Inflation and not buying enough life insurance

[Mark]

Younger clients are not thinking about inflation and buying enough life insurance.

I want to talk about Inflation for a minute. Then I will tell you how it can help you increase your Life Insurance numbers.

What is Inflation? It has to do with the value of a dollar and how it decreases in value. Let me tell you this story to help you understand. 50 years ago, you could buy a coca cola for a nickel or less. Every couple of years, the price of a coke would go up. It just seems like yesterday that you could buy a can of coke for 50 cent. I bought a coke from a vending machine for $1 today in a can. Why does the price of coke keep going up? It is inflation and the value of a dollar.

Let me tell you one more story. I was talking with a client about life insurance the other day. She was 74 years old. She already had life insurance. But the problem was she didn’t’ have enough life insurance. When she bought the insurance it was more then plenty. She had bought her policy about 40 something years ago. She bought a $15,000 policy. When she bought it she could have bought a new home for under $15,000. A new car was under $5,000 at the time she bought this policy. Before you start blaming her agent for not selling her enough life insurance, I want to stop and ask you are you doing the same thing he did? Are you selling your clients enough insurance? The agent truly believed at the time he sold this to her, that this would be enough coverage for her. Let me give you an example in today’s time. Let’s say you have a 30 year old male that wants to buy $50,000 or $100,000 worth of coverage. The average agent would not stop for a second to think about inflation on this young man. I bet he has another 50 years of life left in him. In 50 years will even $100,000 be enough? Will $100,000 be like $50,000 in 50 years? Just 10 years ago $100,000 would buy you a mansion of a house here in Georgia. But today, a $100,000 house is a shack. We are losing the value of the dollar every day that goes by.

Now I’m not sure what the % is that you calculate to figure out what you should add to a life insurance premium to count for inflation. I think someone told me 4% a year or something like that. The younger the client, the more of problem inflation will become. Some would even say that you should add 25% coverage to whatever you think you need if the client is younger then 50 years old. I just don’t want to see any client, get old one day and all of the sudden the protection that they think they have, is not enough.

Why not just at least bring this up to your younger clients when they are purchasing life insurance from you. It may increase your sale by 25% or whatever you determine the inflation amount will be.

Besides talking about inflation, I’m still seeing clients’ everyday that has not bought enough life insurance and think that they have enough insurance. Their agents didn’t take the time to do some kind of a planner with them to determine how much they need. But don’t allow me to get off the subject of inflation and how we need to talk to our younger clients about it.

 

[Newby]

One of my favorite subjects.

Inflation is sometimes low when you look at a short period of years. 1961-1965 was 1.2% average per year. 1996-200 was only 2.5% average annually.

But when you look at 30-year periods you see the real picture.
1951-1985 = 4.8% average
1956-1990 = 4.7
1961-1995 = 4.8
1996-2000 = 5.0
1971-2005 = 4.8

Some of the worst singe years are:
1974= 11.0
1979 = 11.3
1980 = 13.5
1981 = 10.3

So, when I quote insurance amount (especially if it's for a definite item like a funeral) I first ask what the oldest anyone has lived in their family. Everyone says 90-100 years old.

OK lets assume you live that long yourself. You're 68 today and if you live to be 93, we need to factor in 25 years of inflation.

Then I use my inflation calculator to figure 4.5% average inflation. I don't have my calc handy as I type this but I know from experience that prices double about every 15-years. So if someone is figuring they need $10,000 today, that would be $20,000 in 15-years and $40,000 in 30-years.

Working in a funeral home, you figure out real quick why everyone who is over 80-years old has a $500 life insurance policy. They bought it 50-years ago when a funeral was less than $500 but they didn't figure in anything for inflation.

I have funeral records going back to 1890 right in my office. If someone tells me they don't believe a funeral will ever cost $40,000 I just pull out an old record book and show them when a complete funeral was $7.50 and tell them "That guy never believed they would cost more than 10-bucks!"

Then I can show them how they progressed to $100 and then years later $500 and then $1,000 and does he REALLY believe inflation ends in 2008? Inflation is like time. It's VERY predictable. You just can't ignore it.

 

[Mark]

Thanks for the figures. I needed these numbers.

You are the man, NewBy and thank you.

 

[Guest]

Great reminder! What type of calculator do you have that calculates inflation?

 

[xrac]

One of my favorite subjects.

Inflation is sometimes low when you look at a short period of years. 1961-1965 was 1.2% average per year. 1996-200 was only 2.5% average annually.

But when you look at 30-year periods you see the real picture.
1951-1985 = 4.8% average
1956-1990 = 4.7
1961-1995 = 4.8
1996-2000 = 5.0
1971-2005 = 4.8

Some of the worst singe years are:
1974= 11.0
1979 = 11.3
1980 = 13.5
1981 = 10.3

So, when I quote insurance amount (especially if it's for a definite item like a funeral) I first ask what the oldest anyone has lived in their family. Everyone says 90-100 years old.

OK lets assume you live that long yourself. You're 68 today and if you live to be 93, we need to factor in 25 years of inflation.

Then I use my inflation calculator to figure 4.5% average inflation. I don't have my calc handy as I type this but I know from experience that prices double about every 15-years. So if someone is figuring they need $10,000 today, that would be $20,000 in 15-years and $40,000 in 30-years.

Working in a funeral home, you figure out real quick why everyone who is over 80-years old has a $500 life insurance policy. They bought it 50-years ago when a funeral was less than $500 but they didn't figure in anything for inflation.

I have funeral records going back to 1890 right in my office. If someone tells me they don't believe a funeral will ever cost $40,000 I just pull out an old record book and show them when a complete funeral was $7.50 and tell them "That guy never believed they would cost more than 10-bucks!"

Then I can show them how they progressed to $100 and then years later $500 and then $1,000 and does he REALLY believe inflation ends in 2008? Inflation is like time. It's VERY predictable. You just can't ignore it.

Great post!

 

[Newby]

The statistics come from a pocket tables flyer I picked up from Allianz sometime ago. It's dated 2007.

To project the inflation rates I use an old Palm Pilot calculator I've had for years. There are dozens of them available for Palm OS or Windows Mobile and probably Blackberry too. Usually they're free or just take a $5 donation or so. Mine came with a donation to a kidney foundation.

I'm going to have to find a new one soon. I've just ordered a new Palm Treo Pro and it has Windows Mobile so none of my Palm software will work with it anymore.

If you have trouble finding an inflation calculator, you can use an investment calculator as an alternative. The only difference is the investment calc will have a field for annual additions that you just keep on zero. Make the investment return percentage the same as the rate of inflation you want to calculate and you will get the same answer with an inflation calc or an investment calc.

Here's the one I use. It's REAL simple and it works great. Downloads - InvestmentCalc 1.0 Shareware Software

 

[Mark]

For some of you older life agents that have been in the business for a long time. You need to call some of your older clients, that have a existing policy with you and go over inflation. Just tell them you are updating their polices, and want to make sure that they still have enough life insurance, due to inflation.

I call all of my clients every year, 2 weeks after their birthdays, and ask them did they got my birthday card that I sent to them, and check to see if they need to update their polices. Like have they bought a new home, got married, had another kid or know of anyone that I can help with insurance. Now I'm going to have to start adding the inflation question to some of the older clients that have older policies.

I also wonder if there could be some kind of a mailer that targets clients that have had a policy for over 20 years and have not thought about inflation, that need to buy more insurance. If anyone comes up with something good, share it with the rest of us.

 

[HealthGuy]

Mark: Good post, I agree with you - most life guys don't sell with the idea about inflation - however, let me play devil's advocate for a minute: It could also be argued that inflation is a non factor as the need for more life insurance often diminishes the older someone gets as their debts can often get smaller - thus inflation becomes a non factor too. Just another way of looking at this. Is this a valid point?

 

[xrac]

Mark: Good post, I agree with you - most life guys don't sell with the idea about inflation - however, let me play devil's advocate for a minute: It could also be argued that inflation is a non factor as the need for more life insurance often diminishes the older someone gets as their debts can often get smaller - thus inflation becomes a non factor too. Just another way of looking at this. Is this a valid point?

To me the lack of debt still does not cover the need for immediate cash when someone dies and the effect of inflation. You have all of the final expense bills plus potential left over medical bills plus estate taxes, etc. We don't know what the feds are going to do but there are state estate taxes and my money is that with the dems in power we will see the estate taxes come back in full force.

Recently I saw a 50 year old widow who had steel belts sticking out of the tires on her car. Her husband had just died and left her nothing except a bunch of bills and no job. If I have $50,000 now and die twenty years from now with the ravages of inflation what will it buy??????????????!!!!!!!!!!!!!!

 

[Mark]

Mark: Good post, I agree with you - most life guys don't sell with the idea about inflation - however, let me play devil's advocate for a minute: It could also be argued that inflation is a non factor as the need for more life insurance often diminishes the older someone gets as their debts can often get smaller - thus inflation becomes a non factor too. Just another way of looking at this. Is this a valid point?

Depends on the customer. Let's us Mark Rosenthal for an example. I don't want to buy decreasing life insurance. I want my dollar amount to stay the same, for ever. I don't care if the kids leave home one day and the house is paid off. I will never leave Leslie (my wife) too much money. She will never say that I left her too much. I understand how the deal works. On my U.L. policy, for $100,000 , at the most I will pay the company $45,000 if I live to be 100 years old. I am more then doubling my investment that I'm leaving to someone that I love. Side note, I have an age 100 guarantee on it. So the premium can never change. Back to my example on me. I am buying the value of x which is $100,000 that I wish to leave my wife upon my death. I already have other policies for the house and kids. But this policy is just for her. Let's say that I don't die for 50 more years. That $100,000 will be worth about $25,000 in value.

Another example. I grandfather left me $1000 in life insurance. It meant the world to me. But...When he bought it, it had the value of $10,000 to him. When he bought it $1,000 had more value then it does today. Over 20 years ago, $1,000 could do great things. His $1,000 that he left each grandchild, if he had died back then, would have been equal to about $10,000 today.

I think I'm leaving Leslie (my wife) $100,000. THe problem is I'm young and still have 50 years left in me. So I hope. In 50 years, it will be worth $25,000 in value.

$100,000 = x . Your value of x should never become less then x. It does not matter if you have less bills or don't need the money as much.

Also, inflation is about 4% a year. It does not take long for this to be a factor.

It is just like buying a decreasing term policy. Each year you loss 4% in value or protection. But you think you are getting a level value policy.

It reminds me of my homeowners insurance. Each year, they tell me that it cost more to rebuild my home if something happens to it. So they keep increasing my protection every year. The agent told me that cost of wood has more then doubled and I didn't have enough protectiong and he had to update my policy...$$$$$$$

In what you are saying, why not just buy a decreasing term policy or a whole life or ul that has a decreasing face amount? If you don't care about losing value of your protection.

Also look at it in another way. What if instead of life insurance, the $100,000 is in a saving account. 40 years from now you go to your saving account and there is only $40,000. The bank manager tells you, that you don't need $100,000 anymore, because you have less bills. Would you be mad?