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The agent was so nice, Linda thought. He came all the way to her house.
I’ve always had it in my head that I want my kids to have insurance when I die, and $1.5 million is the figure I always thought sounded right. I have a comfortable income from my work—in fact, 1 was the one who paid the settlement in my divorce—but I have no savings, really, and the income will stop when I die. The kids don’t really see their father, and he has children from his second marriage, so this is all they’d get, ever. My father always said life insurance was a great way to save. I always remembered that. I finally got around to it three years ago—I was fifty-three.
The agent was so nice. He came all the way to my house, which is way out of town. On a Saturday! I was so impressed. When he came, I told him what I wanted and he had his computer with him, so he did the figures right there. He said it would be $22,500 a year for twenty years and that was that; the kids would have their money. In my head I added it up. It meant that I’d be putting in $450,000, and they’d get $1.5 million—a good deal, no? So I said fine, and every June 1 since, I’ve sent in my $22,500.
This last yea though, I got a notice that said since interest• rates have been so low, I would have to pay the $22,500 for an extra three years to keep the $1.5 million death benefit, and if the rates stayed this low or went lower, I might have to pay longer. I called up the agent, and he said that it is possible, even though it isn’t probable, that if interest rates didn’t pick up, I might have to pay that money for quite a while longer than I was told. The best that could happen is that I’d have to pay it for twenty-three years in total. But I think he was saying that I might just have to go on paying it forever.
Had I known that, I would have thought twice about this. It just doesn’t seem right. I asked him what if I stopped now and cashed in the policy, how much would I get? He said $36,000. But I’ve already paid $67,500! I got so confused. He had told me the same thing my father always said, that this was a great place for saving money, regardless of the insurance, because they were giving a guaranteed seven percent interest rate. So how do I end up with only $36,000? And what do I do now?
This is when I met Linda, now fifty-six, who still had it fixed in her head that she wanted $1.5 million in life insurance for her kids. But think about it: For the insurance company to pay that $1.5 million, plus all the commissions and expenses buried in the policy, don’t they have to earn more than $1.5 million from Linda’s money? Of course they do.
This is why they are having Linda pay that extra $22,500 a
year for three years right now. If their performance on how they invest Linda’s money, and the money of everyone else covered by their plans, falls short of what they want, no problem. They’ll just tell Linda she’ll have to keep paying that $22,500 a year for as long as they like. And why does Linda, after putting in $67,500, have only $36,000 in cash value in her policy? Simple. Especially in the first few years of the policy, the bulk of her money goes to pay the agent’s commissions; the insurance company also has to take its share. It is totally possible that the agent received that very first year a commission of $18,000, well worth his time that Saturday when he came out to her house. So, $18,000, give or take, of her first payment of $22,500 went out the window as soon as she paid it. In all likelihood the agent also “earns” around $2,000 every year she pays her premium from then on. Not bad.
What is also important to remember when buying universal] whole life or, for that matter, any insurance is to study the chart or illustration your agent will show you of what your premium is going to buy you.
All illustrations have a projected earnings side and a guaranteed earnings side. The projected side shows how this policy is projected to perform if everything goes according to plan. I can still remember seeing projections on certain life insurance policies of what they would be worth if interest rates stayed at 14 percent, which is what they were when these policies were being sold. Policyholders were in for a rude awakening when interest rates came tumbling down and the policies stopped paying the 14 percent. Projected earnings are “in a perfect world” earnings.
If you look at the guaranteed side of the illustration, it will show you the absolute minimum death benefit, given the highest mortality charges (the maximum the company can charge you for the insurance) and the lowest possible interest rate they can pay you. If you look at the guaranteed side and decide that yes, it still feels like a great deal, buy it by all means, but I doubt you will feel this is the case. If Linda had looked at the guaranteed side of her illustration, she would have seen that the $22,500 would go on for the rest of her life in the worst-case scenario. She hadn’t understood that and wouldn’t have taken the policy if she had. Her agent had emphasized only the projected values. A responsible agent will always, even without your asking, point out the worst-case possibilities as well.

Once a fund starts to do well, the word gets out and it seems as if everyone wants to invest in it. A fund that continues to take on new investors’ money and keeps getting larger and larger is known as an open-end mutual fund. This means there’s no set limit as to how much money they’ll permit to be invested in the fund. At their discretion, the manager and others in authority may sometimes close the fund to new investors once they’ve taken in more money than they feel is manageable, but this is
decision they can make anytime, as they go along.
How Is an Open-End Fund Priced?
At the end of each day, the manager totals up the entire value of the portfolio that constitutes this mutual fund. He divides that total by how many shares are owned by the investors. This figure, whatever it comes out to, is called the net asset value, or NAV It is what each of your shares is worth. If you are a new investor and want to invest $1,000 into this mutual fund, and the NAV that day was $10 a share, you would own one hundred shares of the mutual fund. If the fund’s value goes up by $.25 a share, you will make $25. The more shares you have, the more you make, and the more you lose if the fund goes down.