Let's face it, insurance is your hedge against the uncertainties that life throws at us. The following stories, although tragic, become less so because of the care and planning that these individuals put into safeguarding their families in the event of death or disability. They represent some of the truly critical reasons why insurance is such an important part of a comprehensive financial plan.
One of the most misunderstood financial products of our generation is cash value life insurance. There are those on TV and the radio who say to never buy a policy that has any kind of investment component to it. There are also articles written in many financial publications saying that everyone would be better off to buy term insurance and invest the difference somewhere else. I have found that if set up properly, that cash value life insurance can be one of the best investments that you ever make.
If you need death benefit forever, there is no other way to solve this issue than to buy a life insurance policy that has some sort of cash value component. The product that competes directly with any kind of investment is an Indexed Life Insurance policy better known as an IUL policy. An IUL policy accepts premiums, which can vary from year to year, and places them into an account whereby they are then credited each policy anniversary with the gains in a commonly followed index such as the S&P 500, the DJIA, the Eurostoxx 50, the NASDAQ, or the Russell 2000 to name a few. If the index gains in value in a particular year then the policy is credited with the percentage gain that year. Since the money is never really invested in any fund the losses do not affect the IUL contract in the form of losing money.
"If the market performance is negative then the policy owner is credited between 0-2% in returns for that year depending on the carrier chosen to issue the policy. Therefore there are never negative return years in this product."
Because there are no negative returns, most companies have a cap on the index that the policy owner is following. These caps range generally from 12-19%. A well know player in the IUL industry has done many studies to show what type of returns and expenses can be expected over a 20 or 25 year period. It is interesting to note that with this carrier, the rate of return in their S&P 500 product from 1995 to 2014 was 7.288%. The expenses on average per year over this same period 1.204%. This translates to over a 10% gross return in a 35% tax bracket and the expenses look quite a bit like what a very low cost mutual fund charges per year as an expense fee. Past history is no guarantee of future results but as an investor, returns of 10% gross with no chance of losing money in a down market are a tough act to beat. I think that based on this information--life insurance can be a very good investment, especially when you consider that the cash in the policy can be accessed tax free as well.
Life Insurance is designed to provide income and lump sum monies to your family should you pass away prematurely. My third year in the life insurance business, I sold 3 small policies, these policies were sold one per year for three consecutive years, to a salesman in the Pittsburgh area. We will call him Rich.
Rich sold building supplies and traveled the tri-state area by car. He spent many hours in his car and travelled from business to business selling his products. Rich had a wife and a young child at home. He also had an ex-wife and a 8 year old daughter to his prior marriage. When we last met he wanted to be sure that one of his three life insurance policies had his 8 year old daughter as the beneficiary so that if anything happened to him, her college would be partially covered. he then wanted the two new policies to have his current wife and young daughter as the beneficiaries so that if anything happened to him, they would have income to replace his lost income.
Unfortunately this story has an unhappy ending because two days after I sold the third policy to Rich--he was killed on state road Route 51 by a drunk driver. It was 4pm in the afternoon and Rich was travelling between business appointments. I received the call from his good friend on a Saturday night to inform me of the tragedy. The happy ending to the story, if that is possible, is that his eight year old daughter did receive monies to be invested for her future college tuition. His current wife and child did receive monies which helped them pay for burial costs, allowed them to keep their home and also provide income for the next twenty years. Proper planning really paid off for those that Rich left behind.
Disability Insurance is designed to take the place of lost income if you get hurt or sick and can not work. I have sold many disability policies in the last 25 years but the one claim that sticks out in my mind is the physician that bought multiple policies from me. He is a surgeon who lives in Ohio and has a wife and five children who depend on him. We'll call him Dr. Bob.
Dr. Bob purchased $15,000 per month of coverage from me through multiple policies over a 10 year period. As his income grew, he bought more coverage in the form of a new policy to supplement his other policies. he also purchased the rider on the policy that covered him in his own occupation and the rider that covered him for partial disability. He was having trouble with his eyesight and decided to see a Opthlamologist to have things checked. The diagnosis was a detached retina which did permanent damge to his eye. While he could still see, it became increasingly difficult to preform surgeries and he had to give up this aspect of his patient care. Because he could still work, some disability policies might not have covered him. But he had the partial disability clause in his policy as well as the own occupation rider so even though he could work, he could not do all of the material duties of his regular occupation. He could not preform surgeries. Therefore he was able to keep working and collect a lower paying salary within his practice while still collecting the full $15,000 per month of disability benefits due to his inability to preform surgical procedures.