“Do you have the best life insurance policy to protect your family?” asked a friend of mine who sells insurance.
With myriad of different types of short-term insurance policies and long-term insurance polices, it’s easy to forget that the purpose of a life insurance policy is simply to protect your family members in case if you die.
Me: I have the term insurance.
Friend: Well, you are not thinking about your future. If I were you, I would buy a Whole Life policy instead.
His knee jerk response didn’t surprise me. In fact, I expected this response as I know that he works for a large insurance company.
Me: I do think about my future, so I buy term insurance and invest the difference in an Index fund.
Friend: That’s good, but most people don’t have the discipline to invest. Most people spend the difference. As time goes, they find it to be harder to invest as their expenses grow.
Me: Term insurance is the best life insurance policy for the smart people. Now, may I ask you a question and expect an honest answer?
Friend: Of course. I am your friend first.
Me: Imagine that I own a bank. I wanted to know if you will be willing to open a savings account. Trust me, it is insured by FDIC. Don’t forget that I am your friend first; but you have to comply with some requirements.
Friend: What are they?
Me: The bank will use all of your first year deposits to cover our costs, but don’t worry because part of it will be saved to protect your family if you die. Also, we will charge 2% fees from the second year to manage your savings account. You can borrow money at any time, but you will have to pay interest on it. Last but not least, if you die then we will protect your family for the coverage amount. The cash value will be ours to keep.
Friend: Am I a fool to do that? I can find a bank myself that can open a savings account without any strings attached. Why do I ever wanted to throw money away for the first year and pay you to manage my savings account?
Me: Precisely, that’s the question I am asking you. What I described is the nemesis of my beloved term life insurance policy. The ball is in your court, my friend.
Friend: I think I have the best insurance policy for you that can provide best of both worlds — coverage for the death benefits as well as cash value — if you die. Why don’t you buy the Universal life insurance policy? Our company always thinks about you — the client — first.
Me: I know that you are my friend, and you work for a well-known insurance company. The only problem I have with the Universal life insurance policy is its rate of return in the long haul. The average rate of return is only 2.19% in 25 years, and measly .99% in 50 years. I thought that Social Security run by our government returns better than that. Don’t forget that if you add average inflation rate of 3%, you are losing money by investing in a Universal Life insurance policy.
Friend: I think you are overlooking the fact that you are not a professional money manager. You can lose everything, if you invest money yourself in equities.
Me: Don’t worry. I have John Bogle on my side. He is kind enough to think about a common man with common sense. I can buy the life protection part of the insurance cheaply with a term policy, and invest the rest in any of his funds randomly to beat the smartest fund manager on Wall Street consistently.
Friend: Our company allows you to invest in growth funds, and they return in double-digit. Don’t you think that is a better strategy than simply investing in index funds?
Me: That may be true, but I did say that John Bogle’s index funds beat most mutual funds consistently. You will always find funds that can return in double digits for several years, but not consistently. Since I am not as smart as these fund managers are, I would rather invest in an index fund with no fees.
Needless to say that my friend had an urgent call from someone else, so he has promised me that he will put facts together for my benefit. I am still waiting for the best insurance policy to protect my family.