This guest editorial by Dennis Miller of Miller’s Money Forever
In recent articles for my regular weekly newsletter we’ve covered a lot of ground regarding annuities. Of course, this just has readers even more interested. In today’s article we’ll take a look at the “package deal” many insurance agents will likely put in front of you when you ask about either an insurance policy or annuity product. Many readers asked if the package deal a good deal? Let’s see.
A few years back, I decided to purchase some additional life insurance. In the process I learned of a trick up the insurance company’s sleeve – the packaged deal savings and insurance policy. I knew a likeable fellow who happened to sell insurance and I phoned him for help. I told him how much insurance I needed and he immediately began to tell me about this great new universal life policy with 6% guaranteed income.
I told him I keep my investments and insurance separate and just wanted a quote on term insurance with a fixed premium for 20 years. That is just pure insurance; if I die my beneficiaries get paid, and if I live the insurance company benefits from the premiums I paid. After much discussion, he reluctantly agreed to bring me a quote for both his universal life policy and the term policy I was interested in.
He showed up at the appointed time and predictably started his pitch about the wonderful 6% guaranteed income included in the universal life policy. I listened patiently; he even showed me the 6% written in the policy. So I asked him how much the annual premium was. As I recall it was about $1,500. Then I asked him what the policy’s cash value would be in five years and ten years, and he gave me those numbers.
After that I asked what the premium on the straight term policy would be. It was about $900. He immediately pointed out there was no cash value build up, which I understood. Then I subtracted the $900 for the term policy from the $1,500 for his universal life policy and said to him: “If I understand this, I can buy the pure insurance for $900, so the extra $600 I pay in premium each year will be saved and invested for me?” He nodded his head and said: “That is correct.”
Let me pause here to say that what I just did came directly from one of our nine tips on shopping for annuities: split up the features of the product so you can understand each individual part. All nine tips are listed in our new free report, Annuities De-Mystified.
Alright, now back to our comparison shopping. Then I took the numbers he gave me for 5-year and 10-year cash values and compared them to the $600 per year the insurance company would supposedly invest for me – the return was around 3%.
I said: “You told me it was 6% guaranteed.” He then showed me where the policy guaranteed 6% once again. I pointed out that if I could buy the insurance for $900, then the extra $600 in premium should be what’s invested. The numbers just didn’t add up.
I concluded that while they put 6% in the contract, they must charge way too much for the insurance; the numbers bore that out. A 6% payout coupled with an expensive insurance premium was a horrible deal at the time.
The agent became angry and told me I needed to look at insurance as an investment product. He was trying to guide me in the exact direction our friend Stan the Annuity Man warned us not to go.
I told him I did and it was a poor investment because the company over charges big time for the insurance coverage. I will confess I was also aware that the agent’s commission on the universal life policy was substantially higher than the term policy. The price of straight term insurance policies is easily compared from company to company. So, insurance companies keep their premiums and commissions on these products much lower to remain competitive. Thankfully I could see through the BS regarding the universal life policy by splitting apart the features.
Whether you are buying life insurance or annuities the concept is the same. The analogy to term insurance in the annuity industry is a single fixed premium, guaranteed lifetime annuity. With each additional feature a prudent buyer needs to understand how to “run the numbers” and determine the true cost and benefit to the insured. While the policy may have some fancy language, it may not always be such a good deal as we discovered with the insurance quotes our agent gave us.
Some insurance policies are nothing more than insurance, and some combine insurance with investments. The first step in comparing the two is to determine what the real insurance costs. Then you can look at the investment portion. Many salespeople will push for the latter type of policy because they get paid a much higher commission.
As I mentioned earlier, I like to keep my insurance and investment products separate. This way I can get a better deal and more transparency into the costs and expected benefits. If you’re considering an annuity or you’re just curious, you might want to take a look at our new free report, Annuities De-Mystified. In it you’ll find the 8-point checklist to figure out if an annuity is even right for you and our 9-point plan (mentioned above) showing you what to look for when buying an annuity. The report also includes an important overview of the risks associated with annuities – risks that agents won’t often voluntarily tell you about. Here’s the link for a copy of the report.