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♥ & $: Thinking of Buying Life Insurance? Don’t Make the Same Mistake I Did

I can even remember where we were sitting. It was a sports bar down in Soho not far from the office of the non-profit where I worked. I was just a year out of college and eager to grow up, so when I met an insurance saleswoman who assured me the mature thing to do was to plan for my future, I willingly agreed to have lunch with her. I ate my greasy hamburger while she delicately picked over her salad and explained the benefits of owning whole life insurance.

She used terms like “the value of money” and “guaranteed cash value” and “tax advantaged annuity.” She patiently explained the importance of starting now while I was young to capture the optimal benefits of this, “the safest of all investments.” Only five or six years older than I, she seemed so knowledgeable and wise. I wanted to be like her. Maybe she and I could be friends. Maybe she could be the big sister I never had and always wanted.

So when she asked me if I was willing to commit, it was an easy decision. “Of course! Why wouldn’t I?” I told her enthusiastically.

Mmm … let’s see. Maybe I wouldn’t because I was making only $18,000 a year and my income barely covered my expenses (New York City in the 1980s was cheaper than now, but not much). Maybe I wouldn’t because I was thinking of going back to graduate school and what little money I did have was all going to saving for that adventure. Maybe I wouldn’t because I was young, and providing a safety net for my beloveds was irrelevant. My parents were financially secure, my siblings were still in the process of launching their own lives, and my boyfriend already had a relatively high paying job. If I was to die, there was no one who couldn’t survive without my paltry death benefit.

None of this stopped me from signing on the dotted line. My boyfriend was confounded. He thought I was wasting (our) money. I didn’t like him telling me how to spend my hard earned pennies. If I wanted to lay the foundation for a responsible future, then it was my choice.

And who knew? He might not even be in that future. As hard as he tried to dissuade me, the more I insisted I needed that insurance policy. It was our first fight about money. First real fight that is. You can imagine how he responded when I put my parents as beneficiaries.

“What are you trying to tell me about us?” he asked. I didn’t have a good answer. I didn’t know what us would be in the future. Anyway, I was doing this for me.

For the next two years, I paid into that policy religiously. Then, I couldn’t any more. Wedding expenses, school loans, a mortgage, all took precedence. Six moves later and the paperwork for the policy itself was lost. Eventually, I let the whole thing just fade away.

Now, it’s become a running joke in our marriage. “Hey baby, wanna buy some insurance?” is the punch line to all manner of sucker ideas from bad investments to even bad restaurant choices.

I could feel stupid about the wasted money, but it is some measure of relief to know I was not alone. Insurance scams are notorious. Helaine Olen details many of them in her easy-to-read and deeply dismaying new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. In it she writes, “People are routinely sold annuities they have no business purchasing.” Her chapter on the marketing of insurance even has a section called, “There is No Such Thing as a Free Lunch.” It’s a classic sales tactic. Customers are lured by the meal and then feel obligated to reciprocate by buying into the scam at hand. Quoting Dr. Robert B. Cialdini,  Arizona State University Regents’ Professor Emeritus of Psychology and Marketing at Arizona, Olen writes, “They want you to feel guilty. They want you to feel like you have to give something back in return.” I know I did.

Olen goes on to discuss one study in which paid actors were sent undercover to pretend to be potential sales targets to various brokerages. The study revealed that although the brokers did almost everything wrong, they were so effective that even the vast majority of undercover actors (those who knew they were there to test scurrilous sales habits) wanted to go back with their own actual portfolios in hand to get advice and buy the exciting new financial products they had been “sold.” The brokers weren’t doing anything illegal, but “they were willing to make the client effectively worse off,” says Olen.

It’s no wonder an inexperienced college graduate was sucked into the scam. The same thing happens to senior citizens every day. I am happy I learned my mistake young. My youthful intentions were good. I wanted a safe and reliable way to save for my future. I wanted to build towards financial independence. In my eagerness, I was seduced into making a bad investment decision.

Hard for me to say it, but my husband was right all those years ago. Insurance made no sense for me then. And, many would argue whole life insurance never makes sense. It wasn’t until after the birth of our first child that we finally got a term life insurance policy, one for each of us. We did so because we are more settled, could afford the monthly payments, and had beloveds who would benefit if we were to unexpectedly die.

When I think about my own children, I know that teaching them about managing money and building a financial foundation is as important as all of the other life lessons I hope to impart. I can’t promise they won’t make financial mistakes, but at least I can do my best to be sure someone won’t be able to say about  them, “a sucker is born every day.”

Do you have life insurance? If yes, why? And, what kind did you decide felt right for you?

About Lisen Stromberg

Lisen wishes she had money under 30, but she didn't. She had credit card debt, a husband with nearly $200k in school loans, and a job that barely covered the rent. Today at 50, she's made some, lost some, and learned a lot along the way. She had a successful business career, started and ran a non-profit, opted out and then opted back in. Now, she's an award-winning writer who focuses on issues important to women, men, and families. Read her personal blog, follow her @LisenStromberg or become her friend. Email her at lisen (at) prismwork. com with your ♥ & $ questions and concerns.

Comments

  1. I get free life insurance through my work as part of my benefits. I wouldn’t have it if I had to pay for it though, at least not at this point in my life.

  2. I have $50k through work benefits, my youngest just turned 3 and we are no longer planning kids. I was just sold $500k for 20 yr term.

  3. I have some WL and term with Mass Mutual. There are only 2-3 companies in the whole industry that sell permanent life insurance worth considering. Do your homework! I max my ROTH IRA (no match for my 401k) and have plenty of liquidity so WL seems like the next best place to put more away long term. If you pay it up faster you get a better return. Make sure you compare returns on an after-tax basis like my advisor did with me… To be honest one of the biggest selling points he said was… What do you think is going to happen to taxes over the next 40 years?

  4. My husband and I each receive twice our salaries from our employers as life insurance, but that would be canceled if we would leave our companies. We each purchased a 10 year, $250,000 policy, which is enough to cover all mortgage, plus quite a bit extra. When we were shopping for insurance, it was only slightly more expensive to go up to 250, instead of the 150 we needed to cover the mortgage (I’m talking only a dollar or two extra per month). We didn’t want to count on the employer provided coverage at all, because if one of us had a major illness and needed to quit working, we would lose that benefit. We don’t have any children, and both of our families are financially secure, but its still comforting to have the extra insurance. Unfortunately, I’ve known people who had to return to work a few days after the death of their boyfriends or spouses because they couldn’t financially afford the time off.

  5. This article could not have come at a better time. My wife and I currently have term life insurance of $250/$500k respectively with Northwestern. This term policy is plenty to cover our mortgage, future children, and a future larger mortgage. We are being told by our insurance agent that we should consider converting some of our term insurance into whole life. It seems like this could be a pretty good diversification and long term investment tool with the added death benefit. However, all of the bad press and high premiums of the whole life policy has me very skeptical of the idea. We are both just short of 30 years old. What should we do?

    • @JAK

      WL can be a great diversification tool, but only if you have the liquidity and savings to do so. Its just a matter of Can you afford the premiums or not (which is part of the reason we have temporary and WL), and Do you want this type of diversification or do you want all of your money in the market?

      Interesting fact…. how did Dave Ramsey make his millions? His father had a several million dollar WL policy. He just promotes term LI based on the stock market returns in the 90’s because he used to work for Primerica.

  6. Just out of curiosity Brett, what is the actual guaranteed rate of return on your WL policy? How does this compare to return in the illustration shown to you by your agent? I would guess that your actual guaranteed return is much lower than the return used in your illustration.

    Common sense renders whole life a terrible investment. Based purely on common sense, the life insurance company takes the money earned from premiums and, after paying themselves the pure insurance cost, invests that money to earn some sort of return. If they are able to earn a return, they will then take out their fees and other costs (which are significant) and pass some the remainder to the policy holders. Now, what do you think they are investing in? Mostly conservative investments like bonds, which we all have the opportunity to invest in ourselves. So they are earning the same return we could earn ourselves, then taking out significant fees, and then passing the remainder to us. Does this sound like a good deal?

    If the market earns X, we all have the opportunity to earn X as well. Why would we assume that a life insurance company would be willing to pay us more than X? If anything, we should assume that they would pay us less than X so that they can make a profit. And on top of that, whole life is undiversified, because you’re banking on a single life insurance company. And on top of that, you are required to pay the premiums every month, and if you ever can’t or decide you’d rather invest your money elsewhere, your policy likely becomes worthless.

    While there are a small minority of cases in which whole life can be a good idea, it is almost always a poor investment decision, especially for young people in the process of building wealth.

    • Matt,

      The guaranteed is 4%, but what people don’t understand is what would have to happen to the larger insurance companies for this to actually be your return. The financial system would have to melt down like 2008, with no bailout. These companies have paid dividends longer than Exxon.

      Another one of the common misconceptions about these insurance companies is that their investments are the same as a retail investors. You and I CAN NOT own the same investments that accredited investors and Institutions can. They have longer timelines or investment horizons and can load up on 30 year+ bonds that even most small institutional investors don’t have access to. They still own bonds from the 80’s if you recall those double digit rates! Yes, these are corporate bonds and government bonds. Their returns have decreased since the 1990’s as they have been forced to invest new revenue at lower rates. So I ask you, considering we are in the lowest interest rate environment EVER, where will interest rates go at this point long term? HIGHER. I will not retire for 40 years, and the returns for WL are weighted towards later in life.

      I ONLY encourage this for someone who can afford to Max their ROTH IRA and employer plan match and is looking to save more. 401K fees long term will kill you. Taxes will be ridiculous in 30-40 years considering our fiscal situation and I want as much after tax income as possible to stay in a low bracket during retirement. I also ONLY recommend you consider Mass Mutual, Northwestern, and Guardian for WL. The rest are the joke that everyone always speaks of.

      Trust me, I did my homework on this…

      • Thanks for the very informative responses! You guys definitely gave some good insight that I will consider. I really appreciate your advice.