Spring 2000 – I sat at my desk, an aspiring CPA if there is such a thing. Bored out of my mind. It’s not that I didn’t work with great people, or for a great firm, but the work was not inspiring me. I had known since a young age that I wanted a job that helped people decide what to do with their money. This was not it so through some research, I decided I was going to become a financial advisor. I won’t bore you with the details of how I arrived at my next job, but after looking at several companies, I ended up taking a position with an insurance company….to be a “financial advisor.” All of my interviews were about becoming a financial advisor, helping individuals and families make decisions around money. Perfect! (as this story is about to take a turn, let me add that I again found another great company, with great people)
The first few weeks were training – man, did we cover a lot about life insurance. The next few weeks were about more life insurance, and so on, and so on. You get the picture. At this time, variable universal life insurance was the hottest thing going in the life insurance market. A chance to not only protect your loved ones, but to participate in the upside of the stock market at the same time! Needless to say, I was financially incentivized to sell this product and the industry was doing the general public no service by illustrating high expected investment performance in these products. Coming off the tech boom, it seemed logical that one could expect a 12% return from their portfolio each year….didn’t it? As the market began a major correction that was further amplified by 9/11, it started to become clear to me that this product was probably not the best way for someone to invest.
I know this all must be hard to believe. After all, countless commercials on TV aired during major sporting events would lead you to believe that life insurance companies are operated on the belief that they have your best interests at heart, bound by trust. Yet, in many cases, these so-called financial advisors are not even required to act as a fiduciary. The commercial is meant to convey success is just around the corner if you work with a trusted advisor, and the product they will likely recommend is a cash value life insurance contract. The pitch is you not only have a great way to build tax-deferred assets, but your loved ones are protected. However, this is a very expensive way to protect your family in the event something happens to you. The idea they want you to believe is that this product will help create wealth for you during your lifetime that can be accessed later in life without any tax consequence. The truth is these products are not very flexible, especially if you want to change the terms early on, they are extremely expensive (i.e. highly profitable for the insurance company), and typically because of that cost, do not provide an adequate level of life insurance death benefit.
I have a wife who is staying home right now to raise our two young children. If I were to die prematurely, I want to make sure my family can stay in our home, the kids can stay in their school, and my wife can make her own decision about when/if to re-enter the workforce outside the home. I need as much life insurance coverage as possible – at the lowest possible cost. Enter term life insurance. This type of coverage comes in specified time periods, for example 10, 15, 20, and 30 year coverage. I can lock in a low premium for any of those time periods after being underwritten. Personally, I have a 30 year term policy as the premium difference between 20 year and 30 year was small enough that I wanted to lock in the extra ten years. Keep in mind I can cancel anytime I would like. Think of it like renting a life insurance policy – we have an agreed upon amount of premium I pay each year and the insurance company provides death benefit if something happens. At the end of 30 years, I could extend it but at significantly higher premiums. Or I could just be done, and I likely will be because by that time my children will be out of the house (fingers crossed!) and our savings will hopefully be at a level that could support my wife for the balance of her life assuming our debt has been paid down.
Here are a few key characteristics of a good term life policy in my opinion:
- Level term – it does not increase over time
- Issued by a reputable carrier who has strong financial ratings
- Allow for conversion to one of the carrier’s permanent life insurance products*
*“But I thought this was about all the reasons NOT to buy permanent life insurance?” Yes, but what if during the term of your policy you learn of a chronic disease that will eventually lead to death. We want to make sure you can cover that period of time as well.
In my opinion, the sole purpose of life insurance is provide for someone else at your death. There are far more advantageous ways to invest your capital than through the use of a cash value life insurance contract. I posed this challenge in an earlier post and I think it’s a great test if you are considering buying one of these cash building policies: Seek out the most wealthy people you know and ask them how much of their wealth is tied up in a cash value life insurance policy. This is not a product to be used during your life; rather it is there to be used at your death.
Remember this – cash value life insurance is almost never bought; instead it is almost always sold. Keep it simple with term life insurance.