Just about two years ago, my wife and I found out that we were pregnant with our first child. After a few weeks of pure excitement, we got down to the business of planning. Finances were of course at the forefront of my mind.
One of the first big things I knew we needed was life insurance. While I had a decent understanding of the general principles of life insurance, it was not something I had ever bought before and I felt a little uncertain as to how to go about it the right way. This uncertainty, combined with an anxiety to get things done quickly, led me to make some classic mistakes.
I had a guy
A little while back, I had been doing some volunteering and met a guy in the financial business. He worked for a company that provides financial advisory services, but they were affiliated with one of the major life insurance companies. He was an extremely nice and personable guy and I had enjoyed our short conversations together.
When confronted with my life insurance need, my first reaction was to call this guy. Honestly, it was the easy way out of having to do research on my own, although I rationalized it in my head as simply using a professional that I liked to help me with an important process. My wife and I set up a meeting with him, and off we were into the confusing world of a life insurance salesman.
In our initial meeting, this guy positioned himself very convincingly as a financial advisor who just happened to be able to sell life insurance. He reviewed our budget. He asked about our assets. He reviewed our existing insurance, including our auto and renter’s policies. He found some low-hanging fruit and gave us some advice that was legitimately very helpful, much of which we still use today. He also helped us fill out insurance applications and promised to get back to us when they had been reviewed and we could discuss our options.
A few weeks later we had a second meeting. He had entered our information into his company’s financial planning software that presented us with some cool graphics detailing our situation and highlighted our financial strengths and weaknesses. Not surprisingly, life insurance was an area of weakness. Interestingly, so was “tax-deferred retirement savings”. Supposedly this was because neither of us had retirement plans through our employers and so we were relying primarily on our IRAs.
At this point we started to get into some recommendations. We had both qualified for a large amount of life insurance at their highest health rating. Our guy recommended that we each get the maximum amount we had qualified for, the logic being that we were young and in good health and would likely want more soon if we didn’t get it now.
While he was able to sell us life insurance from almost any insurer working within Massachusetts, his recommended insurer was the one affiliated with his company. His reasoning was that they were consistently rated as one of the top life insurers in the country in terms of financial strength. I liked that as well, so we didn’t question his recommendation.
It was also recommended that some part of this insurance be bought in the form of whole life insurance, with the rest as term. I’ve talked before about the differences between the two, but this guy was very convincing about the whole life aspect. He had a variety of charts and statistics about the benefits of using whole life as a retirement vehicle, and I have to say that his arguments were pretty persuasive.
We left his office after that second meeting with some serious things to consider.
Our initial decisions
When my wife and I went back home and started talking things over, the biggest point of contention was whether we needed any amount of whole life insurance. I had gone into this process with a big bias against whole life insurance, but our conversations left me with some doubts. Lucky for me, I have some friends in the financial planning business who I was able to reach out to and ask for advice. They were extremely persuasive that whole life was a poor investment and that I was much better off getting term and investing the rest. So that one bullet was dodged.
But in the end, after a couple of more meetings with our guy in which he tried harder to persuade us of the value of whole life, we ended up buying two term policies for the maximum amount of insurance, with the company he represented. With our life insurance needs covered, we were free to focus on other, more fun, baby planning adventures.
Even at the time, I had some doubts that we were really doing the right thing. I didn’t feel like we were doing anything tragically wrong, but something about the whole process just didn’t feel quite right. Over a long period of time, I came to realize a few specific things about the whole process that really left me uneasy and sealed the deal in my mind that this guys was purely a life insurance salesman, not a true financial advisor.
Though he had asked us to complete a budget, we never once reviewed it with him.
Though he was recommending whole life as part of our retirement planning, he never once asked us about our current investments or our retirement plans so that he could understand how whole life may or may not fit in. He never talked about alternative ways to beef up retirement savings, such as simply saving in regular old taxable accounts.
When he talked about term insurance, he compared it to “throwing money away”. This demonstrated a complete lack of understanding of the function of insurance. Insurance is not meant to make you money. It’s meant to protect you from the devastation of rare, worst-case scenarios. This protection is what you’re buying, even if you never need it.
We never did a real needs analysis to get any kind of understanding of the amount of life insurance we actually needed. He simply sold us the highest amount that he was allowed.
Assuming we were 100% in the term insurance camp, there are plenty of good companies offering insurance at a much cheaper rate than the company he worked for.
These doubts and more built in my mind to the point that finally, about six months ago, I got off my lazy butt and decided to take matters into my own hands.
Doing life insurance my way
The first order of business was to do a full-on needs analysis. I didn’t want to rely on a rule of thumb like 10x income, and I found most online calculators to be lacking or too generic. I legitimately couldn’t find a single source that laid out step-by-step everything I needed to consider. So I borrowed from the best sources I could find and made my own process to determine our true life insurance need. Our need was still high, but it was less than the original amount we had purchased, which was going to save us money.
I did some further research to make a decision once and for all whether whole life needed to be a part of our plans. What I found was that whole life is a very poor retirement vehicle except under certain rare circumstances. It’s value primarily comes as an estate planning tool, or as a way to leave money to your children. What’s great is that any good term policy will allow you to convert all or part of it to whole life at any time during the term. This meant that I could pay the cheaper price of term now, and if at some point later I decided that I needed some amount of whole life, I could simply convert. There was no need to lock myself into an expensive contract now when I had that option.
Finally, I shopped around for an insurer that could offer me a competitive price and a strong financial rating. My favorite site for doing this is term4sale.com. I found the insurer SBLI, a company that has been around for 100 years and has strong financials. Not to mention the fact that they quoted me the lowest rate of anyone else. We went through the application process and purchased new policies that saved us over $1000 per year and kept us covered at the level we needed.
I was lucky in that I didn’t get sucked into the black financial hole of whole life insurance. But I did fall victim to trusting the financial advice of a guy I barely knew based almost entirely on his good personality. I want to be clear that I do not think he was a bad guy, just someone doing a job that wasn’t particularly aligned with my needs at the time. As a result, from the time we began our initial policies to the time we replaced them, we paid about $1600 extra in premiums.
Finances can be difficult and confusing, and when we’re presented with an unfamiliar situation we often look for the quick and easy solution. That’s exactly what I did here and it cost us. But it doesn’t help anyone to dwell on the mistake. Instead, learn from it and make a better decision the next time. Now I have the right insurance for us, and I’m able to share my experience in the hopes that others can do things right the first time.