“I am so sorry.”
These are the only four words that come to mind. I don’t know what else to say to an investor who’s been sold a load of garbage by a life insurance agent. I can no longer keep quiet as I witness this silent epidemic of bad incentives, high pressure sales tactics, and the destruction of investor’s hard earned money. These expensive life insurance products are asset destruction.
One of my earliest posts on this blog was a diatribe against life insurance sold as an ‘investment’ vehicle. It was one of my most widely read posts, but it drew a lot of hate mail and trolling from life insurance agents. I am embarrassed to admit that I have shied away from further criticism of the life insurance industry after that experience. Not anymore. I feel like I’m having my Howard Beale moment on the life insurance industry because I really am “mad as hell, and I’m not going to take it anymore.”
There is one main reason to buy life insurance; to provide income for the dependents who rely on your earnings to live in case you meet an untimely death. I’ll list a few caveats to this reason, but trust me, they do not apply to the vast majority of investors.
For most of us who need life insurance, term life insurance will suffice. Term life insurance is cheap, easy to buy, and provides coverage for a set number of years. If you live past the term, you will no longer have life insurance coverage. And for most people, this is perfectly fine. Your need for life insurance decreases as financial assets increase and as dependents become independent.
So why do life insurance agents offer expensive permanent insurance products to every single client? The answer is simple. They are incentivized, financially, to sell expensive products. It’s human nature to respond to incentives, and insurance agents are humans who have families to support and bills to pay. Selling term policies won’t keep the lights on.
If a man’s livelihood depends on something, he’s going to believe in it. This is the case for many, well-meaning, people who make their living selling life insurance. They believe their own lies about why expensive, permanent life insurance is the solution to every client’s problems.
To set the record straight, here are my biggest gripes with the sales pitch for permanent life insurance:
- To withdraw “tax free” income in retirement – You are paying premiums with after-tax dollars. Why is it considered a benefit that the insurance company will now ‘allow’ you to withdraw those premium tax free? Decades later, you would have significant earnings on those dollars had they been invested in a low cost, diversified portfolio of stocks and bonds. Inside a life insurance policy, withdrawing those initial dollars is considered a benefit. Give me a break.
- The ability to take loans against your policy – Seriously?! Should you be excited you will be able to borrow your own money at high interest rates in 30 years? I just saw a whole life insurance policy with an interest rate of 8% for loans. 8%! In today’s low interest rate environment? You’ve got to be kidding me.
- Because the policy will eventually be “paid up” – Congratulations, you’ve paid hundreds of thousands of dollars in premium for decades. Now the dividend on your cash value covers the relatively cheap cost of your death benefit. Whoop de doo.
- To get tax-deferred growth of your cash value – If you want tax-deferred growth, maximize retirement plan, IRA, health care savings, 529 plans, and FSA contributions. If you have more money left over after that, awesome. Open a brokerage account. You won’t owe tax unless you made money on your investments. Don’t let taxes drive your investment decisions. Be tax aware, but not tax averse.
- To protect your assets from creditors – There are other, less expensive options for asset protection, in my opinion.
If you or someone you love is being sold an expensive life insurance policy, stop and take a breath before you buy. The sales pressure you receive may be intense, but remember, it’s your money, and you get to decide what to do with it. I really don’t want to be the one to tell you “I am so sorry” afterwards.
Here are a few good reasons to buy permanent life insurance:
- You have an estate larger than the federal estate tax exclusion ($11.58 million for individuals / $23.16 million for married couples in 2020), and you want to use life insurance to fund the tax. Or you live in a state with a lower estate tax exclusion, and you want to cover it with insurance.
- You own a business with partners, and you need liquidity to cover the purchase of shares from your partners’ heirs (or from your heirs in the case of your death) if he/she were to die early.
- You have a child with special needs, and you need to ensure a minimum bequest to cover their financial needs beyond your lifetime.
- You desire long-term care insurance coverage, and a permanent life insurance policy with a long-term care rider makes sense for you.
- You are required to obtain life insurance under a divorce decree.
I know I haven’t covered every reason here. This is a blog post, not a book. But consider the fact the very few people need permanent life insurance, and think very hard before decided you are one of them.
Post post script: The world was different 20, 30, 40 years ago. The estate tax exclusion was much smaller ($600,000 individual / $1,200,000 married), the tax code was favorable towards the use of insurance to defer (even avoid) taxes, and there were fewer options for tax deferral of income and tax-deferred growth. This post applies to today’s permanent life insurance policies. If you bought one years ago, there’s no need to second guess yourself now. This post is written for people being pursued by life insurance agents today.