Banks and Fridges. There are two basic types of life insurance. There is what is called ‘Cash Value’ policies which is insurance bundled with a savings vehicle, and then there is Term insurance which is basically pure protection without any bells and whistles.
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There are two basic types of life insurance. There is what is called ‘Cash Value’ policies which is insurance bundled with a savings vehicle, and then there is Term insurance which is basically pure protection without any bells and whistles.
It’s a little easier to explain how these work if we talk about something a little more common… Let’s use refrigerators.
Let’s say you are in the market for a new refrigerator. Where would you go to purchase a fridge? (SEARS and Best Buy). Ok, so let’s use SEARS and Best Buy….
You do some searching and you found your perfect refrigerator at these two stores.
SEARS is offering it for $1, 000
Best Buy is offering the same exact fridge for $2,000
Which one would you choose?
But now Best Buy knows you want to buy the cheaper fridge from their competitors so they tell you that if you pay more now, at the end of the 20 years (how long it will last) they will give you your money back even though the fridge is old and useless!
SEARS doesn’t offer that benefit.
Now which one do you want?
But maybe you talked to me right before you made your decision and I told you about the rule of 72. Have you heard of this before?
Basically what it says is that you take the rate of return that you are getting and you divide it into the number 72, and that’s how many years it takes for your money to double.
So I told you that over a period of 20 years, if you invested your money properly you could get a strong return on your investment. We will use 7% which, especially over that pd of time, is very conservative.
72 divided by 7(%) = 10 yrs
Now, if I taught you to buy the fridge from SEARS at $1,000 cheaper and then showed you how to invest that money at a conservative 7%, look at what you would have at the end of those 20 years!
72 divided by 7(%) = 10 yrs
Now which one would you choose??
(What Best Buy doesn’t tell you is, what I am telling you to do on your own, Best Buy is doing for themselves with your money. So you over pay in the beginning, Best Buy invests your money, they earn the $4,000 and only have to give you $2,000 back. They just make an extra $2,000 on YOUR money!!)
Now let me ask you a different question. If you had the choice between banks A and B which one would you be most interested in given the following information…
Higher Rate of Return
Lower Rate of Return
When you put your money in to the bank would you prefer…
Your money to belong to you
Your money to belong to the bank
Once your money is in the bank would you prefer…
Your money to be passed to your survivors
Your money to be kept by the bank
When you passed away
would you prefer…
That is how insurance companies work. Best Buy in this example represents most insurance companies which promote Cash Value policies. We work based off of the philosophy of buy term and invest the difference (represented by SEARS).
You see, most insurance companies only deal with insurance, which means that their pay check depends highly on the number of sales of their insurance products. Cash value policies pay the agent 8-10 times the amount of commission that a term policy would. This makes sense from a business stand point but not from the client’s position.
Because of who I represent and the great range of areas that I can help my clients in, I don’t have to rely on selling a more expensive and inferior product to my clients. And what I have found, Mr. & Ms. Client, is that Cash Value policies are not right for people 95% of the time.