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”.
Such a good sales tactic. So completely irrelevant.
The salesman tells you this because he wants to sell you whole life insurance.
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.