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.

© Copyright 2018 Heritage Wealth Planning