What's the problem with binoculars? They perform a great duty in that they make things that are off in the distance become very clear to us.
The problem is that they isolate your perspective so much that you often miss what's right in front of you. What's that got to do with anything you ask?
Well, today we're talking about how some life insurance agents, financial advisors, financial planners et. al. like to have you focus too narrowly on the long term. You shouldn't forget that the short term can have value as well. Often times we are able to glean some valuable information form short term data.
In our world, agents love to emphasize that life insurance is a long term “investment” and they do this to try and remove as much attention as humanly possible from the fact that most whole life and universal life policies (when sold the traditional way) have zero cash in the first year (and sometimes the first two years).
If we design them correctly, we can create cash surrender value in year one with almost all policies. That being said universal life insurance can be challenging at times.
Having a substantial amount of cash in terms of the surrender value can be somewhat difficult given the surrender charge on universal life insurance.
However, we think that it's much more useful to pay close attention to the accumulation value (with universal life insurance) and how it relates to the premium paid. In other words, we like to see a decent accumulation value in relation to the first year premium after the first policy year.
A lot of people we encounter do resist life insurance because every policy they've ever seen has no money available after the first year. That doesn't seem like a very good deal…does it?
And in situations where one pays an insurance company $50,000 and has no money after the first policy year, this seems especially odd.
Even as mathematical as we are with our approach, we have to admit that seeing all of your money vanish in the first year is a mighty high emotional hurdle to jump.
When a policy is bought for the purpose of developing cash value there should be much more than zero in the policy after year one. Seems like a reasonable request to us.
If the cash value of the policy isn’t at least 50% of the premium paid, something is likely wrong.
We can’t say always… as they’re could be some variance that would cause an exception to this rule, but generally speaking this is a good guiding principal. And sometimes there can be a whole lot more than just 50% of the premium in cash value after year one–depends on circumstances.
Agents are trained to have you focus on longer term cash values as a way to skirt the discussion on why there is no cash value in the policy in the first year.
That begs the question…
Why is there no cash value in the policy in the first year when policies are designed the traditional way?
- Because policies have a long list of expenses that are incurred from day one.
- Many times these expenses don’t actually take place, but the insurance company cannot refund if the expenses are not incurred, and there is plenty of wiggle room built into the expense assumptions about a product to insure the house always wins
- These expenses are related to the cost of acquiring the business, and they are real expenses
We have the ability, however, to manipulate the policy (in your favor) and remove a lot of these assumed expenses. In fact, any agent theoretically has this same power at his or her disposal, but many of them either never come to understand this or choose not to do it.
We actually think following this option as a guiding form factor should be a requirement for all life insurance policies sold where cash accumulation or retirement income is the goal in mind, but there is strong opposition that would rather us not get our way (they like making money).