Friends Don't Let Friends Buy Whole Life Insurance

When you graduated from college, do you remember when old 'friends' who had gotten jobs with insurance companies began trying to set up lunch to 'catch up' with you all of the sudden?

If you took them up on that offer, you quickly realized that lunch wasn't ending unless you bought some insurance, gave them a list of your family and friends or you awkwardly ended the lunch when they wouldn't take no for an answer. I'm writing this post to keep you from making (or to consider reversing) an expensive mistake many make in their early working years. 

I was recently sitting down with a prospective client to learn more about her situation, see what kind of financial help she was looking for and to see if we were a good fit.

Not long into our conversation she mentioned to me that she had a “friend” that had helped her with her finances to this point. She said they had talked about a budget and her 401k and that she was all set with financial planning. This same “friend”, she went on, had helped her purchase a life insurance policy with some great “investments” inside it.

This young woman (33 years old) was not married and had no kids. If something happened to her, there wasn’t anyone counting on her for support. She had some student debt that would have been wiped clean if something would have happened to her, so no need to have insurance for that. She wasn’t even contributing the max to her 401k, so it wasn’t like she was looking for places to save extra cash. I asked why she needed the life insurance. She said that she really didn’t need or want the insurance, but the agent had told her that the “investments” in the policy were really safe and earning a great return.

Her monthly premium was about $250. She had been paying the premium for about 18 months, meaning she had contributed about $4,500. However, when she showed me her statement, the “investment” value was about $2300. The rest had gone to pay premiums for insurance she didn’t really need.  Of course, she hadn't know how to read the statement and her 'friend' certainly hadn't explained it, so she had no idea. Unfortunately, I see this often with folks who may be smart at their trade in medicine, law or business but have little formal training around finances. 

If she didn’t need or want insurance then why put money into a policy? Her desire was to invest and grow her money. Maybe the agent had told her how she could "borrow" money from the policy. I wonder if he mentioned, however, that the insurance company was going to charge her interest to “borrow” her own money?  I would contend that his only objective was to earn a commission on the policy.

Let’s recap: agent sells policy client doesn’t need or want; “investments” grow slowly; when she wants to use her own money she pays interest.  How are these agents convincing people that this is a good idea? It seems they could sell ice to eskimos. 

Life insurance companies are experts at making money. They are driven by mathematicians stacking the odds in their own favor. They are not your friends. 

There aren’t many situations when I can advocate purchasing a whole life insurance policy, especially when you’re in your 30’s or 40’s.

If a fiduciary financial planner is in an elevator with a life insurance salesman, there is one person who is legally obligated to do what’s in the best interest of the client and one person who is not. Can you figure out who’s who?

Your “friend” gets paid to sell insurance products. He’s good at it. Fiduciaries get paid to provide unbiased advice. Who do you want to work with?

I’m sick of seeing people get hosed by their “friends”.