“That’s A Solution Looking For A Problem”

In my last article, we talked about cash surrender values in whole life policies. I used an example of a 35-year-old female non-smoker to crunch some numbers. In the example, I quoted the price of a 10-year term policy which would cost $137.50 per year. In the conclusion of the article I said I would never recommend a 10-year term policy for a 35-year-old female. I said she should buy a 30-year term which would cost $305 per year.

I then asked if a 30-year term was a good idea for everyone and then answered my own question saying it was not but that you would need to read this article to learn why.

During December I had a call from an American visitor to my website (www.term4sale.com. www.term4sale.ca is the same thing, but it's populated with the companies and rates of Canadian life insurance companies rather than the U.S). Both term4sale websites are intended to make it easy for consumers to shop and compare the prices of life insurance policies offered in the market. Comparisons are completely free and you can shop anonymously. If you haven't checked the site out, and you're a person who is buying life insurance, then you are missing the best resource for life insurance buyers on the internet. Try googling "life insurance comparison" and see where it is listed in the search. You should find it near the top of the first page.

The American caller had some questions about a life insurance policy that he was on the verge of buying. He was a 55-year-old nonsmoker in preferred plus health, and had just qualified for $1,000,000 of a 30-year term. After I answered his questions about www.term4sale.com, I asked if I could ask him a question. He said, “Sure.” I asked him, "Why are you buying 30-year term?" He told me an agent had recommended it and then began to explain why he liked the idea.

The discussion became longer and longer as I tried to guide him through a short planning process. I explained that the reason you buy a 30-year term is because you see a need for life insurance for the next 30 years. I pointed out that he was 55, and asked when he thought he would retire. That led to another discussion and by the time that subject was kicked around, we agreed it would be sometime between his age 65 and 70. He would like to retire earlier but after our chat he realized he didn't have enough money. He then admitted the chances of being able to still work after age 70 were not great. That's how we narrowed it down.

I then pointed out that if he expected to actually fully retire at 65, he would have to have sufficient investments in place in order for him and his wife to receive an income for the rest of his and her life. After some discussion about that he was fairly certain that his company pension combined with his private retirement savings would be sufficient if he retired between 65 and 70.

So I then asked again, "Why buy 30-year term?"

In his case, the policy was going to cost about $6,000 a year and by comparison a 10-year term would only cost him $1,500 per year. I did agree that I could see why he wanted/needed $1,000,000 dollars of coverage now. (As background, he is making in excess of $100,000 per year and his wife would lose that income if he died.) After agreeing with him that he needed the million, I asked why he would still need it after he had actually retired. I then suggested he would be better off investing the $4,500 per year—the difference between 30- and 10year term—adding that $45,000 (plus growth) to his retirement savings. That would make more sense than spending $6,000 per year on a 30-year term policy he wouldn't need after 10 or 15 years.

He then began to think up and run various "what if" scenarios by me, all explaining why he thought the 30-year term would be a good deal. I should note the gentleman was an engineer, and of course that's what those folks do. I played along with the scenarios and cross-examined his thinking.

In one case, he said he was thinking about buying a new house and it would have a new mortgage and so the insurance could be used to pay off the mortgage if he died. I then probed that idea. I asked if he was planning to retire in 10 years, how he imagined he would pay off that mortgage if he didn't die. I asked where the money for those payments was going to come from and how he was going to be able to afford both those and the insurance premiums. After some further discussion the house idea seemed to fade away.

The next scenario he raised was that his pension plan would shrink if he added his wife to the payout. In other words, his company gave him two options: he could take the pension on himself alone which would pay a higher benefit but which would end when he died. If his wife survived him, that would leave her out in the cold. Alternatively, he could include her on a joint survivor basis which would reduce the pension amount but which would pay out until they had both died. He thought he could go with the pension on himself and use the 30-year term policy to take care of his wife if he died before she did.

I then pointed out that the pension problem was a lifetime problem and that using 30-year term was simply a bad solution and a big gamble. Given his excellent health, the reason the life insurance company was happy to sell him the 30-year term was because they thought most people his age would outlive it. I think he was thinking that he was almost certain to not live another 30 years, a mistake a lot of 90-year-old-plus people made when they were younger.

Therefore, it would be conceivable that he would pour all that money into the 30-year term, outlive the 30-year term, then die. That would leave his wife without a pension benefit, no insurance benefit, and he would have blown $180,000 ($6,000 per year) doing it. I said if he wanted to use a life insurance policy to make up the pension shortfall, it would need to be a permanent product because it was a permanent problem. Anything else would be a gamble. Incidentally, there are some cases where buying permanent life insurance to back up a pension makes sense, although not the majority of the time.

In the case of income replacement on the 55-year-old, the 30-year term was too long and the wrong type of insurance. In the case of the pension shortfall, the 30year term was not long enough and again was the wrong type of insurance.

He kept thinking up scenarios (none as good as those two) to explain the reason why 30-year term was a good idea. He was trying to come up with a problem to make the policy fit, rather than buy a policy that actually fit the problem.

I finally asked him if he had ever heard the phrase "That's a solution looking for a problem." He said he hadn't but immediately connected to it. He said that cleared things up for him. The next day he called me and repeated the phrase back to me, saying that he was going to start using that phrase at work because it would summarize a lot of things quite nicely (as I said, he's an engineer).

I'd like to take credit for coining the phrase but I can't. The first programmer who ever worked for my software company was the person who introduced that phrase to me and I liked it immediately. In the software development business you get a lot of solutions looking for problems. That is why some software technology has a tendency to get more complex and complicated than it needs to be. You have people who are designing things because they can, not because there is an actual need for what they’ve created.

But it nicely explains a lot of the ideas that life agents come up with to sell the wrong kinds of policies to people who really need a different type of policy.

In the case of the 55-year old, a 10-year term product makes enormous sense and it's almost impossible to come up with any real reason why a 30-year term would be a good fit.

On the other hand, a 35-year-old needs 30-year term simply because that same 10-year term policy will leave them with major increases in premiums in the 11th and 21st years when they will still need life insurance. If they plan to buy a different 10-year policy at the end of 10 years, it leaves them exposed to having to qualify for that new insurance. In past articles I have pointed out that health risks tend to increase as you get older and so you may not get the same preferred health discounts you could obtain when you were younger. For a younger person, buying a 30-year term policy not only gives them a guaranteed level premium for 30 years, but it means they are locking in their "right to buy" that policy at that premium for 30 years. A 30-year premium guarantee is something a 35-year-old needs and something a 55-yearold doesn't.

Just a side note on that: frequently I am called by people who wonder if buying a 30-year term means that they are "forced" to keep the policy for 30 years. No, if you stop paying premiums, the policy ends and you don't owe anything further. When you buy a 30-year term policy, it is the company’s guarantee that you have the right to buy that policy for that period at that premium.

In the final analysis why would someone need $1,000,000 of life insurance at age 84, and not need that same $1,000,000 a year later at age 85? If you're not going to need it, you probably won't need it long before age 84. Why pay all that extra money for it?

I believe that the gentleman I talked to ultimately decided to buy $500,000 of 10-year term and $500,000 of 20-year term, instead of $1,000,000 of 30-year term.

I though that was a sensible strategy and only cost a total of $2,275 ($810 + $1,465) per year, which was much better than paying $6,000 per year for a policy that he wouldn’t need in the future.

And he really came around to my way of thinking when I asked him where he thought he was going to get the $6,000 per year for the 30-year term policy once he did retire.

Bob Barney, President, Compulife Software Inc., Kitchener, ON (888) 798-3488, barneyrl@compulife.com, www.compulife.com.