My Love/Hate Relationship with Insurance
Insurance is neither inherently good nor inherently evil, but it can be used for either one.
Personally, I have a lot of insurance and I’m incredibly grateful for it. But as a financial planner, I also see lots of people who have been sold inappropriate policies for too much money, and that side of it never ceases to frustrate me.
Insurance is a complicated subject, and new parents especially find themselves with a lot of new needs and new questions about the kinds of coverage they should and shouldn’t get.
To help you answer those questions, I’m making April insurance month on the blog. We’re going to be talking about what insurance is and isn’t good for, what types of insurance to consider, and some common pitfalls to avoid.
My goal is to help you protect your family without spending unnecessary money on insurance you don’t need.
Why I love insurance
My top financial goal is making sure that my wife and boys always have the financial resources they need, no matter what happens to me.
That’s a big reason why I prioritize building up savings like my emergency fund and my irregular expense accounts. Those basic protections have helped to keep life as normal as possible, even in some difficult circumstances.
But the reality is that there are certain things that could happen that I don’t yet have the savings to handle on my own. And it’s for exactly those kinds of situations that insurance is such a beautiful thing.
- I don’t currently have enough money in savings to replace my income if I died. Instead, my life insurance would be there to provide for my family.
- I don’t have enough money in savings to replace my income and pay the medical bills if health issues kept me out of work for an extended period of time. But my long-term disability insurance would provide a monthly check to pay the bills.
- I don’t have enough money in savings to pay the damages if I injured someone in a car accident and they were out of work for an extended period of time. So I have liability insurance to pay the damages instead.
- I don’t have enough money in savings to pay for 100% of the treatment necessary for certain chronic medical conditions like cancer or diabetes. Health insurance would ensure that my family got all the care it needed.
When it comes down to it, insurance is really the only way that I can provide my family with the kind of financial security it deserves.
And when I look at it that way, I’m more than happy to pay the premiums.
Why I hate insurance
With all of that said, I get really frustrated with insurance sometimes. And most of it has to do with the way that it’s sold.
See, the insurance industry is a for-profit business with no legal obligation to act in the best interests of its customers, and over the years they’ve come up with a number of ways to get you to pay more money than you have to for coverage you don’t need.
One of the biggest culprits here is whole life insurance. It’s a type of life insurance policy that’s often sold as a can’t-miss investment opportunity when the truth is that in most cases it’s actually an incredibly poor use of money (though it does pay the agent a big commission). The same usually goes for similar products like variable life insurance, universal life insurance, equity-indexed annuities and the like.
Another trick that agents like to pull is selling you more coverage than you actually need. And again, life insurance is a big culprit here.
A common sales pitch you’ll hear from your insurance agent is that term life insurance is a waste of money because it rarely pays out. This is used as an excuse to once again push whole life insurance, which they claim pays out 100% of the time.
Let’s ignore for a second the fact that whole life insurance DOESN’T actually pay out 100% of the time. We can even ignore the fact that life insurance not paying out is a GOOD thing (you didn’t die young!).
The simple truth is that most people only need life insurance for a temporary period of time, usually until the kids are out of school, after which the coverage is unnecessary. So why are they being sold insurance that lasts forever?
I hate seeing people who are just trying to make the best decisions for their family carrying around insurance policies they don’t need because some insurance agent wanted a bigger commission. After all, those premium payments could be used to actually help these people reach some of their most important goals.
So how can you prevent something like that from happening to you? By understanding what insurance is and isn’t good for.
Here’s what insurance is good for
Basically, it all comes down to this:
- Insurance is great when you purposefully buy it to protect against specific risks.
- Insurance can be a waste of money when it’s sold to you by an insurance agent who is more interested in earning a commission than helping you out.
Which means that in order to get the right insurance and avoid the wrong insurance, you have to know what it is and isn’t good for.
So here’s a quick rule of thumb for you. Actually, this is more than a rule of thumb. This is the exact rule they teach aspiring financial planners working towards the CERTIFIED FINANCIAL PLANNERTM certification.
Insurance is good for things that meet all three of the following criteria:
- Would result in a big financial loss
- Is unlikely to happen
- You actually need the money
Big financial loss – Death or long-term disability are good examples here because it’s virtually impossible to have the savings to handle that on your own when you’re starting out. On the other hand, something like a broken cell phone would be much better handled by savings.
Unlikely to happen – Insurance is priced partially based on how likely you are to have a claim. When something is highly likely to happen, insurance is going to be less cost-effective than either having the money in savings or avoiding the risk altogether.
Need the money – One of the reasons I decided to cancel the collision and comprehensive coverage on my old car was that I had the money to handle the damages if needed. Similarly, if you’ve saved well over the years and your kids are out of the house, you probably no longer have a need for life insurance. If the insurance proceeds would no longer be necessary, it doesn’t really make sense to keep paying for the coverage.
If something meets all three of the criteria above, it’s probably a good idea to look for insurance coverage. If not, you can skip the insurance.
A tool is only as good as its user
In the end, insurance is neither good nor bad. It’s simply one tool of many that can potentially help you reach your financial goals.
But when it is done right, it’s one of the most valuable tools out there.
Next week, we’ll go into more detail on the four types of insurance that most new parents should have so that you know exactly what kinds of policies you should be considering.
I can’t wait for the future post about the insurance.
Me too! Coming next Tuesday…
Matt, I think you seem like a nice guy, but please don’t generalize insurance and what it does for people.
Whole life works, when it’s structured right, and it’s from the right company. I never tell them it’s investment, but there are plenty of third party articles, including FORBES, which tell of the performance of whole life insurance, from the right companies.
Why else would we invite our clients to sit down EVERY YEAR and review their policies?
If we were simply trying to lure them into buying something they don’t need, why in the world would we want to sit in front of them year after year reviewing how their policies performed the previous year?
Why would our company have the highest retention of clients if they saw year after year that
their policies were not doing what they were meant to do?
I see a lot of blogs getting heavy traffic because they bash whole life, and it’s so easy to jump on that bandwagon.
Let me ask you honestly, which of your blog posts have had the most hits? The most comments?
Please don’t put information out there that is not fully true, and fully helpful.
We don’t just seek commissions, but we are paid commissions because it’s a tough business, and if we were paid base salaries how many of us would actually go through the grind of prospecting and informing people about what our company really does?
What do you know about mutuality and financial strength?
Maybe you will say that it’s just sales pitches, but our company is built on that notion,
and therefore we have clients who stay with us year after year and buy more policies for their family members. We act with integrity and honesty. Sure, there are dishonest agents out there, but there are dishonest teachers, lawyers, and so on.
Truly, according to what you say, one bad apple spoils the bunch.
Hi John. Thank you for taking the time to comment. I do agree with your overall point that there are good insurance agents and bad ones, and that certainly not all are bad.
But from my experience, I see people again and again being sold whole life insurance policies that they don’t need, when there are other options available to them that almost any financial professional who doesn’t have a stake in the sale would agree are are likely to be better. I wish that wasn’t the case, but I see it far too often to ignore.
So my goal here is to protect people from being sold a product that in the vast majority of cases is not appropriate for them and will not be the best use of their money. There are exceptions to every rule and I am well aware that exceptions exist here too. But most people will not find themselves in the types of situations that meet those exceptions.
I work in insurance and have learned a good deal from coursework and experience (personally and professionally). I agree that every tool has a purpose and that learning how to use those tools appropriately is the bigger issue. I strive to educate and inform myself as well as customers so that they can make the best decision possible. I grant you that numbers and goals do drive insurance, but that is true of every industry out there. I understand that you aren’t trying to bash any aspect particularly but I worry that people ready blogs and use them to justify their own bias. At my company, we advocate that certain tools meet certain needs and sometimes you need to create a “toolkit” of sorts. Stacking coverages based on the needs and time frame helps to keep families from paying more than they should while getting the coverage they need. As is commonly said, we are all one pay check away from poverty. Most American families could not tolerate a major financial hit. Whole life is meant as final expense protection and can be used to leave a legacy if you choose. Term is meant for those things that hopefully end, like a mortgage, paying off debt and college expenses. I didn’t see anywhere in your article where you attempted to rightly place whole life or give context, rather you advocated for people NOT to get it because there are other options. You did not give helpful situations for what kinds of insurance would meet what kinds of needs. This does a disservice to those who have whole life and should keep it, but maybe adjust the policy limit to fit the family needs. Most American families are underinsured and should not just get rid of what they have. If you are reading this, please make time to go to your agent and review what you have. COMMUNICATE what is going on in life, your needs and changes so that they can adapt what you have to your current situation. Most people are mad at insurance simply because they don’t understand it and have not made the time to sit with their agent so that they can be well informed. Stop looking to the internet and start having those conversations with the professionals. Remember, insurance agents are out there living lives, caring for their own families and have goals too. They understand what you are dealing with and really do care and seek to do what is best for you and your family.
Thanks for your input Andrea. I agree that people shouldn’t make rash decisions based on reading a post or two on the internet. For the record though, I am a financial planner myself and not just some random person on the internet. And I have written a detailed guide to life insurance specifically, which you can read here: The New Parent’s Guide to Life Insurance.
In addition to finding a good, honest, and independent insurance agent, which I agree can be invaluable, I would encourage people looking for objective advice in the context of their entire financial situation to seek out a fee-only financial planner. These are professionals whose financial conflicts of interest are minimized, and who do not have a financial incentive to sell insurance, and are therefore often in a better position to provide objective guidance. Because while there are plenty of good insurance agents, I have sadly seen too many cases where the agent is much more interested in protecting his or her book of business than in providing good advice.