I don’t know if it’s something in the water or what, but I keep getting the same questions about savings and insurance.
Here a few that keep rollin’ in:
1) Why doesn’t everyone do this?
Because not everyone is committed to saving money.
Believe it or not, average savings rate in America is only about 5% – 6%. And, people who do save tend to favor investing for some strange reason.
Now, insurance companies do have lots and lots of customers, which is why they’re so big and hold hundreds of billions in assets. So, there are a lot of people buying whole life as a savings.
2) What’s the risk in buying whole life insurance?
The biggest risk is the client’s attitude.
Some people can’t get out of their own way. You have to look at whole life insurance in the same way you’d look at buying any major asset, like a house (for example). If you think you’re going to buy and cancel in the first year… it’s going to be a bad deal and you’re going to lose money.
Just like with anything else you’d buy and then throw away. Otherwise, there’s no real risk. The whole idea of whole life insurance is to transfer multiple financial risks away from you and put them squarely on the shoulders of an insurance company.
3) What if I can’t keep making my premium payments?
I get this one a lot.
A lot of folks seem to be worried about not being able to make their premium. Yet, I never hear them express concerns about not being able to make their rent or mortgage payments… their car payments… their Netflix payments… and so on.
Here’s what I usually tell these folks: If you get into a financial bind, the insurance policy’s cash value is there to help you out. Think of it like your own personal sidekick.
Most policies I set up can take a lot of abuse, meaning if you can’t work for 6 months, the cash value is sufficient to pay the premiums (it’s called “automatic premium loan” or “APL”). You don’t necessarily want to back yourself into this corner, but again, this is the purpose of insurance: to transfer financial risk away from you and put it squarely onto the shoulders of the insurer.
If you didn’t have insurance, you’d simply deplete your savings and start over. With the insurance policy, you’re still earning interest… so a financial setback doesn’t shake up your ant farm too badly.
4) Why does my financial planner tell me to just buy term and invest the difference?
Because he or she is a moron. No. No. OK, you were looking for a serious answer.
Here it is: Because (usually) he or she doesn’t know any better. The insurance industry had already invented “buy term and invest the difference” (universal life, anyone?) by the time your financial planner arrived on the scene in financial services and it didn’t work very well in strict-form. So, the financial planning industry spun it around, hacked together a DIY version of it, and decided to pick up the burnt flag and re-brand and re-market it.
The syllabus for Certified Financial Planners is extremely thin on life insurance.
Financial planners don’t spend a lot of time learning about advanced principles of life insurance because the exam (and thus their professional focus) is almost exclusively on investments (mutual funds).
Not that that’s bad… but the industry then goes out on a limb and bills the financial planner as the person who knows “everything” about finance. And then… there are financial planners have a lot to say about something they don’t have a lot of textbook (or practical) knowledge about.
Now… if they just called themselves “investment advisors” all of this could be solved in a minute.
Anywho… what they end up doing is recommend supplemental insurance or temporary insurance (term insurance) because it’s simple to explain and sell. Incidentally, I love term insurance… but… it’s cheap on the front end and very expensive on the back-end of the policy. Whole life is (almost) the opposite.
So, if you’re making a comprehensive insurance plan, you need to balance both and know how one feeds into the other and how it will enhance an investment plan, etc.
5) Do I need to use life insurance to “become my own banker”?
Some of the more basic ideas I teach revolve around building up a savings, borrowing from yourself, and repaying yourself with interest. You can do that in a savings account. There’s a lot more to it than that, but that’s the gist of it.
What whole life brings to the party is: guaranteed growth on that money while you’re doing your borrowing (which you can’t get in a 401(k), savings account, or anywhere else), dividends, and a death benefit which lets you spend more of your savings without consequences. It’s much more efficient than using, say, a savings account or a retirement account… both of which have some fairly serious restrictions on borrowing and withdrawals (and which gets very tricky and expensive).
…and that’s all I got today.
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