How to Make Sure Your Life Insurance is Really Benefitting YOU

Back in 1993, I started working for a large life insurance company as an agent. I was 24 at the time and it was my first real job. There was no salary; we were paid on commission. I think they might have even given me a draw, which is an advance of future commissions. My business building strategy was the cold call. Dialing for dollars – trying to convince anyone to let me have 20-30 minutes of their time to talk about life insurance.

At such a young age, I knew the importance of life insurance. It was meant to help provide a backstop and protection for the loved ones left behind.

If something happens to the primary or secondary earner(s) in the family – money would be there to help pay the mortgage, put food on the table, help with the day to day during the grieving process and maybe, if there was enough life insurance, pay for a life with no more worry about money.

Know What You’re Buying

The branch manager thought it would do me good to see a pro in action. He asked me to join him on a sales call to a local hair salon. A client of his worked there and invited him to speak with the other women about his brilliant solution for a retirement plan.

His solution was a product called variable life insurance, which in essence is life insurance and mutual funds in one policy. It’s like a turbo charged whole life policy that places all the growth risk on the policy owner. These mutual funds would grow their money and when they retired they could access this growth tax free. And as a bonus, they had life insurance. So if anything happened to them, their families would be taken care of. Seemed to make a lot of sense. And the women thought so too. They were ready to buy.

Who Is Really Benefitting?

BUT, it’s important to understand this was really a good deal for the branch manager. His commission on each policy sold was incredibly large (I forget the exact amount – but let’s just say it was most likely 50-60% of every dollar they placed in the policy for the first year, then some trail each year after that.)

What these women didn’t know, every dollar they plowed into the life insurance policy was not going to the underlying mutual funds.

A good portion went to actually pay for the life insurance also known as the mortality and expense charge (M & E). If they were lucky enough to actually keep up with the premiums and hold on to this policy for 30 years and then selected the right mutual funds, they may be able to start withdrawing their money.

BUT, they wouldn’t be able to withdraw it all. In order to maintain the tax free status of the withdrawals, the policy must be kept alive and in force. You need to keep paying the M & E charges and every time you pull money in a tax free way, you are taking a loan against your policy. With any loan there is always interest to be paid and in this case, you get charged interest, which also eats into your money that you worked so hard to save.

Empowering You In Your Choices

What I learned from this experience, it’s an awful way to sell life insurance. And to take advantage of women who place their trust in someone, is even worse. It left a bad taste and I knew, while I loved life insurance, I hated the way it was sold.

Fast forward, 24 years to 2017. I received a call from a young local woman who wanted to talk about investing. She was ready but hadn’t really found a financial adviser she connected with. She got my name from her friend and liked what I was posting on Facebook.

I have this passion for investing especially to educate young investors. When given the right advice, the opportunities ahead of them are so significant it could mean the difference of retiring at 50 Vs. 65.

As she and I talked, she shared that she owns a life insurance policy. She was so proud to have owned it for 5 years and that she’s saving consistently every month. Although she hasn’t seen much growth, she recalled the “promise” of a great retirement plan. The insurance agent had one for him, his wife and other family members. He no doubt thought it was a great thing. She trusted him, so how could she go wrong? At that moment, I felt I was back in 1993 at the hair salon.

Forming A Long Term Understanding

We are in the process of reviewing her life insurance policy and understanding what it really is. We are also looking at a term policy and a Roth IRA. It looks like we will most likely cut her premium by a third and increase her life insurance five fold. And the remaining money will be invested in mutual funds via a Roth IRA that is all hers. No loan interest and all the growth will be a tax free withdrawal. She looked at me and said, “Thank you”.

I’m a big believer in Life Insurance. Depending on your need, it’s important to select an appropriate policy that is matched with what you are looking to do. Will permanent insurance ever be a good choice for retirement planning? Absolutely. But not as a sole vehicle for retirement planning. Always review your life insurance with a Fiduciary and I recommend a Certified Financial Planner™, we focus on the larger picture. Life insurance is important and may play an integral part of your overall financial plan.

If you’re unsure about what you own and how it should fit within your plan – call us. We know what works.

NOTES FROM RACHEL
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