Wednesday, October 9, 1996
Insuring Foolishness
or
Life Insurance Isn't Peanuts
by MF Runkle

About six years ago, my father, George Runkle, died. One of the items in the minuscule inheritance he left me was a life insurance policy (about $4,000). I filled out the required paperwork and sent it to the local company office. We wanted the company to mail the check to us, but no, that wasn't their policy. An agent would bring it to our house when it arrived. I had a sinking feeling that we were in trouble.

The agent came over and told me all about the great services of his company. I won't say who the company was, but they use some famous cartoon characters in their ads. By the way, did I have plans for my 401(k) from my now ex-employer? No, I didn't. No problemo, they offered an IRA. I signed over my check to him to buy an incomprehensible mutual fund. At the time I didn't know it, but I bought an IRA Annuity, which offers the market under-performance of a mutual fund with the advantage of higher management fees and a surrender charge. Well, that's another Fribble. The worst was the Whole Life policies he sold my wife and me.

Everybody needs life insurance, and you can usually buy term policies pretty cheaply from many reliable places. I was holding some pretty good term policies at the time through a couple of different fraternal and beneficial organizations. Why would a Whole Life policy suit me? Well, the agent brought out his trusty laptop, and printed out some "projections." How can you question something from a computer? He sure made it look like a good investment. Any rate of return over zero can increase your money quite a bit over a long period of time. It's called "compounding." Unfortunately, I didn't realize just how bad this return was until last Friday (only 5 1/2 years later).

We didn't buy this insurance for an investment, though. We bought it because we were tired, and wanted to get the guy out of our house. Did we do an analysis to see how much insurance we needed? I don't think we're talking about that right now. Take my advice; let the guy sit at your kitchen table running his laptop while you go to bed.

Here's another suggestion, take that "projection" from the life insurance agent (if you can get him out of your house without buying the policy) and make this easy comparison on your spreadsheet. Find the cost of an equivalent Term policy, and take the difference between the two, and see how much cash value you would have if you invested that money directly. If you don't feel like putting formulas in Excel, use the financial planner in Quicken, or any retirement planning software will work. Even using a conservative return of 10%, which historically you could get by selecting stocks with a dart board, the projections the agent gave me look lousy.

Now, let me be fair. This low rate of return was brought out a few years ago, and the insurance industry had an answer. They said people would spend this extra money instead of investing it, so at least it forced them to save something. I'm so glad they are concerned for my welfare, and of course, since I would only spend the money, I may as well give it to them.

Here's another point in favor of Whole Life; it's like owning a car versus renting a car. An insurance salesman told me that, and it puzzled me. Looking out my window, I can see the Foolmobile (212,000 miles) sitting in a pool of anti-freeze. Its water pump is out, which really makes me mad, since I replaced the darn thing just six years ago. At least its getting the transmission fluid out of the concrete. If I was renting a car instead of owning one, I'd be quite happy right now. The same goes for insurance. Whole Life doesn't decrease like Term, but who cares? You don't need all that insurance when you are old. Also, if you do invest that extra money, you may have more in investments than that Whole Life death benefit. You don't even have to die to get the money. This is even better, since as far as I know, they haven't developed a way you can take it with you.

My wife and I have gone on to replace these Whole Life policies with Term insurance. Even after owning the policies for five years, it still was worth cashing out of them. For Term, we used USAA, which isn't open to everyone (you have to be, have been, or be the child of an officer in the Armed Forces). However, a number of other organizations offer very reasonable Term policies. Fraternal organizations usually work with insurance companies to sell this type of policy to help raise money, and they often get good rates. Some organizations have a mission to provide low cost insurance to their members; the Knights of Columbus is one that comes to mind.

We can compare insurance to investments. There are the "Wise," which are a number of unscrupulous commission insurance agents, and companies that often encourage their behavior. There are "Foolish" insurance companies and providers, who will sell you policies that are inexpensive, and meet your needs. The Rev. Shark may sell all his holdings and put his money in Coke's DRiP plan, the Gardner brothers may decide they prefer Technical Analysis, and academics may discover penny stocks are the best investments, but don't count on it. You see, nothing is for sure, except death. You can count on that, which I'm sure is a comfort to you all. So, it is extremely important that we Foolishly prepare for this moment. One hopes it will be later rather than sooner, and we'll all leave behind things more lasting than money. My father did do that.

Transmitted: 10/9/96