself and your items covered with an insurance policy and things will be easy even when you get into problems. In a foreign country, you have no one to help you, but you can turn to your insurance company and claim compensation on all the items lost.

Getting international travel insurance helps you to remain calm and at peace while traveling. You will not be thinking of financial losses once you get good travel insurance cover. The travel insurance should compensate you if you are delayed during the trip. Cancellations can also cause you financial loss and you need to be compensated. To most people, travel insurance is about medical expenses. This is also good for you because you get health care without delay and the bills are cleared for you. Make things easy by getting insurance cover and your trip will be smooth without any problems.

To some people, international travel insurance is wastage of money but this is something vital and you may put your life at risk. Having an insurance cover you can think straight and also be sure of compensation if things fail to go in the right way. When looking for the cheapest insurance cover, always consider the services provided and not the price. This will ensure that you get the best to keep you protected. This is one of the most important things that you need to do when getting ready for a trip.

You need to understand that the benefits of international travel insurance are more than what you invest when applying for the insurance policy. Visit several website and see how insurance companies help in your situation which can be too costly for you. Taking sometime to do some research will ensure that you get the best out of your money. You can only do this by comparing the quotes before you purchase the policy. This will make you get affordable travel insurance and enjoy all the quality protection that you require on your trip.

Make sure that you get international travel insurance before you leave your country. Do no risk thinking that everything will be fine, it’s better to be safe than sorry.

International Health Insurance

One single best investment you can give to yourself is personal insurance. May it be health insurance, travel insurance or life insurance, it will still give you enough leverage to confidently do your task everyday anywhere without worrying so much that in any moment, an accident might occur.

However, these types of insurance have limited coverage that is not applicable on a particular situation. The situation I am talking about here is when you decide to live in another country. Sure, you have life insurance or health insurance. But these are only applicable within the boundaries of the United States. So if anything happens to you outside the country, these insurances cannot help you in any way. Same thing goes with travel insurances. Although they can be applicable outside of the country, the claim is only limited up to a certain extent such as medical evacuation, trip cancellation, and trip delays.

The bottom line is, when you travel and decided to live outside the United States, these insurance policies you have invested in your life is no longer useful. Thus, you need a particular policy that would be about to give you the coverage you need for this particular situation. You need an international health insurance.

In some way, international health insurance is just the same with other insurance policies available for you. But why get international health insurance?

For those who have no desire or could not afford to travel internationally, there is no need to purchase international health insurance. But for those who are considering going abroad and staying there, this would come in handy.

Of course there are prices to pay. While personal health insurance (valid locally) can cost you wealth, international health insurance costs even higher. But, the amount you pay is nothing compared to the benefits it will provide.

In most cases, basic international health insurance can give you coverage on things such as hospital accommodation, local ambulances, in-patient or in-hospital care, anesthetists’, physicians’, and surgeons’ charges. Some provide you with radiotherapy, oncology, pathology, and radiology coverage.

For wider coverage, a more upgraded international health insurance can answer primary care and primary consultations for outpatient visits. Therapies such as homeopathy, physiotherapy, acupuncture, osteopathy, and primary care and primary consultations including prescribed medicines are covered. For added options, emergency dentistry and at-home nursing care are available at your desire. Of course, the wider the coverage you ask, the more expensive it would be. Usually, the international health insurance with this broad coverage can cost twice as much as the basic.

The coverage does not end here.

You can get more with higher premiums. If you opt for this, you can add options such as organ transplants, psychiatry, childbirth, rehabilitation, general practitioners consultations, home delivery, and other specializations such as eye, ear, nose, and troth consultations. Other coverage can include visit to specialists such as chiropractors, psychotherapists, dietitians, and osteopaths. Scans, x-rays, lab works, and others can also be included in your coverage along with prescribed medicines.

The bottom line for international health insurance is: if you need any medical attention whether here or abroad, you can always tap your insurance policy. After all, accidents strike at any given time, regardless of your location and situation you are into.