理财专家林修荣:为什么我反对购买Whole Life人寿保险

為什麼我反對購買WHOLE LIFE人壽保險

Question:

 

I am single, 29-years old, a non-smoker and non-drinker and in good health. I own a condo and a rental property. My annual income of $60,000 is quite stable. I plan on getting married in about three years.

 

Recently I was thinking about buying some life insurance. A brother at my church works for XXXXXXXX Life and he explained to me why I should buy Whole Life insurance instead of Term Life insurance.

 

He highly recommends whole life insurance, justifying by saying that the cash value and death benefit will increase (compared to fixed level in Term Life), and the dividend starting from about the 11th year can automatically pay the premium, etc.  He is a good brother at the church so I don't think he's only trying to get me as a client, but he truly believes whole life is better than term life.

 

I have been listening to you radio program and you reminded us repeatedly to stay away from Whole Life insurance. I am confused. Can you explain to me what type of life insurance I should get.

 

Answer:

 

Thank you for your e-mail. I appreciate your eagerness to seek the truth and not just rely on what people say.

 

XXXXXXXX Life is one of the few companies that hire a lot of Chinese sales agent to market Whole Life to the Chinese community. Whole life has been shunned by the main stream society (will explain below) and that is why the industry came up with Universal Life (which XXXXXXX Life also has, but seldom sold in the Chinese community). Since Whole Life is very profitable to insurance companies, some of them still sell it to people who do not understand insurance, and who do not read or speak English. The Chinese community, with its many new immigrants, has long been a prime target. XXXXXXX Life not only trains (brainwashes) its sales agents to sell Whole Life, it also has a special (higher) commission schedule to encourage the sales of Whole Life. They will sell Whole Life to a small child and to people who are 90 years old. Its special commission schedule is as follows:

 

Assuming a $100,000 Whole Life Policy from XXXXXXXX Life, $2,400 annual premium:

 

1st year:         Agent gets 55% of premium = $1,320

                        Manager gets 10% of 55% = $132

                        Total Commission: 60.5%=$1,452

 

2nd year        5% of premium =$120

3rd year          4% of premium = $96

4th year          3% of premium = $72

5th year          2% of premium = $48

6th year to 9th year              0.48% of policy death benefit = $480 each year

10th year to 14th year         0.72% of policy death benefit = $720 each year

15th year or over                  0.96% of policy death benefit = $960 each year

 

You can see the significant "trailing commission" Whole Life has, which is not available from other types of policies.

 

Whole life is sold as a "permanent policy" which has a fixed premium. Part of the premium goes to pay for the cost of insurance, commission, company profits and other expenses. The rest of the premium goes into "Cash Value" on which an annual dividend is paid. The amount of dividend is not fixed, and it varies according to "claim experience", market interest rates and profits of the insurance company. When the sales agent says you can "stop paying premium after XX years", what he means is if the cash value is large enough, and the dividend rate is high enough, then the dividends from the policy may some day be enough to pay for the cost of insurance, commission, company profits and other expenses. These costs are still to be paid throughout the life of the policy, but if the dividend is high enough then the policy owner does not need to pay. This is called "Premium Offset Plan" or POP. But even if a policy is POP, it is not a "paid-up" policy because premium payments are still required, although they are not being paid in cash by the policyholder. So it is entirely possible that after a few years the policy owner has to pay premium again because the costs may have increased yet dividend rate may have decreased.

 

A few more things you need to know in order to understand Whole Life. First, the POP (or how long it takes to stop paying premium) is NOT guaranteed. It is all just an estimate. Agents usually overestimate the dividend rate and underestimate the POP period. That is why many Whole Life policyholders complain when they find themselves having to continue paying premium long after the supposed POP period. There have been a number of major class action lawsuits against insurance companies on this problem and insurance companies have settled for millions of dollars. Second, the "cash value" may help generate some dividends to offset the premium some day, but the cash value itself actually belongs to the insurance company, not the policy owner. Unless the policy is cancelled, the policy owner does not get the cash value except by borrowing it. When cash value is borrowed, interest has to be paid to the insurance company, and the principal has to be repaid (typically by deducting from the death benefits when the insured dies). So the beneficiary never gets the cash value, because upon the death of the insured the beneficiary only gets the death benefit while the cash value goes to the insurance company. (The insurance company explains it by saying that the cash value gets folded into the death benefit, but since the death benefit does not increase, that means insurance company pays out less death benefits as cash value increases). Lastly, Whole Life policy has several "dividend options". It could be paid out as cash (taxable income), or it could be used to purchase paid-up insurance, or it could be added to the cash value. If it is paid out or used to purchase paid-up insurance, then the cash value will accumulate very slowly so it will take even longer to POP. Some agents are not aware of this, so they would overpromise the POP period.

 

Having explained the mechanics of Whole Life, I want outline below why Whole Life is hardly sold in the main stream society, and why personally I think whole life insurance is a terrible product for the consumer, (but is an excellent product for the insurance sales person because of the high commissions)

 

1. The premium is high as it forces you to over-pay in order to build up cash value.

 

2. The cash value earns low interest rate, so the build up is very slow.

 

3. Usually the salesperson tells you that you won't need to pay any more premium after a certain number of years (usually ranges from 8-12). But many people found that they have to continue paying premium for a long time. It is because the salesperson was using a certain assumption on the interest rate and expenses, which usually turn out to be too optimistic.

 

4. The annual statement that you receive has no breakdown of fees and expenses, and no information on the interest amount. So you really don't know what is going on.

 

5. The cash value you build up actually belongs to the insurance company. When the insured dies, the cash value is not received by the beneficiaries.

 

6. There are better permanent insurance products than whole life even if one wants permanent insurance. But in their eagerness to sell Whole Life, most sales agent would not tell you about the other products, or would give you mis-information about other products.

 

7. This is the biggest reason I have been speaking out against buying whole life insurance: whole life causes many families to be UNDERINSURED and UNDERPROTECTED. Many families have a hard time paying the high premium, yet because of their income level they can only get a very small amount of coverage. They should use term life to get the maximum coverage they need at a very low premium.

 

Most families, particularly families with limited income, should buy adequate Term Life insurance (which is pure insurance for a finite time period) to protect their loved ones. Whole Life premium is on average about 6-9 times higher than 30-year fixed premium Term Life premium, so many families are forced to be underinsured if they go with Whole Life. For example, in your case if you are in normal health and is a non-smoker, a $250,000 30-year Fixed Premium Term Life should cost you only $25 a month or $300 a year, which is fixed for 30 years. But if you buy $250,000 Whole Life, your premium could be $2000 a year. And you probably have to pay this for 14-18 years before you have a chance of stop paying. For most families, they only need life insurance for a period of time in their life. So buying Term Life and invest the premium difference is a wiser way to go.

 

Before you go further, click on this link to read this article from Smartmoney (Wall Street Journal) which compares with Term Life and Whole Life. http://www.smartmoney.com/insurance/life/index.cfm?story=lifeterm  Then open the attached documents to see some of Consumer Report's comments from its July 1998 issue. It is important to hear from unbiased sources (people like me or SmartMoney or Consumer Report) who do not earn any commissions from selling Whole Life). As the article points out, there are some people who, for special reasons, need permanent insurance (most people only need it for a finite period, while their children is growing up). As I mentioned above, even if these people need permanent insurance, Whole Life is still an inferior product as Universal Life is cheaper and better. You will not hear this from a XXXXXXX Life sales agent.

 

As to your personal situation, if no one is relying on you for financial support, you actually do not need any life insurance at this time. So you should save even the $300 a year. But when you have your first child, both you and your wife should get sufficient Term Life coverage (sufficient means a minimum of 5-7 times annual income).

 

As to this brother from your church, I do not doubt his sincerity and honesty. XXXXXX Life sales agents are divided into two groups. One group fully understands what I wrote above but still chooses to sell it for commission reasons. The second group does not know better as they are brainwashed to think Whole Life is the best kind of insurance there is. I have no doubt the brother at your church belongs to the latter group. I would not mind at all if you show him my e-mail. Most Chinese XXXXXXX Life sales agents have heard of me (and many of them hate me because I help my radio listeners understand more about life insurance -- something they are very afraid of.)

 

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