Last week I shared an experience that some friends of mine had with a life insurance agent. The interesting part is that the day before that blog was published I came across an article on Yahoo Finance about; you guessed it life insurance agents. While I will provide the general information from that well written and very informative article I will also explain how it relates to my friends yet again and my experience as a life insurance agent. While I am a registered life insurance agent in my home state of Tennessee I am also completing my MS in Financial Planning and have a goal of becoming a Chartered Financial Planner one day. So let’s not waste any more time and get down to what a life insurance agent won’t tell you.
The first thing they will tell you is that you are most likely under-insured. While it may be a fact that about 30% of American households have no life insurance there may in fact be a good reason for the lack of insurance. Let’s take my parents as an example. Both are retired. They own their house outright with no mortgage. And have very little debt that they have to service. They would be part of the 30% that does not have a life insurance policy and for good reason, they do not need it. Single adults who are just starting their careers are also prime candidates for not having life insurance as they have no dependents and no one relies on them for their income. The only reason a single person would need a life insurance policy is to handle any debts that they do not wish to burden their family with. What is really bad is that it is estimated that as much as 60% of the policies sold are whole life policies which are some of the most expensive while being the most lucrative for the agent. As for what is the correct amount of insurance that is needed that is a question you need to address with your situation being the only factor that helps you decide. At a minimum if you have a family you need enough of a death benefit to pay off your mortgage and possibly fund your children’s college expenses. Other than that it may be necessary to use the policy to help replace your income. In these instances use the much cheaper term policies and not the more expensive whole life policies.
What out for insurance agents who are selling life insurance as a security as they are limited at best. Many universal life policies are sold as indexed policies. The issue here is they generally will pay a minimum interest rate to lure a customer in and sell the fact it is index say to the S&P 500. What they really do not divulge in great detail is that the indexed interest rate that is paid is normally capped and could result in a lost opportunity cost to you, the policy owner. In these instances it is vital you understand what it is you are buying and that you have a trusted agent.
Children really do not need a life insurance policy as there is no income to be replaced. Also these are generally whole life policies that agents sell to people as investments for their children’s college fund. Do not fall into this trap as you would be much better off savings the premiums in a state authorized 529 plan that offers tax benefits as well as much better returns than a whole life policy. And do not let an agent sell you on the fact that your child may be un-insurable when they need to take a policy out. Many employers offer term policies for their employees and to be honest unless there are some serious health issues getting a life insurance policy for younger people is not all that difficult.
While I do not sell variable annuities they are basically an expensive group of mutual funds. While I do believe that these instruments do have a place in someone’s retirement planning as it generally have no limitations on what can be contributed. Also, they allow for you to buy and sell within the annuity with no tax consequences at the time of the buying and selling allowing for a good way to rebalance one’s assets without having large tax implications. If you are an average investor it is better to look at an indexed annuity or a fixed rate annuity as they are much less complicated. Chances are your agent does not fully understand all the complexities of a variable annuity or the fees associated with it so how in the world will they be able to explain this all to you? Chances are they will not be able to.
One of the selling points of a whole life policy is that the accumulated cash value will earn interest which it does and that in time you will earn enough interest to pay the premiums. Many people are finding out that this is not the case as interest rates are at historic lows and have been for some time. And in many instances it may take years for the policy to even accumulate any cash value at all. What insurance companies generally like to keep as quiet as possible is that the first few years premiums go pay the high commissions that they policies have, marketing and management fees just to name a few of the items.
And finally beware of agents who tout the long-term care aspect of a policy. Chances are it is not a good policy for you or for them. As insurance products go these are relatively new to the insurance world and most companies are still trying to figure out the numbers. If they do not know what the total costs will be how do they expect you as the consumer to make an informed decision? The answer is they don’t. While most people can expect to need some form of long-term care there are some viable alternatives to an insurance policy. Take the premiums that you would have spent on the policy and invest them in a low cost indexed exchange traded fund. These are generally tax efficient investments that can experience good returns over long periods of time. And the best part of this approach is that if you do not need long-term care you have not paid years’ worth of premiums and have a nice nest egg you can spend on anything or leave to your heirs.
Keep these things in mind when someone tried to sell you a life insurance policy. Better yet keep these things in mind and think along these lines when you buy any insurance product.
