DING, DING, DING! WE HAVE A WINNER!
Updated: Dec 28, 2019
It's quite rare lately that I find an article about almost ALL the myths surrounding life insurance in one place... but today, I have one!
Let's go through these and see if I have prepared a proper response to some of these notions.
1. BUYING TOO MUCH OR NOT ENOUGH
Not everyone needs life insurance.“ If there’s no one else depending on your income, you probably don’t need much or any at all,” says Alyssa Lum, certified financial planner and founder of Luminate Financial Planning in Sterling, Virginia.
But those with young children will need a lot. For breadwinners, a rule of thumb is at least seven times your annual salary, plus money to pay off debt and fund college. “Those dollars really add up,” Lum says.
Stay-at-home parents don’t need as much, but should have some coverage, says Greg Klingler, a certified financial planner and director of wealth management for the Government Employees’ Benefits Association. Buy enough to cover child care and other services that the stay-at-home parent provides.
My response: This one is actually true... sort of.
What is too much? Too much is an amount you cannot easily afford - either initially or later on. (Insurance companies don't insure anyone for "too much". They're too smart to do that.) However, I don't believe that you can actually buy too much on principle alone. Most people don't have enough to replace their human economic value to their family.
It's also a myth that you should only have "seven times your annual salary plus money to pay off debt and fund college." Replacement value is what the entire insurance industry is based on. If you owned a new car, and it got stolen, would you want the insurance company to give you only what you needed? Or would you want your car to be replaced? You'd want it replaced. Why do we think any differently about life insurance?
Tom Hegna explains in this video segment what happens when you have too little coverage:
2. BUYING THE WRONG POLICY
There two main types of life insurance: term and permanent .
— Term life insurance is simple, cheap and offers coverage for a certain period, such as 10, 20 or 30 years. It pays out if the policyholder dies during that term.
— Permanent life insurance, such as whole life, lasts your entire life and includes a savings component called cash value, which grows slowly over many years. You can borrow against the cash value or surrender the policy for the cash. It’s more complicated and expensive than term life. It also nets the highest commission for insurance agents.
Term life is the best choice for most families, Klingler says, because “most people are going to have a finite need.” Term life can cover you while the kids are growing up or you’re paying off debt, such as a mortgage. Ideally, at the end of the term, you don’t need life insurance anymore.
Yet some people get talked into permanent policies when they all they need is term life, says Jason Speciner, a certified financial planner in Fort Collins, Colorado. Building cash value inside a policy can sound appealing, but fees and the agent’s commission eat away at returns. Instead of pouring money into a permanent policy, max out savings in tax-advantaged retirement accounts. If there’s money left over for long-term investing, a low-cost index fund will probably produce better returns than life insurance, he says. “In most cases the old saying, ‘buy term and invest the difference,’ makes sense,” Speciner says. Permanent life insurance can be an important estate planning tool for those who have a lifelong financial dependent, such as a child with special needs, or whose estate is big enough to incur taxes for heirs. (Only estates over $11.18 million for an individual and $22.36 million for a couple are subject to federal estate taxes in 2018.)
My response: Oh, there's so MUCH here! It's almost hard to know where to start.
If you see life insurance as a pure cost, then you're right - term life insurance is the best. However, you first determine how much death benefits you want for your family and THEN determine what program you want. Life insurance - even term life insurance - is a 'wants' decision, not a 'needs' decision. Unlike with auto insurance (mandated by the state) or homeowners insurance (mandated by your lender), there is no requirement for you to buy life insurance. Therefore, you buy it because you want it.
And assuming that all families will have a "finite need" certainly takes too many assumptions into account - such as the mistaken notion that "by the time they reach retirement age, they'll have enough money in assets that they won't need their insurance coverage anymore". Please. Life happens and changes. Can you imagine having this conversation over dinner with your spouse: "Honey, we've retired... and today, I dropped our life insurance policy! Isn't that great!" Just how do you think your spouse would take that kind of news? (Maybe THIS is just another reason for the spike in "silver divorces"?) By the way, the notion that only "large estates need permanent life insurance" generally is also making an assumption that "you'll have enough for your needs by retirement... but you won't have THAT much to worry about it." How rude! You never know how someone will grow their financial assets, cash flow, and net worth! And by locking away access to one's capital, they are GUARANTEEING that you won't have that much because of credit card debts while saving in these qualified retirement plans.
These "certified financial planners" - unfortunately - do not understand permanent life insurance and its benefits and opportunities. They are comparing it to investment returns rather than a cash asset that can be leveraged if and when needed. Oh, and the notion about commissions eating away at returns - another myth because it's so easy to attack life insurance agents.
Here are a few of my blog posts to reference: - Using Life Insurance as a Permission Slip to Spend Down other assets
PUTTING OFF THE PURCHASE
It’s easier to put off buying life insurance than think about how your death would affect others. “But that’s a pretty risky gamble, especially if you have small kids,” says Michael Kelley, a certified financial planner in Cleveland, Ohio.
Worried about the cost? It might be cheaper than you think. Most consumers overestimate the price of term life insurance by more than three times, according to a 2018 study by industry groups Life Happens and LIMRA. The study was based on a survey of about 2,000 adults who are household financial decision-makers. The actual cost of a 20-year, $250,000 term life policy for a healthy, 30-year-old nonsmoker is about $160 a year, the study says.
Compare quotes from at least a few companies to find the best rates.
MY RESPONSE: Okay, THIS one, I have a problem with too.
Just what is "healthy" in this example? I'll tell you what it is: It's the ultra-preferred "Superman" rates. This equates to one of the BIGGEST "bait and switch" tactics that still exists in today's society! That $160 a year... is most assuredly based on qualifying at the ultra levels of underwriting. It's certainly not impossible, but it's not a realistic way to set expectations for clients. There's a reason there's an underwriting classification called "Standard". Everything else is either a discount for being a preferred risk... or a rating for being a higher risk. Insurance quotes that are NOT "standard" before a medical assessment is done... isn't worth anything. Professionals always quote standard... unless there's a specific reason not to. Remember: You qualify for insurance coverage on your health, so it's important to "see if you look as good on the inside as you do on the outside".
Strange fact: Did you know that Magic Johnson discovered he had HIV because he applied for life insurance?
RELYING ON FREE LIFE INSURANCE AT WORK
Life insurance benefits through work probably aren’t enough for those who have a family depending on their income, Speciner says.
That coverage is typically one to two times your annual salary — not enough to sustain a family after the loss of a breadwinner. Another drawback: The coverage usually ends when an employee leaves the company.
Buy your own policy if you need life insurance, and consider the free benefits from work a bonus.
MY RESPONSE Group policies are a great bargain! Always take advantage of them because they are priced very well... but they only last for as long as you work there. They should never be your sole source of coverage. I consider this coverage a kind of "burial" coverage. It's nice for employers to offer - and often they get deals on it through their health insurance provider. But I wouldn't rely on it for your sole protection for your family. It's just not enough coverage. But it *might* be enough to avoid a "GoFundMe" page or doing car washes to raise money.
As you can tell, there are a lot of biases and facts that are omitted from this AP / NerdWallet article that slam permanent life insurance.
Why is that?
1. Various news outlets have sponsors they want to attract. These are typically mutual fund companies and other similar investment firms. There was a slanted Wall Street Journal article earlier this week that was slamming annuities... but the biases of these articles and news sources becomes very clear over time.
2. Many certified financial planners are more in the investments business than they are in the insurance business. Obviously not all of them, but a vast majority. And CFPs are often quoted in the news because of their reputation for being "fee-only". There's an entire organization called NAPFA or National Association of Personal Financial Advisors who only accept planning fees for their services. Now that's not a bad thing, but they obviously don't have enough incentive to learn about other strategies. That means that they are in the dark about today's life insurance policies... so they simply advise to 'stay away from them' (other than term) and badmouth the "commission-greedy insurance agent"... because they are "more pure" because they only charge fees and never any commissions.
What they don't tell you is that they earn more on your investments over time... so their business model creates this "conflict of interest" against learning about advanced life insurance and annuity strategies.
In my opinion, that means they aren't serving their clients in their best way if they aren't up to date with today's financial strategies, which means that they are not fulfilling their fiduciary duty and just want your fees to create a "financial plan" based solely on investment returns than in lifetime protection and cash flow.
3. Many quality financial professionals who DO understand life insurance, are often with brokerage firms and insurance companies that restrict their ability to promote themselves. Obviously this isn't everyone (I'm an independent agent), but many have overbearing compliance departments that don't allow them to promote themselves as those who are independent could.
David H. Kinder | Lifetime Tax & Wealth Educator
Dynamic Advanced Insurance, Financial, and Retirement Strategies