Stop Apologizing For This Life Insurance Feature
I’ve got a long bucket list of the things that I want to do in my life. I’ve been very blessed and fortunate to be able to accomplish many of them, including playing Augusta, skydiving and climbing a mountain.
But one of the things that remains on my bucket list is going on national TV to have a live debate with Suze Orman or Dave Ramsey on the benefits of permanent life insurance.
The bottom line is that they are probably both way smarter than me. And the facts that they throw out about life insurance are correct.
But the reason they are far off base in their negative opinion about life insurance is because the facts they present are from a text book. They are from a lab. They’re from a classroom.
What all of you know, given the profession you’re in, is that life doesn’t happen in a text book. Human beings are irrational and make decisions based off of emotion, not logic.
In a debate with them, there are a whole list of life insurance benefits that I could bring up that they’ve never considered. But the one I am going to cover here is one that even most financial advisors don’t consider. In fact, many advisors apologize for this benefit and I think that’s a huge mistake.
The benefit that I’m referring to is the “forced savings” element of permanent life insurance.
What is Forced Savings
It’s no secret that I am a big fan of permanent life insurance. The easy argument is that I think that anyone who has someone that they love or care about needs life insurance in force when they die.
We all know the often-cited statistic that fewer than 1% of term policies ever pay a death claim. Most often the policy expires before the policy holder does.
Conversely, permanent life insurance policies that remain in force throughout a policy holders’ lifetime will pay a death benefit.
Additionally, permanent life insurance also has a cash value component. A portion of every premium payment goes towards insuring the policy holder’s life, while another portion of it goes towards building a cash value that also earns interest. This cash value can be available for the policy holder to withdraw or borrow against when they need it.
Here’s the point. When people buy permanent life insurance, they pay their premiums and it creates an environment of “forced savings.”
If there’s anything that the American people desperately need, it’s to save more money. And, they need the environment around them to create the discipline for saving that they don’t have on their own.
Consider the hypothetical example of a 35-year old married couple and imagine we were running a spreadsheet ledger for them. In one column, we show their savings using a Roth IRA that’s invested in an S&P 500 index fund that they contribute $5,000 every year from age 35 to 65.
On the other side of the ledger, they purchase a permanent life insurance policy that has a $5,000 annual premium payment over the same time period.
No matter who you look at it, or how good the particular company’s permanent life insurance policy, the Roth IRA will blow the life insurance policy away every time. This is where Suze Orman would make her case for the Roth IRA over permanent life insurance. On paper, she would be right.
But the truth is that the majority of people don’t have the discipline to contribute to the Roth IRA every year for 30 years. In fact, the median balance of IRAs for individuals in their early 50s is $31,692. Considering that, historically, the annual contribution limit on Roth IRAs has been $5,500, this is a far cry from what the average balance could or should be.
The reason why this is the case is simply because, despite people’s best intentions, life gets in the way. In the case of the 35-year old married couple, the story goes that they begin contributing to their Roth IRA. Then they have kids, buy a new house, adjust their lifestyle to their income, and they start having other major financial commitments.
As a result, the first thing that gets put on hold is the Roth IRA account because retirement seems so far off in the future. There’s no immediate penalty for putting their contributions on hold. The devastating impact of skipping 4, 5, 10 or 20 years of Roth IRA contributions aren’t felt until much later in life.
On the other hand, the life insurance policy has a loss if they stop contributing to it. They lose the death benefit. And for that simple reason, it is far more likely that at the very least that 35-year old couple thinks very carefully before stopping their premium payments and losing the death benefit.
A Greatly Misunderstood Benefit
I got into the insurance business as an advisor, 100% on commission, at 22 years old in June of 1989. In August of 1989, I bought my first life insurance policy for $100 per month. The next year, in August of 1990, I bought a second one for $150 per month.
While I went on to buy many more policies over the years, at 23 years old I was contributing $250 to life insurance. Even though I didn’t quite understand the need for it at that early age, I listened to my mentors and knew it was a smart thing to do.
In 31 years, I’m proud to say that I have never missed a policy payment. That is not a result of any special mental fortitude or ability. I am not a natural saver! I did it because it was forced savings.
Through my career as an advisor, I conducted 3,512 fact finders in which I never met a single person that contributed to a Roth IRA for 30 years with that same level of discipline.
Most financial advisors I work with either a don’t like the long-term commitment of permanent life insurance premiums or apologize for it. When I hear that I can’t help but say, “Are you kidding me? That’s the beauty of it!”
The commitment to making the payments is an unbelievable benefit of the product. When you make those premium payments, you are putting yourself in a position down the road to have access to assets when you need them – thereby providing peace of mind and financial security. That’s a gamechanger. So, stop apologizing for it and start promoting it!
And, if you run into Suze Orman or Dave Ramsey, let them know I’m ready for a debate.