“Our advice—that term life is a better deal for most families—hasn’t changed.” —Consumer Reports
Life insurance agents somehow think that life insurance is the ultimate solution to family financial planning. As a former Primerica Financial Services amateur, I cried “Buy Term and Invest the Difference!” as millions converted policies. Insurance needs are all too painful because I buried a 48-year-old wife. With a MS in Advanced Financial Planning and fee-only fiduciary responsibilities, I now analytically train clients to buy only what they need.
Solomon Huebner’s “human life value method” estimates life insurance needs mostly by career earning capacity, then it calculates the present value of future dependency needs after keen consideration of reduced spousal Social Security benefits. Single breadwinner earnings are protected, though the house warmer can be insured for economic value. But few families value their role so mechanistically when the needs of beneficiaries don’t match earnings. Disabled children may need more and working retirees less.
The “insurance needs analysis approach” adjusts needs more meaningfully to families’ budgets and lifestyles. Students, babies and retirees usually don’t support others and their death usually causes more distress than financial burdens. Burial may be their only need. But families urgently need affordable term insurance to protect dependents until families reverse or pay mortgages, the child grows or graduates, or the grandparent passes. With fixed premiums, clients can decrease their term insurance as needs pass and investments for retirement or estates grow. Yes, do take accelerated death benefits if poor health allows.
Agents sell Whole, Universal or Variable Universal life insurance largely with promises to save taxes, accumulate death benefits, raise cash values and lend cash. Universal policies let policyholders vary payouts and premiums while VUL policies also invest in securities with potentially higher earnings. Life insurance premiums are generally not deductible and neither loans of principle nor death proceeds are taxed! But policies frequently are closed in settlement when policyholders can’t afford hefty premiums, and then any money earned above basis (premiums minus loans) will be taxed as ordinary income up to surrender value with surplus incurring capital gains.
A family meets a cash value insurance salesman. Like most clients, they can’t tell how much the insurance portion of the policy costs for comparison to term: Forbes Advisor found comparable low prices online of $500,000 policies for 50-year-old males of $70 per month with 20-year term versus $847 a month with whole life. The seller justifies extra expense because fees on long-term investments are extracted and whole life policies should pay out fully while term policies expire when insurance needs end.
“When you sell a whole life insurance policy to somebody,” writes financial guru Suze Orzman, “it is possible that you could get 80%, 90% in commissions of the first-year premium. Meaning, if the premium was $5,000 a year, I could put $4,500 in my pocket.”
But “cash value” shines in shell games. Clients dream they could retire on policy loans and still leave money to the kids until they hear David Ramsey on radio: “You’d be paying them interest to borrow your own money!” If somehow loans exceed payments on surrendered policies, they are taxed. And the clients never knew that loans made and cash value disappear contractually on death, so retirement eats estates.
Life insurance eludes comparison to no load ETFs with Roth IRA tax protection simply by confusing clients about investment returns. Dividend illustrations frequently are not guaranteed and whole life may fail to return three per cent. Trebly confusing VUL policies have higher returns, but high commissions and needless saving for old age drain savings with expenses.
So buy life insurance for genuine dependency needs but not for retirement or estates (except business insurance or trusts). David Ramsey applauds separate investments, which I have praised elsewhere in articles on stocks, bonds and real estate; if a young father invests savings from insurance prices “…in good growth stock mutual funds with an 11% average annual rate of return, he’ll have about $177,500 in investments by the time his 20-year term life policy expires and more than $1.8 million at age 65.” No guarantees. But consider the odds and ask if cash value made any SLV neighbor rich?
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
