A couple years ago my grandfather passed away. Him and I were very close. We would have meals together all the time. We would talk for hours. I miss him. My mom was cleaning out his old records this week and came across his trust. We read through the will in the trust and noticed that he had listed a life insurance policy for $27,000. He listed the company and where the policy was. It’s a shame the policy number wasn’t listed. Today I called the company and mentioned our findings. Guess who didn’t have any record of my grandfather’s life insurance policy?
If there is one thing that people are constantly clamoring for, its more insurance! Am I right or am I right?! Ironically, that question seems like the kind of question a life insurance salesman or politician would ask.
Life insurance, at its absolute core, is an odd concept. We, and a whole bunch of our closest friends that we’ve never met, pool our money together with an insurance company in some strange lottery that you win by dying too early. Don’t get me wrong, life insurance is essential, but, at its core, it represents an odd bet.
The most infuriating part of life insurance are the sales ploys. If I read another internet title that states, “New Retirement plan that banks/advisors/governments don’t want you to see,” I’m going to vomit. 999 times out of 1000 it’s nothing new under the sun. When curiosity gets the best of me, I click on these “new ideas.” I can’t remember the last time it didn’t relate to selling you gold or life insurance.
If I read another internet title that states, “New Retirement plan that banks/advisors/governments don’t want you to see,” I’m going to vomit.
Once upon a time, I worked for an insurance company. Our “trainers” preached that all woes could be solved with one of three tools … life insurance, annuities, and mutual funds. Preferably all three, but, if not, the company wanted you to sell them in that order. Were you worried about retirement? You needed life insurance, annuities, and mutual funds. Did you want to save for your vacation? You needed life insurance, annuities, and mutual funds. Was you car making a weird clanking sound? You needed life insurance, annuities, and mutual funds. Did you have a strange sore on your back that oozed glowing green liquid? Well … not to fear … you just needed life insurance, annuities, and mutual funds. Suddenly I understood why people seemed skeptical of life insurance agents.
When should we use life insurance? 99% of the time, life insurance has three simple purposes. Pay estate taxes, pay bills, and/or provide an income stream for your heirs. 1% of the time it can be used for additional savings. Even then, there are a number of hurdles that must be accounted for.
If you are retiring, then, reasonably, you no longer need to create an income stream … FOR YOUR HEIRS. That eliminates one need for life insurance. That leaves paying a bill. Perhaps you want to pay off your mortgage, pay for final expenses, or pay a tax bill. The end. Even then, we want to test and see if saving for those large bills are better than paying a life insurance premium.
Most insurance agents I meet are prepared with every argument under the sun about why every person should own life insurance (or more life insurance). Their training usually revolves around how to sell you life insurance and great one liners. Sadly, they are poorly equipped with math. Don’t get me wrong, they have illustrations that appear to promise incredible benefits. Unfortunately, many illustrations I’ve seen are embarrassingly one sided. The typical … uhh … discrepancies are … uhhh … oversights like … the tax rates for the investment being compared to the life insurance policy is different. The rate of return for the investment opposite the life insurance is lower. The rate of return for the life insurance is higher. Illustrations forget to show tax deferral when it should. The list goes on and on.
Reasonably, this has put a sour taste in many peoples’ mouths. I’ll meet people who tell me they don’t believe in life insurance. Why? Too often, “Pushy salespeople,” has been the answer or, “Something didn’t feel right.”
The problem with using life insurance for savings are the high costs. We are talking crazy high costs. Why are the costs so high? YOU HAVE TO PAY FOR THE LIFE INSURANCE! Remember that you and all those friends you’ve never met are betting that you are going to die too soon. It takes a lot of return or a very specific tax benefit to justify using life insurance as a savings vehicle. 99% of the time you should find something else. If you REALLY want to use life insurance as a savings vehicle, work with an advisor for a couple years. Make sure they provide the service they promise; make sure they establish a good report with you over time. Once you’ve found them to be honest and reasonable, then take the next step. You may find out they don’t recommend life insurance. If you trust them and their judgement, then trust them and move on.
Finally, as I mentioned, my family fought with an insurance company about a pay out. We lost. My grandfather owned a life insurance policy through his company’s pension. Upon his death, we called up to collect the death benefit. We couldn’t find the policy or the policy number. We had marketing pieces, a welcome letter, but no policy. To our (cough, cough) shock, the insurance company couldn’t find record of anything. This doesn’t mean they were lying, but it is always in the back of my mind. If you own a life insurance policy, make sure your beneficiaries know where the policy is and/or have a copy. An insurance company has a vested interest and a responsibility to their shareholders to keep claims to a minimum. Your heirs need to be able to prove they are owed the money. The onus is on you and them.
If something doesn’t feel right or a salesman is being pushy, take a step back. Life insurance is a fantastic tool when used properly, but can create negative consequences when sold/applied improperly.