Life Insurance is NOT a Financial Plan
“There is no tomorrow for you, and that makes you all very dangerous people.” - THE REPLACEMENTS
written by Vince McKewin and directed by Howard Deutch
(3.5-minute read)
For my clients, the following is true: Life Insurance is not a savings plan. Life Insurance is not a retirement plan. Life Insurance is not investing. Life Insurance should (mostly) be used for one reason: to replace lost income. If you’re trying to create some financial stability in your life, then Life Insurance is probably not the answer.
I don’t sell Life Insurance. Not all Life Insurance salespeople are bad but, in my experience, the odds are not in their favor when it comes to moral -vs- immoral. Please get a second opinion if someone is trying to sell you Life Insurance.
I’m not talking about Group Life Insurance that you might receive from your company. That’s a different story. I’m referring to someone who calls himself a “Financial Advisor” but is actually a Life Insurance salesman. Life Insurance and Financial Planning are two completely different things.
INCOME REPLACEMENT INSURANCE
We are not created equal. Your life is different from mine and every other person’s. I can’t confidently say that you don’t need Life Insurance. But I can tell you that most of my clients absolutely don’t need it.
If someone is dependent on your income for their survival, then Term Life Insurance might be a good option. What is Term Life Insurance? Similar to auto insurance, you pay a fee (premiums) and if there’s an accident (you die), then the insurance company will pay you (your beneficiary).
So think of it as Income Replacement Insurance. The people who are dependent on you need to replace the lost income due to your death. Therefore, careful consideration needs to take place to figure out that number. You don’t want to overestimate because then you’re paying too much in fees. If you underestimate, then your family could be left with a shortfall.
TAX-FREE INCOME? WHAT’S THE CATCH?
I’ve seen insurance products sold as tax-free income. This is misleading at best. For the most part, these are the premiums you’ve already paid to them. Personally, I don’t see it as a perk when a company gives me my money back. Loaning someone money in order to get it back later is not something I would consider a sound, financial plan.
You can accomplish the same thing with a Roth IRA. If you contribute to a Roth IRA, but then you need to take those contributions back out, they are tax-free and penalty-free. You’ve already paid taxes on those contributions and premiums, therefore you’re just getting your money back. For most of you, once you turn 59 1/2, every penny of your Roth IRA can be withdrawn tax-free.
While you can take out a tax-free loan with some policies, you still have to pay interest rates. This part is often not articulated by the salesman. The tax-free portion is what’s touted.
CALL IT WHAT IT IS
Retirement Plans are called that for a reason. It is a plan for your retirement. Life Insurance is also called Life Insurance for a reason. It’s insurance on your life. If they were being honest, it would be called Death Insurance, but that’s a tougher sell.
Retirement Plans like 401(k)s, 403(b)s, 457s, and IRAs should be used for income during retirement. Most Life Insurance policies should be used as insurance on someone’s life. There are scenarios where the death benefit can help pay for Estate taxes and other expenses but I won’t get into that here.
SURRENDER AND PAY
According to CBS News, it normally takes ten years or more for a Life Insurance policy to “break even.” This is mainly due to the slow growth from the underlying investments, commissions, and steep surrender charges. But if you invested in the same securities in your own account, then there is virtually no waiting period.
Not all Life Insurance products are the same. There are many, many more considerations when thinking about Life Insurance. I’m just scratching the surface here. But if you’re being sold Life Insurance as a financial plan, please reconsider.
If you’d like more information about not buying Life Insurance, you can schedule a complimentary meeting HERE.
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