I recently met with an ambitious 20 year old looking to make sure she was building a sound foundation for her finances. As we talked about her goals, financial situation, and savings I learned that she has been sold a whole life insurance policy–financial planning red flag #1–after meeting with a friend just getting started in the business. For those not familiar with whole life insurance, it is an expensive life insurance policy, often misrepresented as an “investment”. Whole life insurance covers the insured (person who’s life is covered) for life–well, as long as premiums are paid. Premiums are split between the cost of the insurance and a cash value, the “investment”. In the early years of the policy, the majority of the premium goes to pay for the life insurance, with the leftover going towards cash value. In the case of the young client I met with, the policy illustration she received showed that after 25 years, she still would not have earned any money on her “investment”; she would have paid more in premiums than her cash value was projected to be worth…what type of investment is that?
Whole life insurance isn’t the devil; there are some scenarios where whole life insurance works. Typically, whole life insurance is good for estate planning (i.e. insuring inheritances), and can be an option for high income earners, who have limited tax-favored savings. It’s been my experience that most Millennials don’t fit either of those scenarios, and their concerns are protecting their family, getting out from student loans, and building a foundation for their future wealth.
It may sound like I’m anti-life insurance, but I’m not, I’m a proponent of it, but as insurance–not an investment. If you have a family, life insurance is a necessity to protect your loved ones from financial distress. There are many other options for saving and investing–Roth IRAs, 401K(s), 529s, and brokerage accounts to name a few. I’ve yet to recommend a whole life policy for one of my WealthFusion™ clients. For most young families, term insurance is a better fit. In contrast to whole life insurance, term insurance covers the insured for a specific period of time, the term. Yes, the insured is giving up a lifetime of coverage, but the cost of coverage is significantly less. This savings in premiums can then be invested in lower cost investments. The savings can also be used to pay down student loans, build an emergency fund, or fund a Roth IRA.
So, why are Millennials ending up with these policies? Ignorance. Ignorance on behalf of the Millennial, and ignorance on behalf of the insurance salesperson. The old financial planning model was not built to serve Millennials–it was built to serve those with assets to invest and generate commissions (real old school), or management fees (more and more the status quo). This leaves the door open for salespeople to pose as financial advisors and sell products. I know this story all too well; I lived it. When I first started in the business I worked for an insurance based company–I had every intention on being a financial advisor. I wanted to help people prepare for the future, and I relied on the veterans at the firm to teach me how to help my clients. I was naive and trusted them, and seeing their success (see: high incomes and nice things), I wanted to emulate what they did. The training and mentorships centered around life insurance as the foundation of a financial plan, which ended up being the foundation of most of my recommendations. I remember a whole life insurance product jokingly being referred to as the “unlimited Roth”–I never heard it referred to that in a meeting, but around the water cooler it was common. I shudder when I think about those days. But, this is the way so many get their start today, and in order to earn a living, they call on their friends and pitch them what they have been taught. Not knowing any better, and wanting to help out, the friends sign up for a product they don’t want, understand, or need. There has to be a better way.
Luckily, there are financial advisors who are challenging the status quo. More financial advisors understand that Millennials want advice, and they don’t want to be sold products, and they have developed programs providing advice and planning for Millennials, regardless of income and asset levels. At my firm, I created WealthFusion™ for Millennials looking to work with a financial planner, and not a salesperson. I also joined a network of advisors who specialize in working with Millennials. The good news for Millennials is advice is out there; there are advisors that realize and understand that you are looking for help.
Insurance is an important piece to everyone’s financial plan; the key is to make sure it is used properly and fits your needs and goals. If you are a Millennial and receive a recommendation for whole life insurance, then it may be time to look for a new advisor–one who is actually going to advise you, and not just sell you stuff you don’t need.
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