No One Wears a Bulletproof Vest Hoping to Get Shot

A football player wearing a helmet goes an entire game without a hit to the head.

You get in your car, put on your seatbelt and get where you’re going without an accident.

A police officer wears a bullet proof vest during a raid and doesn’t get shot.

Are any of these people disappointed that they didn’t end up needing those protections? Of course not.

So don’t let the local life insurance salesman trick you into thinking they should be.

I see this all the time

This is a classic bit in a life insurance sales pitch.

The salesman asks the young couple: “Do you know how often term life insurance policies actually pay out?”

The couple looks at each other a little timidly, trying to come up with a guess when they have no idea what the answer is. You go first, sweetie. No it’s okay, you go first.

So they guess. And the salesman chuckles.

“2% of the time,” he says. The couple nods in surprise at how small that number is.

“Now, do you know how often whole life insurance policies pay out?”

Again, a short awkward silence as they think about it.

The salesman interrupts: “100% of the time”.

Boom.

Such a good sales tactic. So completely irrelevant.

The salesman tells you this because he wants to sell you whole life insurance.

I’m telling you because I want to help you avoid this money-draining mistake. I want you to get the right kind of life insurance for your family.

Because I’ll be honest, this is a POWERFUL sales tactic. I went through one of these pitches just a few years ago when my wife and I were buying life insurance and it really does capture your attention.

But it totally misses the point.

The implication is that term insurance is a waste of money if it doesn’t pay out, and since it rarely pays out it’s usually a waste of money. Which is a COMPLETE misunderstanding of what insurance is supposed to do.

The point of life insurance, or any insurance for that matter, is NOT to pay out no matter what.

The point of insurance is to pay out IF something bad happens DURING the period you’re vulnerable to that bad thing.

You buy life insurance to cover yourself from financial loss if you die during the period of time when other people depend on you financially. If you don’t die, you should be happy! Just like you’re happy when you wear your seatbelt and don’t get into an accident. Or the police officer is happy that she didn’t get shot. Those are good things!

The life insurance premiums weren’t a waste any more than the seat belt or bulletproof vest were. They provided the protection you needed when you needed it.

The sales pitch is also a lie

The entire premise of the sales pitch is completely irrelevant, so whether or not it’s actually accurate is secondary. But the fact of the matter is that it’s a lie.

It is NOT true that whole life insurance pays out 100% of the time. You can see the numbers for yourself in this detailed report from the Society of Actuaries, but about 30% of all whole life insurance policies lapse within the first three years alone. Another source finds that only 15-20% of whole life insurance policies ever pay out at all. That’s a far cry from 100%!

Now, keep in mind that these numbers aren’t necessarily bad. There may be good reasons to end a whole life insurance policy, so a low payout rate isn’t an automatic failure, just like it isn’t for term insurance.

But don’t let the insurance salesman fool you into thinking that whole life insurance is a guaranteed payday. It’s not.

Remember what your life insurance is for

Life insurance is a great way to protect your family when it’s used the right way. But it’s important to remember what’s it’s meant for:

  • It’s meant to provide protection.
  • It’s not meant to provide a guaranteed payday.

For as long as you continue to pay your premiums, term insurance will continue to provide that protection. And once you no longer need the protection (when your kids are financially independent), you can simply stop paying.

Even if it never pays out, you still got your money’s worth.

You just didn’t get shot. And that’s a good thing.

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  • Dee May 12, 2014

    Great point Matt. My hubby and I got suckered into buying a whole life insurance policy a few years ago. Luckily we realized what a mistake it was and got rid of it, but we had paid into it for a couple years by then! And of course when you cancel early you get very little back. HUGE lesson for us. I really don’t understand who these types of policies can benefit- other than the insurance companies themselves 🙂

    • Matt @ momanddadmoney May 12, 2014

      It hurts to swallow that cost, but better to do it early on than keep paying in for years and years. There are some unique circumstances where these kinds of policies can make some sense, but in 98% of the cases they don’t. Glad you guys were able to get out!

  • Laurie @thefrugalfarmer May 12, 2014

    Love this, Matt!! We have whole life policies because we bought them dirt cheap many years ago, but in this day and age and at the current rates, I wouldn’t do it again.

    • Matt @ momanddadmoney May 12, 2014

      Thanks Laurie! It’s definitely true that a policy that’s been in place for a while can look much better going forward than one that’s just starting out. Glad it’s working for you!

  • Andrew May 12, 2014

    Great post! My co-workers are looking into life insurance and have spoken to a life insurance sales agent…I mean “financial advisor.” They hear the arguments you mentioned above and yea, those are powerful sales tactics they’re using and can easily influence someone who hasn’t researched it thoroughly.

    • Matt @ momanddadmoney May 12, 2014

      I wish there were more restrictions around who’s allowed to use the term “financial advisor”. I feel like it’s often used to do more harm than good.

  • Such great points Matt. Life insurance is something that most people don’t understand, so manufactured stats like the one you mentioned at the top makes people very susceptible.

  • John S @ Frugal Rules May 12, 2014

    I could not agree more Matt! It always drove me nuts when I was working in life insurance to see reps use these ridiculous pitches on unsuspecting people. Then they start selling these things as investments and it just gets even worse. I can’t remember where I heard it, but it rings true, and it was saying there is a certain reason why life insurance companies can afford Super Bowl commercials and big buildings…it’s because it’s built off of products most of us have no need to buy.

    • Matt @ momanddadmoney May 12, 2014

      Haha, you know what’s crazy? One of the life insurance agents I talked to used that exact same saying, but said that they were building their empires off term insurance! Can you believe it! He really wanted us to believe that term was a rip off and a waste of money.

  • Shannon May 12, 2014

    I saw your blog title and knew exactly where you were going with this Matt and I totally agree. We have our term life insurance because it helps us sleep better at night knowing that we could be part of the 2%. I joked with my hubby that I was worth more dead than alive and he said he would much rather have me around than collect the money.

  • J. Money May 12, 2014

    I was kinda hoping there’d be a reference to 50 Cent up in here, but fortunately I still enjoyed the article 😉 *Now goes off to grab his vest purely out of fashion*

    • Matt @ momanddadmoney May 12, 2014

      Oh man! What a missed opportunity! Can’t wait to see that bulletproof vest at FinCon.

  • LongTermMindset May 13, 2014

    Great summary of the whole life sales pitch! Insurance salesman must love you!

  • Free To Pursue June 12, 2014

    I often wonder why people who need to purchase insurance don’t view it “paying for piece of mind”. That’s what it is, really.

    As you said, you would discontinue it when you have financially-independent children. It’s the piece of mind we need to be paying for. No more, no less.

    • Matt Becker June 13, 2014

      Sure, part of it is peace of mind. But it’s also genuine protection against a weakness that would exist if you didn’t have it. So I think it’s a little more than peace of mind as well.

  • Andy Jasani August 6, 2015

    Hello Matt,
    I am very thankful for this knowledge you have offered here on the WL policy and it may not turn out as expected in terms of “Cash Value”. I was sold on the same basis and now I am about sell them out and walk away with whatever loss I have to face, but will not want to throw in another dime.

    We have two kids, We are already maxing our 401K, she is with GSA and I am with private firm. Once I cancel the WL policy(we both have term policy in place), I would like to know or start IRA/Roth with either Vanguard or Fidelity. Also, I have a 529 plan for one kid. Which direction I should move forward?
    I am 40 and my wife is 35 at the moment.

    Thank you.

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