Ask Dr. Per Cap

Dear Dr. Per Cap: 

My mom recently purchased life insurance from a commercial on TV.  You know the ones – no medical exam, no health questions, 100% guaranteed acceptance.  It sounds too good to be true.  Is it?

Signed, Doubtful

Dear Doubtful:

I’m familiar with the life insurance you’re talking about.  Whether or not it’s too good to be true depends on your definition of truth.

A few years ago I assisted an elderly woman who had purchased life insurance from one of the companies you’re describing.  She wanted the policy to cover future funeral costs to avoid saddling her family with a financial burden.  I took a look at her paperwork and learned she actually had two separate whole life insurance policies that she’d been paying on for about 4 years.

Unlike term life insurance with a death benefit that only pays out if the policy holder passes away, whole life coverage provides a more modest death benefit that accumulates cash value which a person can borrow against as a source of income.

In this case the two death benefits combined amounted to less than $4,000 which I suppose was enough to cover final expenses.  However her monthly payments for those two policies were over $40 combined, and because she’d been making those payments for a few years she had already paid over $2,000 in premiums.  That was more than half the amount of the death benefit already and she was in really good health.

At the rate she was going in just a few more years she would have paid more into the policies than they were worth, which just didn’t make any sense; especially when she could have just as easily put that money into a savings account and used that money to pay for final expenses.

I helped her cancel the two policies and by doing so she was able to claim the cash value she had accrued to date which was about $450.  Sure she was out the roughly $1,500 she had paid in monthly premiums but so what.  She was now free to save the money she was putting toward those premiums which added up fast. In fact she’s still alive today so I know she’s ahead of where she’d be if she’d kept the policies.

So back to your question -are TV life insurance products like the one I described too good to be true? 

The insurance they sell is real; however, it’s very expensive coverage for what you get.  And it’s primarily designed to appeal to older folks who might have trouble purchasing more affordable life insurance that requires a medical exam and more stringent underwriting.  

I’d say the way it’s advertised doesn’t really align with how the products actually work.  And because many people won’t take the time to read the fine print on those policies, they’ll probably end up with a product that doesn’t match their needs.

A better option is to help your mother review life insurance from more reputable mainstream insurance companies.  Depending on her age and health it’s quite possible she can still get quality coverage at an affordable price that fits her needs.

Dear Dr. Per Cap: 

Why did that bank in California fail?  And if it happens at my bank, will I lose all the money in my account?

Signed, 

Banking On

Dear Banking On 

Unfortunately, the biggest U.S. bank failure since 2008 occurred earlier this year when Silicon Valley Bank tanked to the tune of over $150 billion in uninsured deposits.   We’re still waiting for the dust to settle but it appears Silicon Valley Bank expanded too quickly, maintained poor oversight of its financial risks, and made a bad bet on interest rates falling instead of rising.

The good news is that the turmoil didn’t spread, which is always a risk when a bank fails because it can create a domino effect of other bank runs in which customers panic and scramble to withdraw their money before more banks shut down.

More good news is that bank regulators stepped in fairly quickly to take control of Silicon Valley Bank with the promise that all uninsured depositors will get their money back. Hopefully that will be sooner rather than later.  But the key words are “uninsured depositors”.

There’s a back-up plan in case of bank failures.  It’s called the Federal Deposit Insurance Corporation (FDIC) and it insures bank deposit accounts for balances up to $250,000 per depositor, per FDIC insured bank.  Banks actually pay a few cents for every dollar deposited as premiums to the FDIC which is why you should always see an FDIC member sticker on the door when entering a bank or an FDIC member statement on its website.

On its own website the FDIC states that historically it pays insurance within a few days of a bank’s closing by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank.

So for your average person who doesn’t have a checking or savings balance that exceeds a quarter million dollars there’s no need to worry.  However, not every bank customer keeps all of their money in deposit accounts.  Many banks also offer investments like stocks, bonds, and mutual funds as well as life insurance policies and annuities.  These investment and insurance products don’t carry FDIC coverage so if you hold any of these non-deposit accounts at a bank, pay close attention to the risk.

The Silicon Valley Bank failure was really ugly because there were a lot of large deposit accounts that exceeded the FDIC limits.  Many of these uninsured account holders were tech firms; however, there were some uninsured individual depositors too who had a very rude awakening when people started withdrawing their money from Silicon Valley Bank in droves.

Financial crises like these are tough to watch and important reminders that anytime you place your money and trust in an institution there is an element of risk.  Be smart and don’t take it for granted.