Does the Term Life Insurance make sense?

 

Prior to the 1960’s the whole idea of term life was not very popular. In fact, it was so unpopular the very few people have heard of the “term life”. The whole concept seemed shaky. The traditional idea of life insurance was similar to bank accounts. Basically, you would keep putting in money into a policy which you can borrow against and which can invest money on your part. In other words, it was an asset that you built up through the years. If you died, not only do you get a certain fixed amount, but you’ll also get a certain percentage of the money that you have built up.

 

Life insurance has historically been positioned much less as a shared risk as more of an investment asset. It’s so much different from stock portfolios. The key point of differentiation is that insurance companies would often buy huge amount of real estate mostly being commercial in nature and rent out this property.

 

Using this formula, insurance companies became really rich since people only cash out when they died. They have access to this huge amount of money which they used to buy real estate. The real estate in turn would generate income from rents. In many cases, the insurance companies would buy real estate on using a loan and develop it into a commercial building and office space which ends up paying for itself. This was like shooting fish in a barrel. This was a “can’t lose” situation.

 

There is however one downside. Most people cannot afford this type of insurance because it costs a lot of money. Since you are building up an asset and you’re putting a lot of cash year after year, you can well imagine that this can take quite a big chunk out of your annual income. Most people have kids to raise. Most people have to put food on the table. Most people have lots of expenses and if you factor in the need for insurance, most people would automatically think that this is completely optional. It’s great and everything. They can understand the value but it’s definitely not at the top of their priority list.

 

This was the name of the game until the 1960’s. In the 1960’s, term life insurance became really popular. With term life Insurance, you are guaranteed a certain fix amount if your family is guaranteed to collect a certain fix amount if you die within a certain. This is usually offered on a year to year basis. In a way, it’s a bet against the insurance company.

 

The insurance companies are betting that you’re not going to die that year. You on the other hand, whether you like or not and whether it sounds good to you or not, are betting that you will. If you don’t die that year, the insurance company keeps your money and then the bet renews for the next year to pay your premium. This goes on and on and on until of course you die. This model enabled insurance companies to drastically reduce the amount of premiums had to pay. Basically, they would get a huge pool of people putting in their bets year after year and only certain percentage of those individual would actually die. What happens to the rest of the money? Well, it goes to the insurance company.

 

Properly executed, this term life insurance model actually created more cash for insurance companies especially if they’re going to reinvest all that cash on real estate and other investments.  For consumers on the other hand, term life insurance makes sense if they’re older or if they have reached the age that they know that they’re susceptible to certain fatal conditions.

 

Outside of that, it would still be a good idea if you negotiate the lowest prices possible. If you can get the lowest premiums possible, then it would make a lot of sense. But if outside of that, this might be an issue. You probably would be better off with regular or traditional insurance packages.

How the Chinese invented insurance?

 

Over several hundred years, the Chinese civilization invented insurance. Insurance is now a global industry that is bought all over the world. In fact, insurance has enabled the industrial revolution to spread from England to all four corners of the globe. If there is any kind of economic activity that requires risk-taking, insurance is crucial. Without insurance, people are not going to invest as widely and as heavily as they would.

 

Most people would rather take the bird in the hand rather than the two in the bush.  That’s just part of the human condition. That’s just how human nature works. Well, with insurance, people can take more risks and this enables industries to flourish. This enables a lot more people to get hired and this makes for a very progressive and technologically advanced society. Make no mistake about it. When it comes to economic progress, insurance must be part of the picture.

 

Did you know that the Chinese invented insurance in a purely agricultural setting? This was during a time where there were no heavy industries. This was the time where there were no complicated machines. Still, given that China’s a simple agrarian society, they still were able to come up with the concept of insurance.

 

It’s all about RICE

 

Several hundred years ago, Chinese merchants would hire or buy boats to transport rice harvested from one part of china and flowed it down to big city centers. This is how Chinese rice traders made money. They would buy rice at a very low price from rice producing areas of China and then transport them to city centers where they can command a much higher price. They buy low and they sell high and keep the difference as profit.  Sounds simple so far, right?

 

What complicates this neat deliquation is the fact that for every ten Chinese rice boats, sometimes, monsoons, typhoons, bad weather or even robbers and thieves demolish or destroy at least one boat. Accordingly, there’s a ten percent or higher loss rate. Chinese merchants then came up with loss rate. However, this loss rate is not constant. It’s not like every year one of ten boats will run into problems. Instead, that varies from year to year.

 

Some enterprising Chinese entrepreneur came up with insurance. What they would do is they would collect insurance premiums from all the rice boat owners to distribute the risks among all rice boat owners. They would collect this throughout the year. This means that they would sell insurance even during the dry season where there’s no absolutely no risk of loss. Obviously, they would also sell during the rainy season. What this practice did was that it enabled the rice ship owners to ply their trade with utmost confidence knowing that if disasters strike, they will be covered and best of all, it didn’t cost much for this peace of mind.

 

The fee was very small per boat but since there are so many boats covered by insurance, this spread the risk across a wide range of boats and this reduced the overall losses to the industry. This is how insurance was born and just as the Italians got the idea of pasta from a Chinese, the Chinese also taught Europeans the basic concept of insurance.  It’s not like somebody went from renaissance Italy or Elizabethan England caught a bought down to the tip of Africa and went to China. That doesn’t work that way. Instead, insurance actually spread slowly.

 

It started in a southern China moved upwards to the northern imperial China and from there, it was carried by the Mongols to the Muslim territories. This is why insurance really flourished because the Silk Road was a very very busy trade route for eastern goods getting into Europe. From there, it spread to Europe. By the late Middle Ages or earlier, insurance was well established in Western Europe. We can all thank the Chinese for this amazing innovation.

How can life insurance help you earn more money?

 

Usually, people have a weird idea regarding life insurance. They really think that life insurance is simply like some sort of bet. If you don’t die within a year that you’re covered, the insurance company takes the money and you get nothing. If you die within that time frame, they insurance company would then pay you the promised amount of the insurance policy. Sounds good so far, right? Sounds pretty clear!

 

Unfortunately, a lot of people are pretty clueless to the fact that life insurance industry has evolved quite a bit over the years. There are actually a lot of different types of life insurance packages out there. Indeed, with some policies, you can actually earn more money. How does this work? Well, a lot of these insurance companies would re-invest your money. So the more cash you put in to your policy, the more the value increases.

 

Also, you are given a choice between the enhanced value of the policy after a long period of time or the face value. Either way, you come out smelling like roses. Seriously! You come out a winner because you get to pick the higher of the two. Usually, it’s the other way around. When it comes to taxes for example, the government always makes you pay the higher of two options when it comes to assessment fees or penalties. Not so with life insurance.

 

This is why it’s really important for you to get a clear understanding of the many different flavors of life insurance products out there. You need to pay attention to their features and try to cross reference them with your particular set of circumstances. By doing so, you can find the best product to address your needs. This increases the likelihood that you will find the right solution to solve the problem at the right time to produce the right outcome. Otherwise, you may actually be settling for cents on the dollar. You know that happens all the time because a lot of people that buy life insurance because somebody they know sold them a particular package. Little do they know that there are better packages out there. Maybe they have to pay a little bit more money. Maybe they are set of conditions that they have to qualify for. But all the hassles are well worth it because usually the typical insurance policy can leave you in a bind. You may actually be under insured.

 

This is why it’s really important to look for policies that can help you earn more money over a longer period of time. They do exist. You just have to be proactive in looking for them. Let’s put it this way, they’re not going to fall on your lap. You’re not going to run into them. You’re not going to somehow someway lock into them. You have to research these, to know the terms, you have to know the alternative products out there and most importantly, you need to know how to size them up and compare them with each other.

Is insurance like a bank deposit?


When I used to work at an insurance company, people would come in with the expectation that they are simply depositing money in an account. In their minds, insurance policies are very much like bank accounts. You keep putting money in and when the accident or disaster comes, you get to withdraw the full amount. I wish I could tell that that’s how it works but it doesn’t. When it comes to typical accident insurance, you are simply engaged in a bet. This means that in a certain period of time, when you paid your premium and the accident happens within that timeframe, your insurance company will make you hold. They will pay you money to get you to the situation where you are in before the accident or loss.

 

This is a far cry from a bank deposit situation. With a bank deposit, you put money in over an extended period of time and by the time you need to make a withdrawal, you get access to all the money that you’ve put in. With insurance, you only get access to the insurance limit for your policy. Thankfully, this is many times what you pay in a year in premiums.

 

The downside to this is the previous years’ payments are completely discounted. In other words, they don’t count. So even if you take out an insurance for,  let say, a half million dollars, then you get in an accident with damages amounting to exactly half a million dollars, you should make that claim when you were still covered by the insurance policy. Normally, people don’t have a problem with this. Normally, they would make a claim within the valid period. But if you get out of that window by not paying your premiums on time, there’s going to be a problem because like I said, insurance works by only covering you for the period that you paid the premium for. The insurance company is under no legal obligation to cover your losses if you do not pay your premiums. If your policy is expired, the insurance company has no obligation to pay you.

 

Another issue here is the amount of coverage you get. Please understand that there are policy limits. Your insurance policy will state that maximum amount of dollars they can pay for your damages. They are not going to pay a penny more unless certain special circumstances are present. Other than that, which usually involves a lawsuit, you’re stuck with policy limits. Keep this in mind because if you get a clear understanding of these factors, then you would know full well that an insurance policy is not like a bank account. Keep this in mind so you can make better insurance decisions.