Whenever you've heard about insurance as an investment option, there's an excellent chance that you've heard pitches rather than plans. The truth is, insurance could be a perfectly fine option to consider, but it's challenging to know when you're bombarded with promises like: "It's got a dividend of 6%!" Not to mention you can get lobbed easy questions like, "How do you feel about risk?" and "How do you feel about taxes?"
With your eye on retirement in the near future, it's reasonable to expect that you're less comfortable with risk at this point in your life. You're at the edge of retirement, after all – why would you be excited by the idea of high volatility in your portfolio? And taxes? Well, nobody loves taxes. So rather than a thoughtful explanation to help you make a sound decision, you may receive a pitch that's built around just what you want to hear: Percentages that sound attractive and tax deferments.
Seeing Through The Biases
There's just one problem with the above approach. Ask yourself: What makes that particular vehicle right for me? Why that vehicle and not another that may act similarly but have better results? It all sounds very good to suggest that life's big financial questions can be solved with the wave of a hand. The reality is that if it sounds like a biased pitch, there's a good reason for that and it doesn't always have your best interests at heart.
Why? Certain financial vehicles enable some professionals to get paid a higher percentage on the premium of that vehicle compared to others. It's very much about the number of policies they sell and percentages they generated. So there's very much an incentive for them to reap the rewards of pushing this or that vehicle. It's not a philosophy we follow or favor for sound, unbiased and customized financial guidance at FFP.
The Most Popular Bait: Whole Life Insurance
One of the more popular vehicles we see getting pitched to potential investors is a type of permanent life insurance called whole life insurance. Now, there may be nothing wrong with evaluating whole life insurance in the context of your investment goals and portfolio – but pitching it as the only and best option when there may be other vehicles to consider is what we find fault with.
For clarity's sake, here's how whole life insurance works: In a whole life insurance plan, there is a guaranteed cash value that accrues over time on a tax-deferred basis. With consistent payment of premiums that are invested, you can borrow against the cash value of the policy for any number of events, such as income in retirement. The idea of your heirs getting a solid death benefit may also be appealing to your emotions – who doesn't want to protect their loved ones for generations to come, right? And what's not to like about a guaranteed cash value?
Hold on. Let's pump the brakes for a moment.
First, whole life insurance may force you to save money that you can eventually take out tax-deferred if you wish. That's true. But disciplined savings does not have to be exclusive to a life insurance policy.
A better set of questions to ask might be:
- "Do I need a permanent death benefit?"
- "How does this life insurance policy tend to perform next to an IRA or 401(K)?"
- "How do you as an insurance agent get paid on this policy?"
- "What are all the investment fees involved with this vehicle, including annual fees?"
The more fees there are, the more likely you're dealing with someone who is pushing that vehicle in the name of 2 things:
1) Their commissions from the sale and
2) Their company's profit due to various ongoing fees associated with the management of that policy.
Add such fees up and suddenly those great returns you've been promised – even guaranteed – can be negatively impacted in a big way.
Talk With FFP For Less Pitching, More Perspective
Life insurance in itself isn't a bad thing for people to have, depending on the circumstances. However, when we talk about the real motivations why clients might explore permanent life insurance as an investment vehicle, we often find that what they're actually looking for could be something different. Yes, you probably want to take care of your family for the long haul, but spending much more than what you need on an insurance policy may not be the best route to go for this purpose. Plus, you may not need as much life insurance in retirement as you think – in fact, at that stage, some people don't need any.
What's typically behind the life-insurance-as-investment discussion is a need to cover expenses in retirement, to ensure there is enough money left for family at the time of death and to avoid a large amount of risk during the pursuit of such goals. Could whole life insurance achieve that? Perhaps. But so could several other financial vehicles as well – possibly with better results.
Knowing which path is right for you starts with an in-depth planning discussion with Fiduciary Financial Partners. With your financial goals and a variety of other retirement factors in mind, we'll run and compare the performance of several different investment vehicles. No matter what our findings are, when you deal with FFP, you're working with a firm that's designed to work independently and in your best interests, not our own via sales commissions. And that's one more way to Confidently Embrace Your Financial Future. Call us at 630.780.1534 or email info@fiduciaryfp.com.
Nick Economos, CRPS is a dedicated independent Financial Advisor and Chief Retirement Officer at Fiduciary Financial Partners. He has a wealth of expertise in designing qualified retirement plans and participant education programs.