"the termite" (part 2)
THE PHANTOM CASH VALUE
The next question quickly leads to participant outrage — the same
feeling I had when I first learned about it. The answer to this
important question reveals a deep dark secret that the life
insurance industry has carefully kept hidden from the American
public for the last 150 years. They know that if this secret was
ever fully exposed, no sane American would ever buy cash value life
insurance.
The question is, "WHAT DO YOU THINK HAPPENS TO THE CASH VALUE, THE
PROMISED POT OF GOLD, WHEN THE INSURED DIES? WHO GETS IT?" If I
asked them the square root of 5,422, I would get a similar response
—total silence. No one knows the correct answer! Had I been asked
that question prior to my time in the
library, I would not have known the right answer either.
Some people in the class respond, "The beneficiary?"
"Wrong, guess again." Blank stares.
"Okay folks, I'll tell you. The life insurance company keeps it.
All
that extra premium you paid for so many years (five to ten times
more than term) to build up an investment for the future was spent
in vain because the cash value vanishes - literally DISAPPEARS."
Someone usually asks, "Marsh, are you sure about this?"
"You bet I am. Read a cash value insurance contract.in it, buried
somewhere in very small print, is the statement that the insurance
company holds legal title to the cash value. THEY OWN IT, NOT YOU.
Their name is on it, not yours. And if the insured dies, they never
hesitate to keep it for themselves."
"But the beneficiaries still get something, don't they?"
"They sure do, " I reply. "They get the face amount of the policy,
not a dime more or less. But remember, they'd get that same face
value with a term policy at 1/5 to 1/10 the cost."
"But the insurance agent told me that the cash value belongs to me
and it was just like a bank savings account! IT'S MY MONEY!!!"
"Mam, I don't want to upset you, but the cash value resembles a
bank
savings account about as much as a shark resembles a goldfish." That
statement elicits both giggles and more frowns.
"But you can borrow the cash value... Right?"
"Borrowing your cash value from an insurance company is NOT the same
as withdrawing money from your bank savings account because you must
pay the loan back, with interest, making this so called feature no
big deal. More about this later."
"Can we ever get the cash value?" someone asks.
"You sure can. All you need to do is ask your life insurance
company for it. But to dissuade you from taking what is yours, your
insurance company will cancel your life insurance coverage as a
punishment."
"I thought you just said that they own the cash value. If so, why
do they give it to you if you ask them for it?"
"It's because the sow is schizoid, meaning that it acts differently
under different circumstances. If you are alive and ask for it, you
can get it. But if you die, the insurance company gets to keep it.
Weird, huh?"
"None of this makes any sense."
"Believe me, nothing about cash value life insurance makes any
sense.
The product is totally bizarre."
By now there are a lot of unhappy campers in the room. It is not
pleasant for them to learn that the life insurance industry, with
its benevolent mom and apple pie image, plays lots of sneaky tricks
and is anything but benevolent. I will never forget what one
participant once said in disgust, "The good hands people apparently
have lots of dirt underneath their fingernails."
Another participant, who must have heard all he needed to hear, was
in no mood to relax when I announced a break. The burly 300-pound
gorilla grabbed his coat and left the room muttering something about
strangling his brother-in-law who sold him "chump change" whole life
insurance!"NO ONE MAKES A SUCKER OUT OF ME!"
The seminar continues...
THE BORROWING ILLUSION
The ability to borrow the cash value is endlessly hawked by the
industry as a major benefit of cash value life insurance. It's
not,
as the following illustrates.
"Folks, let me change your thinking on this matter. Let's say that
you open a savings account at a bank with $5,000.in a year's
time,
you have a balance of $5,250 including the $250 interest you've
earned. Now you decide to withdraw the $250 in accumulated
interest.
Tell me, what would you say or do if, in a month, the bank sent you
a bill for the $250, plus interest?"
One participant once said, "I'd call out the Marines and scream
bloody murder. My bank would never do that... That's my money!"
"You are correct... Your bank would never do that because the
money in a bank savings account is really your money. You can demand
it from the bank anytime and you will get it with no strings
attached. What's more, they will never send you a bill. But in the
zany world of cash value life insurance, things aren't quite like
that because they treat your cash value withdrawal as a loan and
they will send you a bill.
"What's even more amazing to me is that they have managed to
convince the public that this loan "feature" is some kind of a big
deal. If a bank did it, you'd scream. But when the insurance
industry does it, nary a whimper. They are lending you your own
money and charging you interest to boot."
" I see what you mean by the shark and the goldfish."
Someone once said, "All this talks about whose money is whose and
what money is which is scrambling my poor little brain. Whatever
happened to the good old KISS (keep it simple stupid)?"
"The sow deliberately murdered it. The insurance industry knows that
their greatest ally is misunderstanding and confusion. That's how
they have managed to hoodwink so many people for so many years."
Then I hit everyone with another whammy. "Let's say that you have
owned a $50,000 cash value policy for 10 years and that the cash
value is about $3,000. You then decide to borrow the $3,000 from
your insurance policy to pay your income taxes. But as fate would
have it, on the very next day, you have a massive coronary and die.
Now tell me folks, how much will the life insurance pay your
beneficiary?"
Someone always says, "$50,000, the face amount of the policy."
"Try $47,000. The insurance company will first deduct the $3,000
loan from the $50,000 face value of the policy before it pays out a
dime to the beneficiary."
"Why didn't they just offset the cash value against the loan?
Isn't
the cash value supposed to be the collateral?"
"Because, like I said before, they consider the cash value to be
their property. Thus, they don't offset the loan against it. It's
further proof that the cash value is not always yours.
"Do you all see all the madness and duplicity of it? The insurance
company paid itself back TWICE for the $3,000 loan... Once by
keeping the cash value, and again by reducing the payment to the
beneficiary. Neat trick, eh? Now you are getting a glimpse of how
they manage to build such big tall buildings."
Someone says, "Seems to me that like the guy borrowed money from his
beneficiary."
WHERE'S THE PORK?
Life insurance agents trying to sell customers on a cash value
policy go to great lengths to illustrate how much customers will
earn on the policy. They do this with reams and reams of computer
printouts that overwhelm and thoroughly confuse their customers.
The question now is... Really, how good is the investment and
what is the rate of return?
"More bad news, huh Marsh?"
"You could say that. The rate of return... Well... It's kind
of hard to figure, especially since the investment vanishes if you
die. If that happens you might say that the rate of return on your
investment is zilch."
"But what if we don't die and cash the policy in for its cash
value.
What's the rate of return in that case?"
"Dismal, at best. For the first two or three years, there is no
cash buildup at all because of all the heavy loading charges.
Someone has to pay for the life insurance agent's commission and
the
insurance companies will elect you. Add to that the cancellation
charges that you may be charged for having the gall to withdraw your
money. Notice that a bank has no such see or charges on it's
savings
accounts.
"Folks, how many of you would open a bank savings account under
these conditions? I sure wouldn't."
Someone produces lots of giggles with, "... Not much pork on the
sow."
"Here's another way to look at the situation. When people buy a
cash value policy, they think that they are getting both life
insurance protection and an investment in one package. But that's
not true. No matter how much you slice up the sow, you cannot get
both. It's either/or, but never both. What's more, whatever you
do
end up with, the life insurance protection or the investment, will
be totally inadequate."
"Like I said, not much pork on the sow." More giggles.
"Now, would you all like to know how to have your cake and eat it
too?" Everyone sits with rapt attention waiting for my words of
wisdom.
"First, purchase a term policy that adequately covers your family in
case you die. Then take the difference in cost between that policy
and a cash value policy and buy an investment in your own name — a
bank savings account, real estate, or shares in a mutual fund. Do
this and you will come out many thousands of dollars ahead because
you will get both - lots of family protection and the investment
with your name on it."
POLITICAL MUSCLE
Someone invariable asks me, "Why do they sell this cash value
garbage and why doesn't someone stop them?"
"Why? Because of the insurance industry and its agents make lots of
money from cash value insurance. Tons of it. The agents who sell it
make no less than 55% of your first year's premium as a commission
and sometimes up to 105%. Contrast that to the measly 25% or less
that they earn on term policies. This is why Jack was never told
about term insurance. THE NAME OF THIS GAME IS GREED, GREED, AND
MORE GREED."
"As for why no one stops them, the individual fifty states regulate
the insurance industry. The Feds have no control over them as they
do with banks, savings and loans, and the securities industry.
Thus, we have fifty state insurance commissioners to protect us from
the wolves and very few of them have the guts or the brains to
challenge the industry for the public well being."
"You would think that as government agencies, they would protect the
public from the ravages of cash value life insurance.instead these
toadies' act as the life insurance industry's agents, assisting
in
by letting this rip-off continue.
"One of the ways they do this is to freely disseminate to consumers
a pamphlet entitled "A Consumer's Guide to Life Insurance, written
by the American Council of Life Insurance, an industry lobby. This
industry propaganda is the most slanted and misleading baloney I
have ever read. It is shameful that governmental agencies would buy
into this and freely disseminate it to the public. Talk about Judas
Goats...
"Political muscle? Here's what the insurance industry did to the
Federal Trade Commission.in 1979, after investigating the life
insurance industry, the FTC issued a scathing report and promptly
ran into the power and wrath of the life insurance industry. Among
other things, they didn't appreciate the FTC's disclosure that
cash
value insurance was paying, on average, a miserly 1.9% return on
investment. The FTC didn't have a chance against these power
brokers. Soon after the report was issued, Congress passed a law
(guessed who instigated it) preventing the FTC from ever sticking
their noses into the industry again! NOW THAT'S CLOUT!"
"Marsh, would you do to make matters right?"
"There is only one cure for the scourge of cash value life
insurance."
It must be outlawed!
"C'mon Marsh, the stuff isn't that bad."
I reply..."Considering massive number of people who have been
robbed by the sow in the last 150 years and the amounts involved, I
don't think that a law declaring cash value insurance illegal is
too
severe. Maybe we should ask Zelda her opinion.
"To really fix matters, I'd dump the 50 state insurance commissions
and federalize the whole shebang."
The seminar continues...
"During the last few years I've had occasion to discuss cash value
insurance with agents, financial planners, and others who sell it.
I wanted them to tell me — convince me — why anyone should buy the
stuff. I hoped that everything I had learned was wrong, that I
missed something crucial in my research.
"However, once the agents figured out that I knew my stuff and had
tons of supporting proof, they dropped all of their well practiced
jargon and hype. Nothing they ever told me and nothing I ever read,
has changed my mind about cash value life insurance in the
slightest.
"But what I did learn from these conversations was something about
their appalling ignorance. It was as if the people who sell this
junk never bothered to learn anything except what the industry
wanted them to learn. Some of them, amazingly enough, didn't even
realize that their companies kept the cash value if the insured
dies. Can't these people read? Don't they realize the awful
consequences of their actions? Is money so blinding?"
Questions and comments
Q. Marsh, this is not a question. I have read the Consumer's Guide
To Life Insurance at home and I read it. It doesn't say word one
about the disappearing cash value.
A. Why should they shoot themselves in the foot by mentioning this
little tidbit? Do you want to have some fun? As of today,
their toll free number is 800-942-4242. Call and ask their
representative about who gets the cash value if the insured dies. I
have done it several times and all I get is a bunch of hemming and
hawing. One rep said that it comes to you as "part of the death
benefit." That means that you are self insuring with your own money.
Q. Are you telling us to replace our cash value policies with term
right away?
A. YES! And do it as soon as you can. But be sure that you are
first covered by the new term policy before you dump the cash value
policy. And be aware that you might get a visit from an agent who
will try to dissuade you. They can be very convincing so watch out.
Q. Don't they pay dividends on cash value policies?
A. They do pay you back money but it's definitely not a dividend in
the true meaning of the word. The money you receive each year is
really a nontaxable return of your overpaid premium.in substance,
they are merely refunding to you your own money, your overpaid
premium. If you don't believe that, call the IRS and ask. If it
was a real dividend, the IRS would surely tax it.
Q. Buy why?
A. To fool consumers into thinking that they are getting a return on
their investment. It's a sales gimmick, pure and simple.
Q. My agent told me, "Why should you pay premiums for so many years
and get nothing back?"
A. This is another cute sales gimmick. Tell me, do you expect
something back on auto, health, or homeowners insurance? Why is it
only in life insurance that we are told we should get money back?
Q. Buying whole life insurance instead of term insurance sounds like
you're paying $90,000 for a $15,000 car.
A. I'll have to remember that one for my for my next seminar...
Thanks.
Q. If you don't sell life insurance, are you still a CPA?
A. No, these days I spend my time inventing spelling and math games
for kids. It's much more fun than accounting and taxes.
Q. What is this "split dollar" stuff I hear about for businesses?
A. It's the same old cash value garbage wrapped up in a neat
package for the business sector. With it, the employer pays for part
of the life insurance and the employees pays the remainder. There
are a zillion of such plans out there but the net effects are the
same: the employee ends up with peanuts for coverage. Avoid this
junk like the pox.
Q. Doesn't term insurance get very expensive as you get older?
A. This is the line of baloney that sells more cash value life
insurance than anything else. Yes, it does get expensive,
particularly for people over 60. However, an equivalent amount of
cash value insurance is always about 500% more expensive! The fact
that life insurance gets expensive is actually one of the best
reasons for buying term insurance, not cash value.
Q. But term life isn't "permanent..."
A. The term "permanent" is a buzz word used by agents to sell cash
value insurance. All it really means is that the insurance is in
force until the insured is 100 years old. Since renewable term
insurance can easily be purchased to age 90, when most of us are
long dead, the word is meaningless. Besides, how many people need
life insurance at the age of 100?
Q. Doesn't cash value have a lifetime level premium?
A. Yes, but believe it or not, this is a disadvantage, especially
for young couples raising a family. To compute a level premium over
your life expectancy, the insurance company simply averages out the
cost of your coverage for the rest of your life. This means that
you are paying much more for your life insurance when you are young
and can least afford it and paying less when you get older when life
insurance is not so important. And by the way, don't forget that
term
insurance can be bought on a level premium basis for up to twenty
years.
Q. How much coverage do I need?
A. As a rule of thumb, buy somewhere between eight to ten times your
yearly gross income. For most families, that means at least
$250,000 in coverage. That will cost a 30 year old nonsmoker about
$350 a year for term. A cash value policy for the same coverage
could run as much as $1,800 or more. Take your pick. But do not
rely entirely on this rule of thumb as you may need significantly
more or less coverage. That is up to you to decide, based on your
particular circumstances and life style.
Q. Does everyone need life insurance?
A. No. People who do not have dependents to protect certainly
don't
need it. Nor do others who have sizable estates to protect their
dependents.
Q. What about life insurance on my children's lives?
A. Life insurance is a wonderful invention to protect dependents
from financial ruin if the breadwinner dies. That is its sole
function. This means that you should not waste money by buying
insurance on your children's lives. Every available insurance
dollar should be on your life. But if you feel you do need some
life insurance on their lives, get term, of course.
Q. How about life insurance to protect my estate against estate
taxes?
A. A bad bet. As Charles Givens so cleverly put it in his book,
Financial Self Defense, "When you buy a life insurance policy to
pay estate taxes, all you are doing is paying estate taxes before
you die instead of afterwards. That's like paying income taxes on
money you haven't earned yet." He has a point.
Q. What's this I hear about vanishing premiums in Universal life
Insurance?
A. It's a case of the old smelly sow playing more gimmickry tricks.
You know that in life that there are no free rides. This is
especially true when it comes to dealing with the insurance
industry. If your premiums vanish, all it means is that you paid
them too much in premiums to begin with.
Q. How do we know that you are not full of baloney and just grinding
your ax?
A. That is a fair enough question. My answer is that right now you
don't know, but for the sake of your family, do some research and
find out for yourself. Take out some time and do some reading at
the library as I did. Isn't the well being of your family worth
a few hours of your time? Your job, if you can do it, is to prove
me wrong about anything that I have told you tonight. If you can
do that, I will happily refund the cost of this seminar. But if
you cannot prove me wrong, then do what I am telling you to do.
Fair enough?
As for my ax, you bet I have one to grind! It is estimated that
most people own about two times their yearly gross income in life
insurance protection. That's pitiful. That means that there are
millions of vastly under insured households in America...
Millions of time bombs just waiting to explode.
Do you remember that what I told you about my client and how his
cash value policy robbed his widow and two children of a half
million dollars? I did not make that story up just to impress you.
It really happened. My guilt is real and so is my anger.
Q. Are you trying to say that a term policy makes em pay through
the nose if my husband croaks?
A. You betcha!
Q. The guy who sold me the policy last year never said one word
about any of this.
A. If he had, would you have purchased the cash value policy?
A. Not a chance.
A. That's why he didn't tell you.
Q. I have some credit life insurance for my home mortgage and car
loan. Is that ok?
A. Not ok. What you have is very overpriced term life insurance.
Dump them all and replace them with a regular good term policy.
Q. I am a member of AARP and I received in the mail an offer for
term life insurance. Since it is term, should I purchase it?
A. No. The stuff is extremely expensive term.in fact, it is a good
rule of thumb to never buy any kind of insurance from a mail offer.
I am surprised that the AARP would endorse such garbage.
Q. Any guidelines on where to get inexpensive term insurance?
A. No. I will not recommend any specific company. If I did, you
might think that I work for someone in the industry. But you should
know that there is is a wide variance in prices for this product, so
you must do some shopping. Get quotes from at least four companies
before you decide. Also, make sure that the policy is guaranteed
renewable and that you do not have to take another physical at time
of renewal. You do not want something called "reentry".
A valuable tip... Avoid having multiple term insurance policies
as they usually have a base policy fee. Combine all the policies and
pay just one fee.
THE GRAND FINALE
Here is where I really lay it on thick.
"For most of us, life insurance is the most important purchase we
will ever make. That's because so much depends on whether or not we
have adequately protected our dependents.in this arena, there is
simply no room for error. You will probably purchase life insurance
only a few times in your life so please make sure that you do it
right.
Cash value insurance tries to accomplish two very worthy goals:
family protection and family savings. It doesn't work. The two
goals rub each other the wrong way and cannot coexist together. If
you need protection, buy pure protection (term insurance) and as
much as you need to fully protect your dependents today. If you
need a savings or investment plan, that's a separate financial
planning issue. But never buy a product (cash value insurance) that
attempts to fulfill both goals in one package.
*and*
Never - never - never forget about zelda
What some others have said:
* Cash value policies, such as whole life, are inappropriate for
most families. Too often such policies provide less protection
than families need for more money than they can afford.
Consumer Reports, September 1993
* Existing cash value policies, in almost every case, should be
replaced... When you die, the insurance company steals your
savings — the cash surrender value.
The Canadian Buyer's Guide to Life Insurance
* Term is the no-frills model of the life insurance industry. It
is relatively inexpensive, easy to understand, and in general, the
best value of the premium dollar. However, there is a good chance
that your agent will not discuss term insurance as an option for
your family unless you bring it up.
New Jersey Dept. Of Insurance Buyers Guide To Life Insurance
* Agents make five to ten as much cash value life insurance policies
as they do selling term insurance policies of the same face amounts,
yet no disclosure of this fact is made to consumers. Policies are
not sold on the basis of consumer need, but on industry greed."
Ralph Nader
* Life insurance companies and their agents intentionally mislead
consumers about how much their life insurance policies will cost
and what those policies will be worth when they need them the most.
United States Senate, Subcommittee Hearing, 1993
* Never buy whole life insurance. The truth is there are no good
whole life policies. Not one. Not for anybody.
Charles J. Givens, "Financial Self Defense"
* Term is the wave of the future and the nation's consumers will be
the real beneficiaries... Nothing I did in my eight years at the
Commission holds the potential for bringing greater economic
benefit to more Americans than the simple act of releasing the
FTC Report on life insurance.
Michael Pertschuk, former FTC Chairman
* Many families with cash value policies are tragically under
insured...
Had they bought low premium term insurance, they'd have 10 times
the money, but agents earn bigger commissions by selling cash value,
so they often push it, even if it leaves a family short.
Newsweek, May 8,1989 Jane Bryant Quinn
* Don't buy any life insurance with cash values.
National Insurance Consumers Organization, 1982
about the author:
Marshall Kay is a non-practicing CPA
who has a consumer interest in the subject of life insurance.
Mr. Kay lives in the Chicagoland area where he invents and
markets educational math and spelling games for children. He
appreciates Julie Larsen's editorial contributions to this article.
Anyone wishing to order reprints of this pamphlet or to contact
the author can reach Mr. Kay by e-mail at [email protected].
* * *
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