forced savings

 

There are a few talking heads on TV that love knocking Whole Life insurance. “Buy term and invest the rest,” they preach.

The bottom line is that they are all probably way smarter than me. And the facts they throw out about life insurance are correct. And I don’t disagree with buying Term and investing.

But the reason they are off-base in their negative opinion about Life insurance is that the facts they present are from a textbook.

What all of you know, given the profession you’re in, is that life doesn’t happen in a textbook. Human beings are irrational and make decisions based on emotion, not logic.

Today I’m focusing on a Life insurance benefit that most Life insurance agents don’t consider. In fact, many Life agents apologize for this benefit. I think that’s a huge mistake.

𝗧𝗵𝗲 𝗯𝗲𝗻𝗲𝗳𝗶𝘁 𝗶𝘀 𝗰𝗮𝗹𝗹𝗲𝗱 𝘁𝗵𝗲 “𝗳𝗼𝗿𝗰𝗲𝗱 𝘀𝗮𝘃𝗶𝗻𝗴𝘀” 𝗲𝗹𝗲𝗺𝗲𝗻𝘁 𝗼𝗳 𝗪𝗵𝗼𝗹𝗲 𝗟𝗶𝗳𝗲 𝗶𝗻𝘀𝘂𝗿𝗮𝗻𝗰𝗲.

𝗪𝗵𝗮𝘁 𝗶𝘀 𝗙𝗼𝗿𝗰𝗲𝗱 𝗦𝗮𝘃𝗶𝗻𝗴𝘀?

It’s no secret that I am a big fan of permanent Life insurance. The easy argument is anyone who has someone they love or care about needs life insurance in force when they die.

We all know the often-cited statistic that fewer than 1% of term policies ever pay a death claim. Most often the policy expires before the policyholder does.

Conversely, permanent life insurance policies that remain in force throughout a policyholders’ lifetime will pay a death benefit. Additionally, permanent life insurance also has a cash value component.
A portion of every premium payment goes towards ensuring the policy holder’s life, while another portion of it goes towards building a cash value that also earns interest. This cash value can be available for the policyholder to withdraw or borrow against when they need it.

𝗛𝗲𝗿𝗲’𝘀 𝘁𝗵𝗲 𝗽𝗼𝗶𝗻𝘁: When people buy permanent life insurance, they pay their premiums and it creates an environment of “forced savings.”

If there’s anything that the American people desperately need, it’s to save more money. And, they need the environment around them to create the discipline for saving that they don’t have on their own.

Consider the hypothetical example of a 35-year old married couple and say we are running a spreadsheet ledger for them. In one column, we show their savings using a Roth IRA that’s invested in an S&P 500 index fund that they contribute $5,000 every year from age 35 to 65. On the other side of the ledger, they purchase a permanent life insurance policy that has a $5,000 annual premium payment over the same time period.

No matter how you look at it, or how good the particular company’s permanent life insurance policy, the Roth IRA will blow the life insurance policy away every time. This is where the talking heads would make their case for the Roth IRA over permanent life insurance. On paper, they’d be right.

But the truth is that the majority of people don’t have the discipline to contribute to the Roth IRA every year for 30 years. In fact, the median balance of IRAs for individuals in their early 50s is $31,692. Considering that, historically, the annual contribution limit on Roth IRAs has been $5,500, this is a far cry from what the average balance could or should be.

𝙏𝙝𝙚 𝙧𝙚𝙖𝙨𝙤𝙣 𝙬𝙝𝙮 𝙞𝙨 𝙨𝙞𝙢𝙥𝙡𝙮 𝙗𝙚𝙘𝙖𝙪𝙨𝙚, 𝙙𝙚𝙨𝙥𝙞𝙩𝙚 𝙥𝙚𝙤𝙥𝙡𝙚’𝙨 𝙗𝙚𝙨𝙩 𝙞𝙣𝙩𝙚𝙣𝙩𝙞𝙤𝙣𝙨, 𝙡𝙞𝙛𝙚 𝙜𝙚𝙩𝙨 𝙞𝙣 𝙩𝙝𝙚 𝙬𝙖𝙮.

In the case of the 35-year old married couple, the story goes that they begin contributing to their Roth IRA. Then they have kids, buy a new house, adjust their lifestyle to their income, and they start having other major financial commitments.

𝗪𝗵𝗲𝗻 𝗽𝗲𝗼𝗽𝗹𝗲 𝗯𝘂𝘆 𝗽𝗲𝗿𝗺𝗮𝗻𝗲𝗻𝘁 𝗹𝗶𝗳𝗲 𝗶𝗻𝘀𝘂𝗿𝗮𝗻𝗰𝗲, 𝘁𝗵𝗲𝘆 𝗽𝗮𝘆 𝘁𝗵𝗲𝗶𝗿 𝗽𝗿𝗲𝗺𝗶𝘂𝗺𝘀 𝗮𝗻𝗱 𝗶𝘁 𝗰𝗿𝗲𝗮𝘁𝗲𝘀 𝗮𝗻 𝗲𝗻𝘃𝗶𝗿𝗼𝗻𝗺𝗲𝗻𝘁 𝗼𝗳 “𝗳𝗼𝗿𝗰𝗲𝗱 𝘀𝗮𝘃𝗶𝗻𝗴𝘀.”

As a result, the first thing that gets put on hold is the Roth IRA account because retirement seems so far off in the future. There’s no immediate penalty for putting their contributions on hold. The devastating impact of skipping 4, 5, 10 or 20 years of Roth IRA contributions aren’t felt until much later in life

On the other hand, the Life insurance policy has a loss if they stop contributing to it. They lose the death benefit. And for that simple reason, it is far more likely that at the very least that 35-year old couple thinks very carefully before stopping their premium payments and losing the death benefit.

Most Life agents either don’t like the long-term commitment of permanent Life insurance premiums or apologize for it. When I hear that I can’t help but say,“𝘈𝘳𝘦 𝘺𝘰𝘶 𝘬𝘪𝘥𝘥𝘪𝘯𝘨 𝘮𝘦? 𝘛𝘩𝘢𝘵’𝘴 𝘵𝘩𝘦 𝘣𝘦𝘢𝘶𝘵𝘺 𝘰𝘧 𝘪𝘵!”

The commitment to making the payments is an unbelievable benefit of the product. 𝗪𝗵𝗲𝗻 𝘆𝗼𝘂 𝗺𝗮𝗸𝗲 𝘁𝗵𝗼𝘀𝗲 𝗽𝗿𝗲𝗺𝗶𝘂𝗺 𝗽𝗮𝘆𝗺𝗲𝗻𝘁𝘀, 𝘆𝗼𝘂 𝗮𝗿𝗲 𝗽𝘂𝘁𝘁𝗶𝗻𝗴 𝘆𝗼𝘂𝗿𝘀𝗲𝗹𝗳 𝗶𝗻 𝗮 𝗽𝗼𝘀𝗶𝘁𝗶𝗼𝗻 𝗱𝗼𝘄𝗻 𝘁𝗵𝗲 𝗿𝗼𝗮𝗱 𝘁𝗼 𝗵𝗮𝘃𝗲 𝗮𝗰𝗰𝗲𝘀𝘀 𝘁𝗼 𝗮𝘀𝘀𝗲𝘁𝘀 𝘄𝗵𝗲𝗻 𝘆𝗼𝘂 𝗻𝗲𝗲𝗱 𝘁𝗵𝗲𝗺 – 𝘁𝗵𝗲𝗿𝗲𝗯𝘆 𝗽𝗿𝗼𝘃𝗶𝗱𝗶𝗻𝗴 𝗽𝗲𝗮𝗰𝗲 𝗼𝗳 𝗺𝗶𝗻𝗱 𝗮𝗻𝗱 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘀𝗲𝗰𝘂𝗿𝗶𝘁𝘆.

That’s a game-changer.

So, stop apologizing for it and start promoting it.