This episode of the One for the Money podcast is a little different than previous episodes, as it’s more of a “buyer beware” when buying life insurance. Life insurance is a valuable part of any financial plan, but I’ve seen too many individuals fall for the tricks of some insurance salesmen. Listen to the end when I share strategies on some of the best ways to buy life insurance, which some agents may not want you to know.
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In this episode...
- My journey to becoming a CFP [01:19]
- The wrong life insurance [02:53]
- Permanent life insurance [05:55]
- The fastest way for agents to make money [08:35]
- Factors in life insurance [11:30]
- Avoiding expensive life insurance [16:02]
- One of the best ways to purchase life insurance [18:01]
The dangers in life insurance
I became a certified financial planner to have the greatest impact for my clients. This career has married personal finance and education, two things I love. Sadly, my career didn’t start that way. Due to my naivety, I joined a financial services firm that claimed to put financial planning at the forefront of what they did. However, the reality was that they primarily pushed expensive insurance that the overwhelming majority of people don’t need.
In my defense, the job wasn’t anything like what I was promised in the interviews with the firm. I had interviewed with a few certified financial planners who spoke of the merits of being fiduciaries, but apparently, this was in name only. In fact, they did not do comprehensive financial planning, nor were they fiduciaries. Their primary efforts were to sell expensive insurance. I share this so you know I have first-hand knowledge of how some financial services industries operate.
Why is permanent life insurance so bad?
Many people don’t have life insurance at all, and those who do often have policies that are way too expensive because they fell for the tricks of insurance salespeople. This insurance is called Index Universal Life(IUL), whole life and similar permanent life insurance policies. Legally, life insurance cannot be sold as an investment, but there are far too many instances where an IUL is portrayed as an investment. Often IULs are sold as a way to avoid stock market losses and receive stock market-like returns.
The illustrations used to demonstrate the policy often don’t share the majority of expenses associated with these policies, some of which include significant commissions. More importantly, these representatives don’t determine if these policies are in the individual’s best interest. Permanent insurance is introduced as the only solution. I know this because of my training at the original firm on how to schedule appointments and use emotionally manipulative sales techniques. But that firm didn’t train on how to determine if the clients had sufficient retirement savings or whether they had an adequate emergency fund. The focus was to sell the most expensive insurance.
Needless to say, the agency and I parted ways. I’ve since learned that, with rare exception, term life insurance is usually all that is needed. It typically costs less than indexed universal life, variable universal, or whole life policies that are incredibly expensive and may not meet clients' goals. An IUL policy could potentially erode over 80% of your wealth compared to investing directly in an index fund.
How to choose life insurance
Various insurance companies offer better-priced policies for specific individuals. Some offer better terms for people with diabetes, while others are only better for younger people. A person could apply for one company and receive the highest health rating but receive a lower rating at another company. These variables result in a significant difference in monthly premiums for the same benefits. Consequently, obtaining quotes from multiple companies is beneficial.
Choosing an independent licensed agent who can provide quotes from multiple companies would help find the best option as opposed to a captive agent who would only offer a quote from the company they represent. If you’re still interested in buying whole life insurance, there are a few things to consider. You need to have no consumer debt besides a mortgage, be on track for retirement, and have an adequate emergency fund in place. After all those things, if you still have extra money, there is a more cost-effective way to buy whole life insurance. That’s to purchase a convertible term policy with the same company. These types of term policies allow you to convert to a whole life policy later, and the commission paid to the agents is much lower. Therefore more of your money would build up in the policy.
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