Category: Insurance

Alright so this isn’t so much about stocks as it is about insurance. Life insurance specifically.

Before you tune out; I know life insurance isn’t exciting and dying isn’t something any of us really like to think about. But life insurance is a critical part of any strong financial plan.

As a broker I was licensed to sell all types of securities (stock, bonds, mutual funds & more). In addition to that I was licensed to sell insurance products as well.

But I never sold a single life insurance policy. I never even tried.

Not because I don’t believe in life insurance as a valuable part of your financial strategy, but because the vast majority of the life insurance products that any salesman will try to sell to you are overpriced and generally terrible investments.

There is one type of life insurance worth the cost and the rest are not even close. But here is the problem: For a broker, selling the best product/the most cost effective product means making very little commission.

The best product out there is TERM life insurance. Basically how it works is you choose a “term” or time frame that the policy will cover you. So let’s say 20 years. Then you pick a coverage amount like $250,000. After that you buy the policy and make payments to keep the coverage. If you were to die in that 20 year term your beneficiaries would be paid the $250,000.

If you don’t die (which is good) the policy ends and nothing is paid out. This type of coverage is pretty inexpensive.

Both Lauren and I have 20 year term polices around $500,000 and we pay roughly $15 a month each.

So it’s very affordable in most cases.

If I sold this type of policy as a broker I would have made almost nothing in commissions. This is why most brokers don’t even offer it. Instead they go straight to offering you something like: Whole Life, Permanent Life, Universal Life, or Variable Life.

In almost every scenario those policies do not make sense for a customer.

A broker with your best interest in mind could get a significantly better outcome for you financially by not selling you one of those policies.

But you know what they do…? They try to sell them like crazy. Why? Because the commissions are fantastic.

The products are ridiculously expensive and the broker gets a big kickback for selling them.

If you are thinking right now, “shoot, I already bought one of those.” No worries hang in there and I will give you some ideas for what you could do going forward.

And I know there are a few of you out there who are skeptical because you either have sold the insurance policies I mentioned or you bought one from someone you trust. I’m not here to tell you that you or the person who sold you life insurance is a bad person, but… the product is not great and here is why:

Take my example above. Lauren and I are paying roughly $15 a month for $500,000 coverage over 20 years. This means that over the course of 20 years each of us will have paid $3600.

Hopefully neither of us will die and the money will have gone for nothing except peace of mind.

Now instead let’s say we bought Whole Life insurance which is one of the most popular to be pushed by sales people.

Before the math comes in, whole life insurance is more expensive because it not only provides your heirs with a lump sum payout if you die, but if you don’t die they have “invested” your premiums so that at a certain point you can withdraw a cash savings.

Sounds like a pretty good deal so far, right? You are investing which is great and you have life insurance which is good.

I did a quote on myself to see how it compared. First of all I can’t even imagine paying for $500,000 in coverage like I have with the term policy because the monthly payment is close to $400. Yikes. So instead let’s give this a fighting chance and go with a $250,000 whole life policy for a male in his 30s in good health:

The cost is $212 per month. So $197 more per month than my term policy. The website I got my quote from said that buying a whole life policy is like buying an asset. Their example was: it’s like buying a house when you purchase whole life coverage vs. renting when you buy term coverage.

In the quote it says that when I get to 65 years old the cash value that has accumulated from the money that they invested for me will be worth $225,000.

So I will have $250,000 in coverage for my heirs in case I die but if I don’t die (fingers crossed) I didn’t “waste” my money because I have almost a quarter of a million dollars in cash value that I can access. Seems totally reasonable.

Until you do this:

Take my term policy for $15 per month and buy it instead of the whole life policy. Now take the $197 that I am not paying for whole life, because now I have an extra $197 per month that I was about to spend on a whole life policy.

With this money instead of letting the insurance company invest it within the life insurance product let’s say I invest it on my own in the stock market.

In my case I’m investing the $197 on my own into the stock market every month for 35 years. I am assuming that the market continues its average return of 10% roughly per year. (This is the average S&P 500 return for almost every 30+ year period over the last 100 years, so I’m not cheating)

The insurance company says they will give me $225,000 after 35 years.

But when I invest that money on my own by the age of 65 I have over $700,000!!!

Hold on a second. If I give my hard earned money to my broker for whole life insurance he will turn it into $225,000 over the 35 years that he has it. But instead I could take the same money and turn it into $700,000!?

And I didn’t invest it into anything crazy, just the 500 largest companies in the US stock market.

Where did all of that money go that my broker was investing for me? How did it do so poorly?

It went to fees and commissions. Purchasing whole life insurance in my example would cost me over FOUR HUNDRED THOUSAND DOLLARS because of fees and commissions. This is why your broker loves selling whole life, permanent life, universal life, and variable life policies.

There is more. In most cases if you were to die your family would get the $250,000 policy pay out, but what about the cash value you saved up: THE INSURANCE COMPANY KEEPS IT!

No joke, you could save up for years paying into this policy and then when your loved ones need it most, the insurance company keeps the “cash value” of the investment that you paid into. Your family gets the policy payout only. The cash value is why you bought whole life to begin with when they gave you the pitch about buying vs. renting!

It’s so wrong.

Let’s break this down again. I can buy term life for $15 a month and invest $197 into the stock market on my own and end up with $700,000 at age 65. If I die before that my heirs get $500,000 plus they will have the investments I made with the $197 on the side.

-OR-

I can buy whole life and get $225,000 when I turn 65 or if I die before that my family gets $250,000 and my investments disappear into a brokerage’s bottom line.

This is a no brainer. There is not a single rational, moral, financial expert out there who believes that purchasing whole life insurance over term life insurance is a good idea. I have spent countless hours researching this topic over the last decade and have yet to find one.

And that is because it is so obvious. It’s such a bad deal when you sit down and do a comparison.

The only people who pretend it’s a good investment are the people who have to sell it for a living.

I feel bad for them. I really do, because I remember the pressure that I was under to sell those policies. But I refused to pitch it even one time. And that is why the life insurance sales industry has such high turnover, people aren’t willing to sell a product that they don’t believe in.

Not only do the salespeople quit but the people who bought the products quit too. Several studies I have read show that up to 50% of these types of insurance policies are cancelled within the first 10 years after they are purchased. Most of those are cancelled in the first three years. Yikes!

Before I get too far ahead of myself I do want to mention that whole life is not exactly the same as variable or universal life policies. But they have poor investment returns, high fees, and are generally bad products just like whole life.

If your excuse for buying whole life is that you don’t have the discipline to save on your own, let me help you. You have heard me talk about them several times before. I set up my Acorns account in 10 minutes. It will automatically invest whatever amount you want each month and they have pre-set portfolios that they will recommend for you. It’s $1 per month, $12 per year, that’s way cheaper than any broker selling whole life insurance.

So you have no excuse, go check them out:

Now, what should you do if you already have a whole life policy?

I can’t speak to each scenario because I don’t know your exact financial situation. But if I had a whole life policy, as long as I bought the policy within the last 5 years or so, I would get out of it. I would buy term insurance first then cancel my whole life policy. (It is critical to get the term insurance before cancelling the old policy, don’t get stuck with no coverage.)

Also be careful to read the fine print before you do, some of those contracts are crazy. Because so many people try to cancel the insurance companies know they need some crazy contractual stipulations to keep you paying premiums as long as possible.

If you have been in a whole life policy for a very long time and you have built up some significant “cash value” then you might just want to let it play out. At that point the bulk of the fees are paid and you are likely to take a penalty or tax hit to get out of it.

At that point the decision is in the past and you shouldn’t feel bad about it. You could have done better, but it’s also not some crippling financial decision. In fact you at least have some money to show for it.

Some other day I will write a detailed post all about who should have life insurance and how much they should have. But for now in case you are curious the short answer is:

If you have people depending on your income to live, you should have life insurance. How much? Generally 10x your income or so. That isn’t exact for everyone and every situation but somewhere in that ballpark will be close.

A company that only offers term coverage and aims to keep the process simple is Haven Life. It takes about 20-30 minutes to sign up and get a quote. Check it out if you need coverage:

No matter who you get your policy through, get TERM coverage and then invest every month for your future. You will be so much better off paying your future self vs. paying some broker a bunch of commissions.

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Well first off I am sorry. Getting in a car accident is not fun. Been there done that. But I’m here to help. I was the person on the other end of the line handling claims in the not so distant past. In fact I still get the opportunity to help people through this process occasionally.

Insurance is a topic that almost everyone is confused by. I always joke that half of the people in car accidents don’t want to talk to their own carrier because they are afraid their rates will go up. The other half only want to talk to their own carrier because they think the other person’s insurance is out to trick them somehow.

Why is it that there is so much confusion about how to handle auto accident claims? To clear up the confusion here are the basics in case you have been in a crash. And if you haven’t here is some great info to make sure you are prepared.

First get pictures at the scene and contact info from the other party if possible. If not make sure the proper authorities get that info. It’s always better if you can get it and in most cases people at the scene of a crash are willing to help each other out. I can’t tell you how many times I have seen claims drag on for weeks or months because someone failed to get basic information at the scene.

Next you need to know what coverage you have. Your insurance carrier should do a good job of explaining this, but you were just in an accident and a lot of information is coming your way.

(Before I go on I want to make one thing very clear. I understand that insurance is BORING. But guess what, this stuff is really important. You want to win with money, not understanding your insurance causes big mistakes that could cost you a lot of money. Those mistakes could ruin your life, I have witnessed it. Don’t let that happen to you. Get a basic understanding of how this works, keep reading.)

Collision coverage: This covers your car. It is there to take care of your regardless of who is at fault. Generally it will have some sort of deductible like $500 for example. The deductible is the part that you are responsible to pay. To clear up any confusion though, you don’t owe this to your insurance company in fact if you choose not to fix your car you don’t owe it to anyone at all. Usually when you get your car repaired you would pay the deductible to the shop you choose and then your insurance will cover the rest.

What if you are not at fault though? Why should you have to pay your deductible!? Well that is what you purchased when you bought your policy, so if you want to use your insurance your deductible will apply. BUT if you are not at fault you have the option of going through the other person’s insurance. They would pay for all of your damage as long as it is related to the accident and they agree that you are not at fault. The other option is to go through your insurance and allow them to attempt to collect your deductible back for you, but this can take some time.

What if you are at fault? You have liability coverages on your insurance policy. Property damage liability and Bodily injury liability. They are exactly what they sound like. Property damage takes care of any property you caused damage to. It has a limit or maximum pay out, for example you might have a $25,000 limit.

If you cause $100,000 in property damage but you only have a $25,000 limit you might be responsible for the $75,000 your insurance doesn’t pay. This is important to think through.

There are some expensive cars on the road… and don’t forget property could include hitting a house or store front too. Some of the saddest insurance stories I have come across are cases where someone was at fault but their limits weren’t enough to cover the loss. Those people ended up in lawsuit and losing personal assets. Liability coverage is generally inexpensive for what it covers, make sure you are well protected.

Bodily injury is similar to property damage and covers people you have hurt in an accident. Same story here, make sure you have enough coverage. Your policy will likely have a limit like $100k/$300k. This means simply that it covers up to $100k per person hurt and a maximum of $300k per accident. Don’t skimp on these coverages.

Without knowing your exact situation it would be impossible for me to tell you what limits you should have on your policy. Take time to review your policy, see how much it costs to bump your limits up, for me in the past bumping my limits from $50k to $100k is usually only a few dollars per month. That is well worth the peace of mind.

What about all the other coverages out there? Here are the most common ones and what they cover. PIP or personal injury protection or medpay: this covers your medical bills if you get hurt. It covers them regardless of fault and it pays your medical bills even if someone else is at fault to you. The at fault insurance will not pay your medical bills up front in almost every case. So if you can’t afford to pay medical bills you should probably have PIP coverage. Some states require it and others do not.

Rental: This is one that makes people really upset when they don’t have it. It’s generally pretty cheap. If you have other means of transportation you don’t really need it. Also you can self-insure rental with a good emergency fund in place.

Uninsured Motorist: These coverages step in if you are hit by someone without insurance or someone who doesn’t have enough insurance. The coverages and limits are a little different state to state but they act similarly to the coverages we talked about already.

I have really bad luck in this area, my car has been hit multiple times by hit and run drivers. I’m not talking about door dings either, more like they crushed in the side doors and fled. Ugh, but I’m glad I had the coverage when I needed it.

Auto insurers sell all sorts of other coverages but these are the big ones. Make sure you know what coverage you have. Take some time once a year to review your policy, the limits, and the coverages. If you haven’t done this in a while do it right now. Most carriers allow you to view everything online.

I agree insurance is boring, but it’s not so boring when you are well protected after an accident. I am here to help because I have seen the worst case scenarios unfold. Don’t let that be you. Protect your future to ensure that you can win with your money!

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