Death Insurance
The reason why your family is underinsured is because some commission-hungry insurance salesman has sold you too much life insurance. You don't need life insurance. You need, or rather your heirs need, death insurance. You die, the company pays. This is term insurance, and salesmen don't like to sell it. They want to sell you "life" insurance: a "savings" plan, called cash-value life insurance, which will give you your paper money back at age 65. It is grotesquely expensive, incredibly profitable for the insurance industry, and a disaster for the buyer. Price inflation wipes you out.
It is very easy to find out if you are overpaying for your death insurance. In the PDF link at the bottom of this article is a reproduction of the Commissioners 1958 Standard Mortality Table, the uber-conservative table used by insurance companies to estimate life expectancy for members of each age group. Here is how to use it. Locate your age group, and then check the "Deaths Per 1,000" figure. If you want $100,000 of term insurance, multiply this figure by 100. At age 30, for example, you should pay no more than $213 this year for the $100,000 protection you want for your family. If you pay more than 10% above $213, you are overpaying, and really, you should not be paying this much. If they revise the table in a few years, as they should, given the longer life expectancy of Americans today, the rates will drop, but only on new policies. You must check every year with your insurance salesman to see if the new table is out. If it is, convert your policy to a new one which reflects the lower risk. If you have a pre-1958 policy, you are really overpaying; some policies are not automatically reconverted. You are paying on the 1941 table which reflects the life spans of men living in the 1931-41 era. You can still switch your policy. Remember, few agents will tell you when a new mortality table becomes standard. You have to ask. Keep shopping, and never hesitate to switch companies or policies.
Cash-value life insurance -- "ordinary life," "whole life," etc.--is sold in the name of family savings. You earn something under 3% on your cash-value portion, and only if you hold the policy to maturity at age 65. Meanwhile, the company is earning about 6% on the money you have invested in the policy. Life insurance companies therefore structure salesmen's commission rates to discourage the sale of term insurance. The difference between a first-year commission for a $100,000 cash-value policy and a term policy can be as large as $1,000: $1,100 vs. $100. No salesman can earn his living selling only term insurance.
Term insurance buyers therefore get a subsidy from buyers of non-term insurance. They pay lower commissions, and therefore lower premiums, than would have been possible had the commission structure accounted for the full costs of signing them up. You are foolish if you continue to subsidize term insurance buyers like me by buying cash-value policies. Only 15% of all American policies sold are term insurance policies.
With price inflation at 6% per annum, compounded, and cash values receiving about 2.5%, the purchasing power of each year's cash value portion of the premium will fall by about 50% every 20 years. With price inflation at 10%, the investment is losing over 7% per annum in terms of purchasing power, reducing its purchasing power by 50% every decade. This is a savings plan?
In a time of price inflation, as our era is, it is economically suicidal to become a long-term creditor in fixed return (fixed percentage) long-term credit investments are these: cash-value life insurance, annuities, pensions, bonds, and mortgages. Life insurance companies sell us the first three in order to invest two-thirds of their assets in the last two. Draw your own conclusions.
If you die, the savings portion of your cash-value policy is used to pay off its face value to your heirs. The longer you hold a cash-value policy, the larger your share of the death insurance portion. You die, you pay. This is insurance protection? Your death wipes out your so-called savings. lf you buy term insurance and invest the difference between the two premiums, you should be able to make 6% or more on your savings (not 3% or less), and your death will not wipe out your savings. Convert to term. Now.
How much death insurance is necessary? The standard rule of thumb is this: at least three times the net (after tax) annual income of the insured. This is probably too low, given the present rate of price inflation. A four-to-one figure is more reasonable. Personally, I think a young family needs at least $75,000 and probably $100,000. You therefore have to buy term insurance. You can't afford anything else.
The wife should purchase the policy in order to keep the pay-out from entering the total estate of the husband at his death. It removes the pay-out from the estate tax, should there be any. She should be listed as the owner and pay the premiums with her own personal, exclusive checking account (not a joint account).
You (she) should insist on the following type of policy: annual renewable term, renewable to age 70, non-participating, with increasing premiums and a fixed pay-out. To get one, you will have to insist on it. Salesman don't like to sell them.
Premiums on identical insurance coverage can vary more than 100% per year. You must shop price. One Christian organization that can help you is the Life Insurance Truth Society, 140 N. Barry Aye., Wayzata, MN 55391. They keep track of low-cost companies. (You might send a $5 donation when you write.)
A. M. Best Co., of Oldwick, NJ, publishes the financial ratings and addresses of all U. S. insurance companies. Your library may have Best's Insurance Reports--Life/Health. If so, use it. Here is the universal rule: if you don't fully understand the economics of the policy, don't buy it. If you have already bought it, buy term and then cancel it.
A few companies "low ball" you in the first four years and then raise premiums on you in the fifth year. They want you to convert your policy to cash-value life. If your policy does this, switch to another company. For larger policies above $40,000 Commercial Bankers Life, Covenant Life (Indiana), and United Investors Life offer competitive rates. For $10,000 and $25,000 policies, Old Line Life is good. New policies with new rates keep appearing on the market. Keep shopping, and never be afraid to switch companies. This is a good reason for avoiding "deposit" term insurance, where you have to stay with the same company for 10 years to recoup your initial extra deposit. Even when you receive double your deposit, you have barely kept pace with inflation. Make the companies compete for your insurance dollar.
For more information, read Norman F. Dacey's book, What's Wrong With Your Life Insurance (Collier, 1962, $1.95) and the American Institute for Economic Research's book, Life Insurance from the Investor's Point of View (Great Barrington, Mass., $1).
Biblical Economics Today Vol. 1, No. 4 (August/September, 1978)
For a PDF of the original publication, click here: