“Term insurance is a waste. Savings-type insurance is a better deal because you get money back.” This is the standard sales pitch at insurance counters. However, if you look at it calmly based on the definition of the terms, savings-type insurance does not meet the criteria for “insurance.”
The original role of insurance is a system where everyone shares the burden of rare but life-ruining losses. It is mutual aid. The operating side should only be taking a small amount for administrative fees. Please remember this fundamental point.
Endowment insurance, whole life insurance, variable insurance, educational insurance, and personal pensions. The names differ, but the structure is the same: they are financial products that mix “coverage” with “savings and investment.” Viewed as coverage, they are expensive and thin. If you bought the same death benefit as term insurance, it would cost a fraction of the price. Viewed as savings, the returns are slow and small. A 105% return rate over 30 years is equivalent to an annual interest rate of 0.1%, which is effectively negative when you consider inflation. Viewed as an investment, the fees are too heavy. Only a portion of the premium is used for investment, and the breakdown is not disclosed.
Let me reveal the secret. The reason you suffer a significant loss of principal if you cancel in the short term is that nearly 90% of the first year’s premium is taken as fees. Your money disappears into sales commissions and expenses before it is ever invested. The reason you get a little more back in the long term is that the insurance company has invested your money in decent assets for a long time, increased it significantly, and is returning only a small portion of that gain to you. Most of the profit belongs to the insurance company. If you had invested it yourself via NISA, all of those gains would have been yours.
In other words, whether in the short term or the long term, the insurance company has a structure where they never lose money. The true nature of “it’s a good deal because you get money back” is simply that you are getting back what is left of the extra premiums you paid after fees are deducted. It is not that someone else’s money is being increased and returned to you.
There is only one conclusion. Get coverage through term insurance only for the period you need it, and do your saving through NISA. Mixing them is dangerous.
I have summarized the meaning of the 40-90% fee figures and how to handle the savings-type insurance you currently have on my blog.
