Buy Term Fallacies

Maybe it’s just me but…

People who exaggerate drive me up the wall.  Especially when there is NO need to do so to validate one’s point!

So, I am preparing to do a live video on the basics of whole life insurance.  You can watch the YouTube video here.  Or the Facebook video here.  (By the way, I do daily videos on both my Facebook  and Youtube pages so if you want to be kept in the loop hit SUBSCRIBE on the Youtube Page and FOLLOW on the Facebook page.)

Anyway, as I’m preparing for my video I come across this article by the Founder and CEO of Wealthfront.

Now, this article was written in 2013 which was the hey-day of the Robo-advisor craze.  Wealthfront and Betterment were two firms that were going to take over the financial industry because of Artificial Intelligence (AI).  So, when the CEO of Wealthfront talked, people listened.

Unfortunately, this article is infantile. Again, it’s 5 years old. But that makes it worse because the author had an enormous amount of street cred back then.  And yet writing such a piece with the influence he carried,  I assure you, steered many people wrong.

His premise is you should not buy whole life insurance but rather term insurance. The savings you get from the much lower term premiums on term life you should then invest. Doing so will achieve a higher level of wealth.

How do we know this? Well, because he shows us.

He says investing in Wealthfront would net you more than 7% a year which would significantly outperform what you will get in the whole life policy. He doesn’t say what the cash value will be on the life insurance, but certainly it would be lower than the Wealthfornt investment.  I don’t dispute that assumption in the least.

What I dispute though is HOW he got the assumption he did.  A significant portion of that 7+% return will come from Tax Loss Harvesting (TLH).  My head hit the floor when I read that. I don’t argue with his 7+% return assumptions.  But his assumptions are based on his firms ability to INCREASE returns because of tax management strategies. I couldn’t believe it. And still can’t actually.  Yet, five years later, the article not only is still out there but it ranks high in the Search Engine Results Page (SERP).

If a regulator were to witness ole Josh telling Ms. Smith that I think she can net 7% returns because of my ability to increase her returns due to tax loss harvesting, that regulator would hopefully cut me off at the knees.

You can’t do that!  Yes, taxes are a big drain on portfolio returns.  In fact, in this post I show you how taxes can easily reduce your returns by 50%.  But the problem with what this guy is doing is he’s using assumptions that are simply fanciful.  There is NO basis at all for one to make ANY assumption about using the tax code to increase returns.

All taxes do is reduce returns. That your returns may or may not be reduced from taxes is entirely based on your specific circumstances. But what this guy is doing is actually ADDING the supposed tax savings his firm provides to your total return.  That’s bad. Horrible in fact. And again, you can’t do that! Saving taxes do not INCREASE your returns. (By the way, the returns you receive from whole life insurance are tax free. So, should an insurance guy add another X percentage points to the whole life returns because of paying no taxes? Of course not.)

And this is what frustrates me so about many in my beloved industry.  They’re too cute by half.  We don’t need to throw exaggerated claims to validate what we do.  This is why no one wants to talk to anyone selling insurance.  Because we’re aware of the false claims folks in that industry have made repeatedly. Things like, the “tax free” retirement one can achieve by living on a life insurance.

The problem is, of course, is that life insurance IS needed. Whole life insurance has a place for some too. But many people will simply shut the door to that product due to the experiences they’ve had, or heard, by salesmen with exaggerated claims that don’t come to fruition.  “I was told X but Y was the result. I’m never ever doing that again.” Enough people have that experience and guess what? You’re industry is going to have a hard time going forward.

So, to end this little diatribe.  If a claim sounds too good to be true, it most likely is. If the claim is made from one who benefits from YOU acting on HIS claim, I would suggest a bit of skepticism is warranted.  And, as always, there is nothing wrong with seeking a second opinion from someone you trust.

Is that self serving for me? Sure. I offer second opinions.  But I have nothing to sell. So you are literally getting my opinion. If you act on it or not is up to you.

Veterans Group Life Insurance (VGLI) – What You Need To Know (2018)

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Veterans Group Life Insurance is very important to understand. When you are in the service you have SGLI. SGLI is nice. It’s subsidized so it’s not very expensive.

But when you separate from service you have 240 days from your last day to get VGLI without having to go through underwriting.

Make sure you take advantage of that 240 day window. If you don’t, and you try to get underwritten later, you may not be approved.

Without question, get VGLI when you separate. However, after you’ve secured coverage try to get a private insurance policy. Private policies may be a lot more affordable.

But do NOT drop your VGLI until you have secured a replacement!!!

Universal Life Insurance – What You Need To Know

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Universal Life Insurance is NOT the same as Whole Life Insurance, please be advised.

Two completely different things. In my experience, very few Universal Life (UL) policies work as sold. I’ve seen many about to lapse to unsuspecting owners, always at the most inopportune time.

This doesn’t happen with Whole Life.

If you have a Universal Lfe policy, PLEASE, get an INFORCE ILLUSTRATION. This is how you analyze the strength of the policy going forward.

The annual statement you receive does NOT do this. It only gives you a brief review of what happened in the previous 12 months. We need to see what the projections are going forward.

Get the InForce Illustration every few years. Please. I’m begging you.

Term Life Insurance – Why EVERYONE Under 50 Needs It

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Term life insurance OUTSIDE OF YOUR EMPLOYER is so important. I’m going to share with you why you need some.

I’ll also share with you my near disaster when I left my job with no life insurance.

Thankfully, it worked out, but man, it made me nervous. Don’t let that happen to you!

 

$500k 30 Year Term Life Insurance

Here’s a strategy for those in their 20s, even if you’re not married. Go get a $500k 30 year term policy. That sucker won’t cost you much at all, especially if you’re in good health. Then you don’t EVER let it expire. That’s what I foolishly did. And it nearly cost m family dearly.

Once you have that policy locked in, you don’t have to worry about life insurance ever again. Well, unless you have more than $500k of debt.

If you are in your 30s and just starting out. You may think you don’t need much life insurance either. After all, you’re young right??? WRONG!

 

Get a Private Term Life Insurance Policy

Get a 20 or 30 year term life policy, again for $500k to have that locked in too. DO NOT rely on your employer.

Do you know how employer life insurance works? First AD&D is not true life insurance. Whatever AD&D you have, simply disregard.

You are underwritten through your employer as standard rate, which is similar to if you smoke. Thus if you are in good health you are paying much more than you would for a policy you get on your own.

Secondly, if your employer drops your salary for whatever reason and your insurance is say 5 times salary, guess what happened to your insurance? It drops too!

 

Employer Life Insurance May Be Portable But It Isn’t Cheap

Lastly, if you get laid off, you can take your insurance with you but it’s crazy expensive. Too expensive for most people who just got laid off to afford.

Avoid all this by simply going and getting your own policy when you’re young and in good health. And get MORE than you think you need. It’s too cheap not too. Just do it!

What You Need To Know About “Infinite Banking”

You’ve probably heard this term “Infinite Banking” all over the place. It is also known as the ‘Bank On Yourself” concept.

In theory it’s very appealing. Pay yourself interest instead of the bank The problem is that it takes CASH in order to loan yourself…CASH.

And here’s my issue with the Infinite Banking concept. A Universal or Whole Life Insurance policy is the basis for the operation to succeed. This means you need a significant amount of cash value in these policies for your to “bank on yourself.”

So, the next obvious question should be is how long does it take to get a significant amount of cash value in your life insurance policies?

Well, if you buy a policy through an insurance salesmen, it’s going to take some time. You probably won’t have much cash in the policy, if any, in the first 8 years or so.

However, even a firm like USAA or TIAA-CREF that sell their policies direct to the consumer they also have loads too, which reduce your cash value. Loads are synonymous with commissions. In fact, at USAA you pay a 5% load with each premium payment you make.

Now because there is no salesman commission you will see more cash value available to you in a shorter amount of time, but you probably won’t see much growth on that cash value for a few years until after the policy has been inforce.

Also, you need to know the difference between whole life and universal life insurance. Whole Life is literally there for your “whole life.” You just make the premium payments and when you die the policy pays out. Thus, the risk is on the insurance company.

Universal life (UL) means the risk is on you. There are a myriad different ways you can fund a UL policy. For cash strapped people mostly this means they’ll “under-fund” the policy with the idea of contributing heavily when they can more afford it. (For the record, I haven’t seen this happen).

On rare occasions you can overfund a UL policy too. This means you’re putting more in on the front end than the target premium allows. You can do that but there are restrictions on your ability then to “bank on yourself” because you have MEC’d the contract. MEC means Modified Endowment Contract and this will put limits on your ability to borrow against the policy and also poses a 10% withdrawal penalty if you take money out before you’re 59.5, like an IRA.

Lastly, with a UL policy, if there is not enough cash in the policy to keep it afloat it will lapse before you do and could potentially cause a significant tax hit, never mind the fact your insurance is gone too.

At the end of the day, I’ve RARELY seen ULs work as advertised. Doesn’t mean it can’t. It’s just a rare occurrence in my experience. If you are healthy, in your 40s or so, with excess cash flow, a UL may be a great option.
For everyone else, not so much.

Whole life isn’t a bad option because you know exactly what you’re getting for what price. The problem is though because the risk is on the insurance company and now you, you’ll get less life insurance coverage for each dollar of premium. This will make whole life a lot harder to work successfully in the infinite banking arena.

Podcast Episode 41 – Proof The SWAMP Lives!

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In this episode I talk about an article from TheHill.com which mentions, almost in passing, that the previous head of the Beverage Association is now going to head the Life Insurance lobbying group.

The next head of the group is certainly going to be the current CEO of Philip Morris.

So you might ask “How does one become head of a lobbying group and make $2.3mill a year? Do you need to be an expert in life insurance?”

Good question. Quick answer to the second question. NO! Just look who her predecessor was. One, Dick Kempthorne, a Senator, Governor and Secretary of the Interior under Bush. Life insurance expertise he had not.

But LOBBYING expertise he carried with great abundance.

Now, how did the new head of the insurance lobby get the gig? You got it! Politics. She was in the Bush administration as well before she went on to hawk the sugary drinks that are killing people.

Only in The Swamp does this make sense.

Song of the day – “Hersham Boys” by Sham 69

Podcast Episode 30 – Life Insurance For A 70+ Man? Good Luck With That!

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So I am debating a guy who thinks ONLY people who actually paid into Social Security should receive any benefits. He thinks spouses, who did not pay into the system, should not receive a Spousal Benefit off the work record of their working spouse.

I asked him then what he thinks about the Survivor Benefits then because after all a s Spousal Benefit is only 50% of the primary workers PIA. In today’s dollars the max Spousal Benefit will be all of a $1400 a month.

However, a Survivor Benefit is the amount that the primary worker was receiving when he died. It could be as high as $3700 a month if he had the maximum PIA and delayed taking his Social Security benefit until he was 70.

So, in this case, the spouse who paid nothing in is getting 250% MORE than what she was receiving for her Spousal Benefit. I asked this guy, “man, you must really despise the survivor benefit, eh?”

To which he said he stood by his original statement and that only people who paid in should receive a benefit. I had to challenge that and asked him “you realize there’ll be a lot of destitute widows out there if this were the law of the land?”

He replied, “You ever heard of life insurance?”

And now we get into the gist of this podcast episode. My friends, getting a life insurance policy is not the same as going to your grocery store and picking up a loaf of bread. Life insurance is a process the life insurance companies use to maximize THEIR returns, not yours. That means that if the life insurance company feels they are going to pay out more in death benefits than the premiums they receive they simply won’t take the risk to provide you a policy.

So, let’s look at say a 72 year old man. The Social Security life tables say this guy will live another 13 years. In its purest simplicity, that means the life insurance company can expect to receive premiums for…13 years.

A $250,000 death benefit with premiums paid over 13 years means the insurance company would charge $19,230 a year in premiums…again in its purest simplicity.

But there are a couple variables to consider. The first the insurance MUST make a profit or else it will go out of business and NOONE would ever receive a death benefit.

So, they need to tack on whatever profit margins they need to make to that $19,230 in premiums.

Secondly, the insurance company will also be able to invest that premium they receive into other securities, typically, highly rated corporate and government bonds. Those investments will reduce then the premium amount. However, what’s the interest rates on 15 year bonds today? 3.5% or so? Nothing to write home about that’s for sure.

Also, though, is that some of their insured client base will die sooner than the 13 years average which means they need to keep enough liquidity to be able to pay the claims. That liquidity will take away from their overall investment performance and thus increase the premiums the averaged insured pays.

Finally, though, is that the insured doesn’t want the higher risk population, folks with heart problems, on lots of meds, diabetes, obese, etc. That’s too much a risk for them. If you happen to fall into those categories, you’re just out of luck. You’re too risky.

Unfortunately, as you get into your 70s your are more prone to develop health issues, which means you are more likely to die. Insurance companies don’t like that. If the do take you on, it’s going to cost you dearly. But most will just deny you from the outset. So you won’t have ANY insurance.

For those who still are eligible though, because your risk is less than the overall population, the premiums will most likely be quite a bit lower than what we discussed above. But it’s still going to be expensive!

Say it’s a 25% discount to the pure insurance cost we discussed above. You’re still looking at premiums well into the 5 figures annually. Is that something you can even afford?

And now you see why insurance is NOT a solution typically for most older folks. First, they may not get underwritten for coverage. Secondly, it’s doggone expensive!

Which is why you get insurance when you’re young(before you think you’ll need it).

#1 Thing To Do BEFORE You Change Jobs- Understand Your Life Insurance

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Don’t Rely On Your Employer For Life Insurance

When it comes to financial planning life insurance is one area that is often overlooked.  I’ve asked many clients about their life insurance coverage only to be told dismissively, “I have it  through work.”

“Really? What exactly do you have?” I ask them.

At that point, there will be a pause, a bit of hemming and hawing, and finally they will answer with a curt “I’m not really sure the exact amount. But I’m good there.”

I’ve come to the conclusion that just being asked about life insurance by a financial planner brings up a wall of defensiveness with clients. It seems they feel they’ll be sold something that is not in their best interest.

 

Life Insurance Industry Has Hurt Itself

You can’t blame clients for thinking this way. After all, life insurance salesmen are notorious for their inability to be told “no.” In fact, many a sales trainer foolishly subscribes to the notion that a salesman needs to hear seven nos before the client will say yes.

Of course, this is idiotic. Any advisor or manager who advocates treating people in such a way I implore you to get out of the business now! You are hurting the wonderful work a real advisor is doing by making clients hesitant if not outright hostile to engage us for fear of being sold something.

No good financial planner will allow a client’s initial dismissiveness be the end of the discussion, however. A good financial planner will challenge the client, even if it means making the conversation uncomfortable, because life insurance is too critical to overlook.

 

Proper Financial Planning Includes A Life Insurance Analysis

“Just so I’m clear,” a good planner will say. “You do have kids and debt. So it’s important to know exactly how much life insurance you have and the types of it as well. I’m going to put that down on your to-do list for things we need to discuss in our next meeting, okay?”

At that point the client will nod and somewhat sheepishly agree to “look into it.” 

Eventually, the client will get back to that planner with a list of the various coverages they have through work. There’ll be a lot of Accidental Death and Dismemberment (AD&D) insurance which the client believes is part of his/her overall coverage. They’ll say something like, “I have 4 times salary plus $250k in AD&D. So, I’m good.”

Accidental Death and Disability (AD&D) is Not True Life Insurance

Unfortunately, AD&D insurance isn’t true life insurance. If you die from an illness, for example, your heirs will not receive a penny under these policies. There is a reason AD&D is so inexpensive, after all, because it doesn’t provide much in terms of protection.


The client says he also has 4 times his salary. Doesn’t take a rocket scientist to figure out if this is adequate. What’s your salary? Multiple that by 4 and you have your coverage. So, if your salary equals $50k you have $200k of life insurance coverage. Is that enough?

Let’s look at a hypothetical couple,  Brenda and Kevin. They have over $200k in total debt. Brenda’s salary is $40k a year and Kevin is not working. If Brenda has 4x her salary she has $160k of life insurance. That is not enough to pay off their debts.  If she were to die Kevin no longer has any income coming in and yet he still has well over $40k in debt!

 

Non-Working Spouse Needs Life Insurance Too!

It goes without saying that Brenda should get more coverage. But don’t overlook Kevin either. Just because he isn’t earning an income doesn’t mean he shouldn’t have insurance. He has flexibility to help out around the house, get the kids off the bus, get the kids off to school in the morning while Brenda sits in traffic on her way to work. Maybe Kevin even helps with homework when they get back from school before Brenda comes home.


Let’s say Kevin dies. Who is going to watch the kids when they get home from school? Who is going to get them ready in the morning? All these activities either cost time, that Brenda doesn’t have because she has to go to work, or money through a child care provider. The costs of child care isn’t cheap by the way.

Given that Brenda and Kevin are squeezed financially right now, how much more squeezed would they be if Kevin died and Brenda had to pay for childcare?  Here is a great resource on child care costs for your state.  Again, it’s not cheap! (Please be advised I’m not an advocating what the authors of that article suggest.  EPI is a VERY liberal think tank. But they do raise a good point on the costs of child care, nonetheless.)

Now just think if Brenda and Kevin had taken the time to actually look into life insurance. They’d realize it’s so cheap they should get policies on their own as opposed to relying solely on Brenda’s employer.

 

Term Life Insurance is So Cheap No Reason Not To Have It

Let’s say Brenda is 43 years old and is in decent shape. USAA.com quotes a $400,000 term policy with a fixed premium of $35 a month for 20 years(subject to this writing in late 2017). Let’s say Kevin is 47 years old, the same policy would cost $60 a month.

So, for less than $100 a month both Brenda and Kevin would have $400k coverage guaranteed for the next 20 years. If either of them died that coverage would be more than enough to pay off all their debts and have a significant amount of cash left over. All for $100 a month in premiums.

 

Understand Group, or Employer-Sponsored, Life Insurance

Employer-sponsored life insurance, also known as group insurance, is much different from a policy you get on your own. Essentially what happens with ANY group policy, be it Medicare, Medicaid, employer sponsored health or life insurance, is that the healthy are subsidizing the sick so the premiums get evened out for everyone.

Take two 47-year-old men, one is overweight, sick a lot, never exercises etc. The other is lean, exercises, eats right. These guys pay the same premiums. Cost-sharing is the only way for a group policy to work. Everyone in the group is underwritten the same. This actually benefits those who are not in good health. But it certainly hurts those who are in decent shape. Again, the healthy subsidize the sick.

 

Premiums Based On Age-Band

Another thing to understand about employer-sponsored life insurance is that the premiums are based on age-bands, say 40-44, 45-49 etc. The older you are, the higher premiums will be.

Look at the table below to see how this works for Veterans Group Life Insurance(VGLI). VGLI is insurance for veterans who separate from service and trade in their Federal Government subsidized Soldiers Group Life Insurance(SGLI). When they leave the service they are guaranteed coverage but it’s at a steep cost.

This table is from 2014 but the concept will be the same regardless of what year it is. Your premiums are based on the amount of insurance you want plus your age-band. As your age-band increases, so does your premium.

 

VGLI Monthly Premium Rates Effective July 1, 2014

Amount of Insurance

Age

29 & Below

Age 30-34

Age 35-39

Age 40-44

Age 45-49

Age 50-54

Age 55-59

$400,000

$32.00

$40.00

$52.00

$68.00

$88.00

$144.00

$268.00

390,000

31.2

39

50.7

66.3

85.8

140.4

261.3

380,000

30.4

38

49.4

64.6

83.6

136.8

254.6

http://www.benefits.va.gov/insurance/vgli_rates_new.asp

 

HUGE Premium Increases As You Get Older!

In this case, if you are 47 you pay $88 a month for $400k in life insurance. When you hit 50 though your premiums increase 60% to $144 and then they increase another 86% when you hit age 55 to $268 a month.

The cost for this coverage has nothing to do with your physical shape, your family’s history of illness, and in many cases even if you smoke. The cost only has to do with your age and how much coverage you want.

However, If you would have locked in a policy on the private market using the USAA example for instance, you’d be paying less than $100 a month for both you and your spouse to each have $400k coverage for 20 years. You’d save thousands in total premiums compared to what your employer-sponsored life insurance may cost.

If You Have Debt, You NEED Life Insurance

Remember, if you have debt, you need life insurance. No two ways around that. What’s the best way to get that life insurance coverage? Get your own policy first because if you qualify it should be much cheaper than a policy you can get through your employer, if they even offer life insurance as a benefit.

Secondly, your own policy is not in any way tied to your employer. You can change jobs and keep the coverage, so long as you continue to pay the premiums.

 

What if New Employer Doesn’t Provide Life Insurance Benefits?

Go back to Brenda again. What if she got a new job but it turns out her new company doesn’t offer any life insurance as a benefit. She really didn’t think too much of this until she realized that she had no coverage. So, she decides to do what she should have done in the first place, go get her own policy.

 

Unfortunately, a few years ago when things were really tight at home with the economic situation she and Kevin were in, she went to the doctor to ask about anti-anxiety medication. When her doctor wrote the prescription it went into Brenda’s medical records which the insurance company checks before they issue a policy. Now, the life insurance company has some concerns, so much so that they will only cover her if she pays huge premiums.

 

What If You Can’t Get A Private Life Insurance Policy?

At this stage she’s stuck because she can’t afford a large life insurance premium. She and Kevin live paycheck to paycheck with no room to spare. Yet they still have all that debt but now have no insurance because her new company doesn’t offer any. If she were to die, then Kevin and the kids would be destitute.

This would all be a non-issue if she and Kevin simply bought policies when they were younger, before there were any medical issues. For instance, when Kevin was 37 he could have locked in a $400k policy for 30 years for around $50 a month. Brenda could have the same for even cheaper because she is a woman and younger. Her premiums would have been $30 a month. That means between them they could have locked in $400k of life insurance EACH at a fixed rate of about $80 a month locked in for 30 years!

But they didn’t do it. They didn’t want to talk life insurance back then. They felt Brenda’s employer’s coverage was adequate. Unfortunately they were wrong and it will cost them, either through huge premiums going forward or by the risk of not having life insurance.

 

Don’t Forget To Subscribe Below!

 

When Is The Best Time To Buy Life Insurance?

Don’t be like Brenda and Kevin. Buy a large term policy on your own NOW!

Say you are in your early 30’s, get a 30 year term policy to cover you until you hit your 60’s which is typically when you won’t need the insurance anymore. With that policy in place you most likely need not worry about life insurance again. Say you are in your 40s, get a 20 year term to cover you until you’re in your mid 60s. In your 50’s? Get a 10 year policy. Get enough coverage for a long enough term until you think you’ll be out of debt and the kids will be out of the house.

Maybe you’re single or you have no kids, no debts etc. You’re probably thinking you don’t need any life insurance coverage at all. You’re right, you probably don’t need life insurance…now. But you will, later, when you get married, have kids, maybe add weight, or develop a health issue that makes you more a risk than you are today for the life insurance company. Buy it now!

Buy it to at least cover the mortgage of a home you think you might own later. Term life insurance is so cheap now, just do it and get it over with so you won’t have to think about it again. If nothing else get at least a 250k 30 year term and never, EVER let that it lapse.

 

Parents, Tell Your 20-Something Kids to Get Life Insurance

Parents, tell your kids to get a life insurance policy and tell them YOU’LL pay for it if you must. By purchasing it now, when they’re young, they’ll save tons of money by not having to buy a much more expensive policy well into their 40s or 50s. Insurance is always the cheapest when you don’t need. So buy it today for your future needs and cross it off your list of things to worry about.

 

***This is a chapter from my forthcoming book “Stop Wasting Your Money: How to Pay Down Debt, Increase Cash Flow and Reduce Stress”. For purchase info click here.***

For more financial planning related topics click here.