APPLES & ORANGES:
The Chance to Get Rich vs. The Guarantee of Avoiding Poverty
“The more things change, the more they stay the same.”
Every now and then, a look backward can be enlightening. That’s the case with the on-going debate about how whole life insurance fits into individual financial programs. Because whole life insurance is a unique financial asset, the challenge for professionals and consumers has always been to properly evaluate its value in relation to other alternatives.
Life Insurance Selling is a professional trade publication with a long history of reporting on issues and trends relating to life insurance. In its November 2011 issue, LIS published an excerpt from a November 1967 article titled “Apples or Oranges – A Meaningful Comparison?” by R. Earl Denman. Although Mr. Denman’s commentary was written 44 years ago, his words remain relevant today; the same issues are still being discussed, and the same distinctions still apply. Here’s the excerpt:
There is such a to-do these days about life insurance versus mutual funds, common stocks, etc., that unless an agent is careful, he finds himself comparing life insurance as an investment with a lot of other things or becoming involved in a long discussion of the history of the stock market, mutual funds, and investment trusts, in which people have put surplus cash in years past, only to find that age did not fulfill the promises of youth.
It has been helpful to me in the past year or so, when the [individual] wanted to compare life insurance with these other things, to remind him that he is comparing apples with oranges.
Life insurance is a guarantee that he and his dependents will not be poor. All the other institutions offer is a chance to get rich. After 45 years of observing people and reading financial results obtained by my friends and acquaintances, I’m convinced that 99 out of 100 need the guarantee that they won’t be poor more than they need the chance to get rich.
Denman’s last paragraph neatly summarizes the apples-and-oranges issue in evaluating whole life insurance: Which objective is more valuable, the guarantee of avoiding poverty or having the opportunity to get rich? Both paths offer the prospect of greater financial security, but address the objective in markedly different ways. And in spite of the many changes in products over the past five decades, consumers today face the same decisions about saving and accumulating: Should I take the risk or play it safe?
Mathematically, the determination of which approach to follow depends on how the variables are manipulated. The results of any mathematical analysis between whole life insurance and another investment and/or combination of investments and term insurance will hinge largely on the projected rate of return, tax assumptions and length of time used for comparison. Of course, the math isn’t the whole story; there are also the intangible aspects of the risk-vs.-guarantee issue.
Historically, Americans’ response to investment risk has hinged on their perceptions. When double-digit annual returns were an every-year expectation, money flowed into all sorts of equity products. Sure, it was possible to lose money, but it seemed so many people were profiting that the risk of loss seemed minimal. Conversely, the performance of many equity products in the past decade has driven many investors to re-evaluate their risk tolerance, and guess what? Whole life is back in the discussion again. Insurance companies run television ads during football games promoting whole life insurance, and the Wall Street Journal features articles like “Honestly, What’s the Best Policy?” explaining why Baby Boomers and their children may want to invest in whole life insurance.
Psst!… It’s not an either-or decision
In real life, no one insists that you decide between apples or oranges; you can have both. Likewise, although there is a tendency for experts to make an exclusive declaration in favor of one option over another, many American consumers would benefit from a financial approach that included both the guarantee of avoiding poverty and the chance to get rich. In fact, having the guarantees against poverty might make it easier to take advantage of chances to get rich.
Whole life insurance is a unique financial product, but one with a proven track record in the market place. Just because comparing whole life to almost everything else may be an apple-and-oranges endeavor, shouldn’t mean you don’t want whole life. The key to a successful whole life program is properly positioning it among your other financial assets, – i.e., finding a place where the apples and oranges can grow together.
