To oversimplify, there are two kinds of life insurance. Term Life Insurance is life insurance for a stated limited period of time like 10 years, 20 years, 25 years, etc. This is the kind of life insurance that most people, especially those with young children should have. They are relatively cheap and relatively straight-forward. You pay a few bucks each month for the duration of the policy. If you die during the term of the policy we send your beneficiary(s) a big check. If you don’t die, the policy ends and we keep all the money you paid us. Yes, we make good money on these policies, but there is another type of life insurance that’s a lot better for us.
Whole Life Insurance is life insurance that is permanent in that you keep paying us monthly premiums right up to the month you die. When you do die, like with term insurance, your beneficiary(s) gets a big check. So why is Whole Life better for us? Firstly, those premium checks keep rolling in for as many years as you live. Few people really need life insurance in their 60s, 70s or 80s. If you don’t keep paying, the policy gets cancelled and we get to keep the premiums you paid. Secondly, those premiums you send us every month are a lot more than the measly premiums paid to us on term policies.
How can we charge so much more for Whole Life? The beauty of Whole Life is we kind of mix it with an investment program. You are buying life insurance, yes. You are also buying an investment program that we manage. It’s not diversified, and we don’t have to tell you exactly how your money is being invested like mutual funds and ETFs do. We get to charge lots of management and related fees. Our sales guys are equipped with spiffy charts and iPad presentations that show your money growing into 6 and 7 figure sums, though we certainly don’t guarantee that growth. At best, we guarantee growth that is similar to the growth of no risk US Government bonds. Fortunately for us , few prospective buyers do the math to calculate their rate of return relative to risk and to compare that to their other investment options. Oh, and unlike investing in mutual funds or ETFs, your investment is locked-in and quite illiquid. Sure, we’ll let you borrow against the cash value. If you do that, we can charge you interest on borrowing your own money; pretty cool, huh?
There other insurance products that are great for us: