I wouldn’t be a good finance blogger if I didn’t take a minute to point out my love for term life insurance. We love it more than Donald Trump loves his daughter. More like loves her a long time! Just kidding please don’t have the CIA shoot me.
I tend to look at insurance in a pretty simple fashion. It should be in place to protect someone (usually a spouse) in case a major source of income goes away. The insurance settlement should be enough to pay off any debts and make sure the surviving spouse has enough money to live a comfortable life before she goes and shacks up with the mailman or your friend Billy. DAMMIT BILLY COME ON. MY CORPSE IS BARELY COLD. I AM SO GONNA HAUNT YOUR ASS.
Other than that, we can’t really see much use for life insurance. Many even go down my path, choosing to self insure. Insurance agents and other wusses might advocate getting insurance even if you don’t need it today, essentially as way to ensure you’ll have access to insurance in the future. Yes, this is an argument they make with a straight face. It happens “all the time.”
Yeah, suuuure it does. It’s the equivalent of getting a haircut today just in case you can’t get a haircut tomorrow.
The role of whole life insurance
So let’s talk about whole life insurance. I won’t get into too much detail because only insurance guys like reading up on the minutiae of the latest offering from Manulife.
Unlike term life insurance, it never expires — provided you pay the premium. There are two parts consisting of a death benefit and a savings component. The savings component can be invested in various things, including GICs, stocks, etc., usually a product with some sort of insurance feature on it. So the equity portion of the savings component would be in a segregated fund, an investment that charges higher MERs in exchange for assurance you won’t lose all your money.
Whole life insurance sounds like a crummy deal, but there are times when it really makes sense. Estate planning is one such scenario. Since insurance proceeds always pass onto heirs tax free, parents can use whole life insurance products to ensure their kids have enough to pay the tax on any inheritances.
Say mom and dad own a cabin in the woods they’d like to pass onto junior. That cabin would have to be sold to the kid, which means capital gains tax would be owing by the estate. Insurance would allow junior to get the cabin and make sure there’s money left over to pay the taxes. If the parents don’t have enough other assets to pay the tax, the feds can and will seize the cabin.
WHOO KIDS CRA PARTY IN MUSKOKA!!
(Looks around, everyone is reading nerdy tax books)
The problem with whole life
I have no problem with insurance agents selling whole life to people like that. It can play a useful role in estate planning.
What I do have a problem with is insurance salespeople selling the product as a savings account to financial dumbasses.
Such a practice exists today. Oh lordy does it ever. It’s common enough and used poorly enough that it’s time to ban whole life insurance.
I actually talk to people with money problems on a regular basis. It’s part of being a private lender. And more often than not they’re stuck in some whole life insurance product. These aren’t people who need to protect assets from taxation. They’re unsophisticated people who wanted to start saving for the future. So they talked to their local financial guy and now they’re locked into paying $100 or $200 per month into an insurance contract.
These are people who are drowning in debt, folks who are in deep financial doo doo. They shouldn’t be in such products. But they are.
We all know why, of course. Commissions are fantastic for whole life products. An insurance guy is going to push them. He’s got kids to feed and 14 different kinds of his own insurance to pay. Insurance guys are always overinsured. It’s hilariously bad. “Yeah, I have three different kinds of disability insurance. Only a moron has two.” To these guys, there’s no problem that can’t be fixed with more insurance.
The problem with selling whole life insurance to people who don’t really need such a product is it’s hard to argue an insurance guy is really ripping off somebody with such a product. It provides a benefit. It’s just not an ideal benefit. Buddy is getting ahead each month since some of his payment goes towards the cash value. He’d be better off just saving in a regular account, of course, but he’s still getting ahead each month by paying into this thing.
I’m not really serious
Okay, look. I don’t really think we need to ban whole life insurance. It’s a niche product that is a useful estate planning tool.
So how do we stop shady advisors from selling the stuff to unsuitable clients? Especially since a lot of the people responsible work for less than reputable outfits like World Financial Group and Primerica. These people come and go so fast that shaming them is hardly worthwhile. They’re the zombie army of the financial services industry. No matter how many you shoot, they still don’t go away.
And we can’t really expect the regulatory agencies to do anything, since it is easy to argue that such products do have some benefit to the client.
I don’t know what the answer is. Do we ban whole life insurance for people under 40? Do we make sure people actually understand it before entering into it? Or do we just do what I’m doing today and trying to make the target market doubt the product?
I dunno. All I do know is I’m tired of seeing people come into my office and tell me that they “have” to pay $100 per month for a shitty insurance product that is doing them more harm than good.