Let's say I was trying to sell a very expensive whole life insurance policy. Let's say I knew that my client would never buy if they knew how expensive it would be to pay for life insurance for their entire life. Let's say I knew that the cost of insurance would become so great that one day my client would refuse to pay. How could I configure a policy that would sell?
The answer is easy. To solve the first problem I would sell the policy using a hypothetical which did not show the cost of insurance. I would only show payments that did not increase so that the client would believe the cost of insurance was not increasing over time. To solve the second problem, I would charge double, triple or even ten times what is necessary during the first few years and hold that amount in a separate account. When the client finally decided to stop paying, I would automatically build into the policy a way to pay the premiums from the separate account.
Here are the 2 questions you need to ask:
- Why doesn't a whole life insurance hypothetical show the cost of the underlying life insurance each year?
- Knowing that the cost of insurance increases each year, how is the cost of insurance covered since the payments are not increasing?
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This post was reposted from http://finlit.biz/life-insurance/2-questions-you-need-to-ask-before-you-purchase-a-whole-life-insurance-policy/, originally written on January 23rd, 2013.
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