The Complexity of Life Insurance

Whole life, term, universal… A lot of people have no idea what they’re buying. Dave and John Y. Campbell discuss why life insurance is one of the most misunderstood financial products out there.

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Let’s move over to the most complex of all areas life insurance.

You talk to the average consumer and they have no feel, frankly. You talk to people in the financial business often and they have very little feel for how insurance truly works. What one makes sense, what kind of policy, what amount even makes sense? What are your thoughts on the insurance industry and the way that that product is marketed to the consumer?

Yeah. So, um, insurance certainly is an area where, complexity and bundling creates problems. The traditional whole life insurance policy that builds up cash value. You know that that is really a bundled saving in insurance product. It’s very hard to evaluate. You know, many years ago it did.

There was a case for it based on tax advantages that you could save tax-free within a life insurance, a whole life insurance vehicle. But of course, the rise of 4 0 1 Ks and IRAs. Has really taken that rationale away, and I think in today’s environment it makes much more sense to have term life insurance, which is much simpler, easier to understand what you’re getting and combine that with saving in a, in a 401k or equivalent account.

Yeah, absolutely. And, and you know, you go back to the traditional whole life, one of the challenges I always had with the product was that you’re paying for two services. You’re paying for protection if you die, protection for your loved ones, protection for yourself. If you live through the. Ash value building up, but you can’t receive both in the old fashioned traditional product.

This is pre universal life. If you only got one of the two, you can’t be simultaneously alive and dead. And that was another problem with the product. And again, the complexity of the product is so few people understand it. I’ll never forget this. I’m at a conference in the States in California, I’m speaking on personal finance, and after we’re going back and forth about universal life and two actuaries who’ve been involved in developing this specific company’s product are arguing back and forth about how it works.

There are two actuaries. Working for the company, having a heated exchange about how the product works and you’re going well, that is a complex product when the actuaries can’t come to grips with exactly how it works and they’re going back and forth in a heated manner. So how is the average consumer supposed to understand all this?