Is Life Insurance for Retirement?
I am paraphrasing a great article recently from Blair duQuesnay titled “Life Insurance is Not for Saving.” Her article gets into more detail than I will, however, it was so good I wanted to share some of her highlights along with thoughts of my own.
The purpose of insurance is to protect oneself from “loss or harm.” In the case of life insurance, this primarily applies to future earnings potential. I have shared before how my dad died suddenly when I was ten years old. He had some insurance on himself, however, there was one policy he did not follow through on. My mom told me when I was older she found a sealed envelope with a check in it sitting on top of the fridge, just waiting for a stamp to be mailed. It was payment for an insurance policy which would have paid off our mortgage when he passed. Even with that background, I realize insurance is to reduce the financial impact of the loss of one’s life, and NOT for saving for retirement.
Your need for insurance is typically higher when you are younger and have more working years ahead of you. Over time the need decreases. The insurance industry created term insurance to deal with this fact. For most people, term insurance is more than adequate when it comes to life insurance.This is life insurance that lasts 10, 20, or 30 years. You know, a specific term. Sadly, there is little incentive for insurance salesmen, including financial advisors, to solely sell term policies as the commissions are so low.
(Un)fortunately, the insurance industry has provided an alternative for these commission-based salespeople – permanent insurance (whole and universal are some names here). Or, as an advisor I used to know would say – “Would you rather rent or own your insurance?” Permanent insurance provides a hell of an incentive for salespeople with significantly higher commissions. You know my position on quality products – the higher the commission the worse the quality.
Permanent policies are more expensive because they do provide coverage until the day you die, not just for a specific term. I get that.There are a myriad of additional expenses layered in these policies and include the cost of the insurance itself, riders, selling and administrative expenses, and more. As Blair points out, if you have ever looked at an illustration for a whole life policy you may have noticed it can take 10 years before the policy has broken even.
Now, I probably shouldn’t complain too much about these expensive policies and the aggressive sales tactics being used. Why?Because several clients have come to me after hearing too many “advisors” pitch them on these products and use high-pressure sales tactics to get them to buy. One of the most popular themes these clients tell me is the “tax-free” income in retirement. I won’t get deep here as Blair does a great job explaining it, however, please know this is a loan you are taking out, and repaying, on premiums you have paid in your policy. I guess you could say you are paying interest on your own money. Maybe that is what some insurance salespeople mean by “banking on yourself.”
Now, just like pointed out in the article, there are times when buying permanent insurance makes sense.I will say the ones I see are consistent with her second point of leaving money for a dependent heir. In my case it is loved ones with special needs as insurance is a great tool to provide for them.
Finally, I do not sell life insurance and dropped my insurance license some time ago.However, I do work with clients on addressing their life insurance/risk management needs. I do this by working with an outside insurance specialist. I treat it the same way as when a client needs legal or tax work done – turn it over to those experts. They keep the fees, handle all the paperwork, and I know the clients are taken care of.
In the meantime, remember the definition of insurance is to “hedge against the risk of financial loss that may result to the insured.” Nowhere in there does it say it is for saving for retirement.