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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75811  
Subject: Re: Dilbert's 1-page personal finance guide Date: 9/23/2013 1:50 PM
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I'm still trying to figure out why anyone would buy into any kind of investment from an insurance company.

Path dependence.

I assume that this was an honest question and not rhetorical?

Norman Dacey lifted the rock in 1965 when he wrote "How to avoid probate" and then "What's Wrong With Your Life Insurance" (1989)

The True Fact is that the cost of life insurance (note: cost, not price) goes up as you age. Life insurance doesn't insure your life, it insures against dying early, sooner than the mortality table shows your life expectancy is.

The unit of insurance is "dollars of premium per $1000 of insurance".
U = P/V
U is one specific number for the age of the insured, because it is defined by the mortality table. U goes up each year, because the chance of dying goes up each year.
You can keep P the same -- by reducing V
Or you can keep V the same -- by increasing P
What you cannot do is keep both P and V constant. Reality doesn't allow that.

People didn't like this for many reasons. One reason was that people just don't like to believe an uncomfortable truth and will deny that truth. Another reason is that people don't like to have a bill that increases every year. Which the insurance premium must, in order to keep the same insurance amount.
Either the price has to increase or the coverage has to decrease.

But people do not like this tradeoff, they want a stable premium AND a constant coverage amount. So insurance companies -- who know everything there is to know about time-value-of-money -- figured that they could give customers what they wanted.
They computed the average premium (very low at first and very high at the end) for the entire term and charged that.

In essence the company overcharges in the early years and uses that to offset the undercharge in the later years. Works great until until a customer decides to terminate the policy before the later, undercharged, premiums come into play. They overpaid for years but never got the benefit that didn't kick in until much later. Regulators noticed the unfairness.

The outcome was Whole Life Insurance, that builds cash value. Level premium (albeit higher than term insurance) and level death benefit. Many customers don't realize or don't care that the amount of INSURANCE is the difference between the cash value and the death benefit.

Now it's back to level premium and a decreasing amount of insurance -- exactly the thing that customers hated in the first place.
Except that *now* customers have in their minds the idea that you should be getting money back from the company, that is it's an investment.
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