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Guarding Your Wealth for Senior Citizens
Beware of Universal Life Insurance: Part 1
Reasons sales people
give seem compelling, but…
By Jeffrey D. Voudrie, CFP
 August 16, 2006 - Has a life insurance agent
suggested that you buy ‘permanent’ insurance such as Whole Life,
Universal Life or Variable Universal Life? The reasons they give seem so
compelling, but are they in your best interest? Here’s an explanation of
the basics, plus what the insurance agent isn’t telling you!
There are two broad categories of life
insurance—term and permanent. The basic idea behind life insurance is
that if you die prematurely, there will be a pot of money there to take
care of your loved ones. That pot of money is referred to as the ‘death
benefit’.
The cost of life insurance is based on your age,
your gender and your health. The insurance company bases the premium on
the risk that you will die. The older you are or the poorer your health,
the more expensive the insurance will be.
The ‘raw’ cost of insurance goes up every year
because the risk of death increases every year. Term and permanent
insurance approach the payment plan differently. With level term, these
increases in cost are spread out over 10, 20 or 30 years and the premium
is kept the same. If you renew your policy at the end of the term, your
insurance costs will increase.
With permanent insurance, your premium stays the
same as long as you own the insurance, up to age 100. That way, you
shouldn’t be in a situation where it becomes too expensive as you age.
Initially you pay more than the raw cost of insurance and that money is
kept in reserve. Once the raw cost of insurance is greater than your
premium, the difference is taken from the reserve.
The difference between Whole Life, Universal Life
and Variable Universal Life has to do with the return you earn on that
money while it’s kept in reserve. Whole and universal essentially pay
interest while variable universal allows you to ‘invest’ that reserve in
mutual-fund-like accounts.
On the surface, it may seem that there shouldn’t be
a lot of difference between the premium on 20-year term and a universal
policy with the same death benefit. But let’s look at some real numbers.
The annual premium for a 45-year old man in excellent health for
$1,000,000 in coverage is $1400 per year for 20-year term. That man
would pay roughly $8,000 a year for permanent insurance. That’s
right—about $6600 more every year.
That reserve in the permanent insurance can become
a substantial over time, so they give you the ability to borrow the
money held in reserve. This has spawned the use of permanent insurance
for needs other than the death benefit, such as a way to build a
retirement nest egg. The ‘ploy of the day’ is that you should take all
the equity out of your home and put it into a universal life insurance
policy because it will allow you to build your wealth more quickly. (I
expose the fallacy of that argument in a future article.)
What your insurance agent isn’t going to tell you
is that the commission on permanent insurance can be around 70% of the
first year premium and then maybe 5% a year on additional premiums.
Commissions on first year term premiums can be as high as 100%. In our
example above, the agent will make about $5600 on permanent versus only
$1400 on the term. This higher commission is a tremendous incentive for
agents to sell permanent insurance instead of term.
The result is a huge conflict of interest between
the needs of the client and the desires of the agent. I would like to
think that every agent will always do what’s in the client’s best
interest, but we know that’s not the case. And most agents are convinced
that term is a waste of money and that permanent life insurance is the
better choice. I don’t.
I believe that permanent life insurance should only
be used in special situations, such as to cover estate taxes due at
death. I do not think it should be used when you want to provide for
your family in the event of a premature death. I don’t think it should
be used as a way to ‘build wealth’ or as a type of retirement plan. In
my next article, I’ll explain why.
>> "Beware Of Universal Life Insurance – Part 2"
was published in SeniorJournal.com on August 17, 2006 and is available
by Clicking Here.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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