"Why is life so complicated? The list of culprits includes tax code writers, whoever it is who comes up with the rebate procedures for electronic gadgets, and life insurance salesmen. ... Now you have all kinds of enhanced features to contend with: Guaranteed Minimum Income Benefit, Return of Premium, Equity Linked Universal Life, Lifetime Withdrawl Guarantee. ... Buy level-payment term insurance. This product has a flat annual rate, no cash value at the end and no decisions for you to make except to send in the premiums. ... The reason sales agents don't push term insurance is that it's so simple and so easy on comparison shoppers, and as a result so cheap that they can't make a living off the commissions", William Baldwin (WB) at Forbes, 5 October 2009.
I agree with WB. For 40 years it's been BTID, buy term, invest the difference. The more complicated a financial product is, the more laden with fees.
2 comments:
BTID...
What a great internet business model that could be.
Amazon.com for financial products.
Well Sort of, All life insurance generally pays the same for the first year. Term and UL/WL generally pay 9 months advanced and 3 months as earned. Which means the first years premium goes to the agent. so if the client has a 30 dollar a month policy, the agent gets $270 once the policy is issued and $90 dollars on the last 3 months. The insurance company is out the blood work, ekg, other test and underwriting costs until the 2nd year. which is the reason why the insurance companies hate when agents switch clients to different insurance companies at the end of the first year. There are non monetary reasons to switch your client too. Just because you are one year older does not mean you can't get a cheaper rate.
On UL/WL there are residuals on these polices but you have to write a lot to make any real money from it. You basically have to keep finding new people to sell insurance or your are out of the game because it is a one time sale.
On Health and Property the renewals are better than the residuals from life. Medicare Advantage plans pay $200 on renewals which is nice. Auto on the other hand pays 40 dollars for the entire year..
Which is the reason why insurance agents will try to get referrals from the client and try and sell Accidental Death, Critical Illness(get a check when you get sick), Disability Insurance, Supplement(Aflac),Auto, Liability coverage, Etc... You have to continue to sell, so you can make a thousand dollars or more from one client (hint think about the yearly policy review). Or you simply have to find a source of nearly a unlimited number of people that are interested in buying life insurance.
I do agree that buy term and invest the rest is the best option for young healthy people. But how many people do that? I still would not buy a whole or UL. But I am still young. But there are many other situations that would require something different. What about a senior who is broke? Term is crazy expensive. the only life insurance is whole life. The sick are in the same boat too. that is what Final Expense is great for. there one one more big situation in which whole or UL is the only choice and that is preparing for the estate tax. if all your money is locked up in a business and you die you are most likely going to have to sell your business. But whole life will bring liquidity to this situation. If you think term can do that then just don't live past 85 which is the max a underwriter will write a term for.
Term is not a one size fits all insurance product but for 90% of the time it is great. You just have to get the person to actully invest the rest and not lose it.
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