When talking to Boomers about life insurance, there is an education bridge that must be crossed for us to get on the same page. This is because the life insurance industry has done such a terrific job of selling the product. This has had a two-fold effect: Many people were insured at death and their family’s and businesses were better off financially because of it, and many people still here who don’t know what they have or why. There are many, many boomers with a sense of being sold a product, with little or no follow-up service and not sure of what she has, if she really needs it, or what. The life insurance issue gets back burnered usually until it’s too late to make the best of it. And make no mistake– Life insurance is a fantastic product and can meet a tremendous number of needs and concerns. But like everything else in financial planning, it depends on the individual circumstances.
Who promotes and sells Life Insurance? Make sure you know who you are dealing with and how he gets compensated. See the blog on “Who’s your financial advisor?”
Basically there are three general types of Financial Advisors- Insurance ChFC, CLU types. CFP or RR Investment type, CPA tax type. (See my earlier post ‘Alphabet Soup’ for explanation)
The CFP/RR will see the internal rate of return (IOR) of the cash value and only see the cost of administration and cost of the death benefit protection. Thus, because the IOR is much lower than say a no load mutual fund or the performance of the S&P 500, these advisors pronounce permanent life insurance a bad investment. The RR’s recommendation then is “buy term and invest the difference”.
The CPA sees the tax benefits of the cash value buildup and the tax-free withdrawal, and the tax-free death benefit but has difficulty in understanding the psychological/emotional content of using it as an inheritance vehicle with guaranteed tax-free death benefit in the old age. Except in the case where the client has a very large and taxable estate where permanent life insurance might be a good fit, he tends to see historical information and not looking into the future. Having never worked with the product, they generally don’t understand the insurability and underwriting of the product and the marketplace or competitive nature of the sales industry.
The life insurance ChFC, CLU agent/advisor sees all the above but, too often over zealously sells the product. Since it’s his livelihood and how he pays his bills, this pressure has certainly led to many sales perhaps not in the clients best interest. If a true advisory position were taken in the evaluation of the clients needs, perhaps a better solution could have been found. “If your only tool is a hammer, the world looks like so many nails”.-Anon.
So what about life insurance? Investment (in the cash value)? Investment in the death benefit? a Savings plan? A tax advantaged retirement supplement? Roth alternative for high income clients? or should it be only a low-cost protection product intended to be held for a set number of years while accumulating assets, eliminating all debt and achieving a financial condition where death benefit protection is no longer needed and one can safely live out life without paying life insurance premiums? Is “Self Insured” for the ultimate claim (death) the best way to go?
We’ll be discussing the uses, the fair evaluation of the various products, newly innovated products, the older products that should be throughly evaluated and whether on not Boomers should even own life insurance in the upcoming posts.