The unforeseen financial shock of the last year has forced many individuals to curtail their spending dramatically, including spending on investments. Those hit most severely by the economic downtown who own cash value life insurance have often found they can no longer afford the premiums. In a large percentage of these cases, they feel the need to drop these policies and switch to term insurance if they continue their insurance at all.
The typical commission structure of permanent insurance causes a substantial, and often total, loss when this happens. The commissions are heavily “front-loaded,” leaving little or nothing to show in the investment component (cash surrender value) of the policy in the first year in exchange for the premium paid. Because of this commission structure, even decent cash value policies generally won’t show the surrender value exceeding the premium outlay for ten years or more.
Avoiding or minimizing commissions – an option insurance agents don’t mention – not only enhances the immediate and long-term value of permanent life insurance but guards against the drastic investment consequences of a policy lapse in the early years of a policy.
The possible future need to change course with a policy is a compelling reason to choose one that maximizes the amount of cash building up immediately within a policy. Even those who think they are only interested in a policy’s death benefit may not anticipate the circumstances (e.g., financial hardship, divorce) that will force them to drop or change a policy during their lives. I have seen these things happen to clients often enough to counsel them to think long and hard about the need to build in future flexibility when selecting a policy. Minimizing or avoiding sales commissions quickly boosts the savings value of a policy. Policy holders can then deal with unforeseen circumstances, such as those of this past year, without incurring an additional heavy investment loss when a policy is surrendered or modified.
