Commentary - Hans H. Mathisen
Is whole life insurance a rip-off? - The January issue of LIFE LETTER points out how whole life insurance is designed for permanent needs, while term insurance is for temporary situations. We need to determine which kind of coverage we need.
Retroactive life insurance! - Please read LIFE LETTER for February. This kind of insurance is neither affordable nor reliable. Let's stick with what we have.
THE STOCK MARKETS - 2006 proved to be a very good year for the major stock indexes. Toronto 's S & P TSX Composite Index cruised to a gain of 14.5% for the year, a fourth consecutive year of double-digit gains. The Dow Jones ended the year up 16.3%; S & P 500 grew by 13.6%; and the NASDAQ gained 9.5%.
In Europe , Germany 's DAX was up 22.0%; France 's CAC 40 rose 17.5%; and the Britidsh FTSE 100 increased 10.7%. Hong Kong 's Hang Seng Index surged 34.2%. Japan 's NIKKEI failed to repeat the steller performance of 2005, but was up 6.9% for the year.
So, where should we be invested in 2007?
While international diversification is always a major consideration for Canadian investors, those of us who have kept most of our money here at home for the past several years have fared very well. This has been my recommendation and continues to be my advice. Please feel free to contact me for an exchange of ideas regarding investments in mutual and segregated funds, both domestic and foreign.
Is whole life insurance a rip-off?
Every so often, a self-proclaimed "expert" gets some media attention by claiming that whole life insurance is a rip-off. But are they right?
The critics of whole life say term insurance is better because it has no cash values and cash values are the only advantage whole life has over term. This shows a lack of knowledge of the reasons for, and history of whole life insurance. One expects critics to do their home-work before they spout off.
The truth is that term insurance is neither better nor worse than whole life. Nor is whole life better than term. Like a bicycle and a car, they both perform the same function, but in different ways to satisfy different needs.
Whole life evolved from term insurance like the automobile evolved from the bicycle. Originally there was only term insurance, but the media of over two centuries ago felt it was a rip-off because the older you got the more you had to pay.
Eventually it became too expensive to continue, so you dropped it. This left the insurance company with all the premiums you paid over the years and no obligation to pay you anything. Insurance companies liked this, but the newspapers of the day thought it was inequitable.
They thought that it would be more equitable to have life insurance that didn't run out before you died. It should also have a level premium so it doesn't become more expensive as you got older. Naturally, you'd pay more in the early years so you could pay less in the later years. The answer they developed to overcome the disadvantages of term insurance we now call whole life insurance because it insures you for the whole of your life.
In its first century it lacked cash values, so people bought it for its level premium and lifelong coverage. The insurance company had to maintain the coverage for the lifetime of the insured no matter what. He might double his weight, change to a high-risk occupation or be struck with an incurable disease. The insurance company could not increase his premiums or cancel the policy.
Term insurance is for a fixed term - it is temporary. If you still need the insurance when the term expires, you'll have to start all over. You'll have to apply for a new policy, satisfy new medical requirements and, if you can get it, pay a higher premium. It's best for situations that you know will be temporary, like certain debts.
Whole life is for permanent needs, or those that may be permanent. If you start with whole life to cover something that appears to be permanent, to find years later that it isn't, it may cost you a little.
But if you start with term for a temporary need, only to discover when it expires that you still need the protection, it can cost you much more. Compare it to starting a trip on a bike, to find out too late that a car was needed to protect you from the storms you faced along the way.
Want help with your life insurance planning?
Hans Mathisen today at (306)242-7042.
Copyright © 2007 Life Letter. All rights reserved
Retroactive life insurance
The most irritating thing about life insurance is that you have to pay for it before anyone gains any benefit from it.
Wouldn't it be great if you could obtain "retroactive life insurance" that would not have to be be paid for until after death? You'd pay nothing during your lifetime. After your death, your beneficiary would receive money from the insurance company and then they would start to pay for it.
How much would it cost?
Life expectancy wouldn't be a factor. The length of the premium paying period and the expected interest rate over that period would be. Here's an example of how it might work.
Carla , as Karl's widow, will need $500,000 cash to settle his estate and provide herself with a modest income. Assuming 6% annual interest, retroactive life insurance will cost her about $2,974 every month for 30 years.
How does this compare with modern life insurance?
Which is the better deal?
Both provide the $500,000 Carla will need at the time she needs it. One will cost her $2,974 every month for 30 years after she has lost Karl. The other requires less than $175 monthly and only while he's still alive. Obviously $175 monthly is easier to pay than $2,974 each month.
"Retroactive life insurance" does not have to be invented because it already exists under another name. Carla may be able to obtain it as a bank loan or mortgage.
Of course, Carla will have to show that she has the income necessary to handle the monthly payments. She'd probably have to pay more interest than 6% because of the increased risk to the bank. Carla may even have to repay the loan over a shorter period than 30 years. Even then, she would probably have a difficult time getting the loan. After all, her husband has just died.
Retroactive life insurance, Karl and Carla realize, is neither affordable nor reliable. Fortunately they discover it in time to guarantee the cash his estate will need through modern life insurance.
This article is for information purposes only and is not intended as an offering or illustration of a life insurance policy. Work with your insurance advisor to determine the right plan for you.
Want help with your life insurance planning ?
Call Hans Mathisen today at (306)242-7042.
Copyright © 2007 Life Letter. All rights reserved
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