Life insurance woes, or why people hate the financial industry
(part one of N, because I have a lot to say about the financial industry and don’t know how many posts it’ll take to get it out.)
Originally written in fall 2019, well before Covid. I have not seen my hairdresser in many, many months and it shows.
I was getting my haircut recently by a wonderful woman in her early 20s. I have knighted her my Johnathan from Queer Eye and she is as excited about the role as I am.
She knows what I do for a living and I’m happy to explain any money questions she may have. She is my Johnathan, after all. Our conversation this last haircut was one more brick in the wall of why the financial industry is synonymous with charlatan or cheat or bloodsucker. Why the ire? Because some ethically-vacant SOB sold a 23-year old, who is just scraping by already, without children or anyone dependent on her, life insurance.
With all the bills she has, dreams she wants to achieve, and no one who is dependent on her income, there is no good reason she should be spending her few and hard-earned dollars on life insurance. There is a general order to how she should be preparing for the future (emergency fund; retirement; short- , mid- , long-term goals) and only after she’s achieved all these does she even start to look at this type of product. (Come at me, bro!/financial advisors!) It’s like spending your money on a $500 watch while you’re barely able to make rent. Yes, having the time on your wrist is useful. However, you don’t need a watch. You do need a place to live.
Let’s use real numbers
At her age putting that money into retirement, it would have 40 years to grow!! She is far, far, far more likely to hit age 63 than not to (an 89% chance of getting to age 63, to be precise). Let’s say she put away $1,000 to start a fund and then put only $20 a month into it (about the cost of an insurance premium) until age 63. At 8%, she would have $94,093.54.
If someone asked you to choose between the following, which would you pick?
0.7439% chance of your family collecting $500,000 within 10 years (this is the actual 2016 statistical probability)*
89% chance of you collecting $94,093.54 in 40 years (using the SEC’s calculator)
Yeah. #I’llTakeThe89PercentChanceThankYouVeryMuch
Meanwhile she isn’t putting away anything towards retirement and I don’t know if she has an emergency savings worth 3 -6 months of needs.
But, but, but!
Oh, I hear the insurance people - - even if she doesn’t have anyone dependent on her income,
1. it’s so cheap at her age, she should lock in the cost!
2. what about funeral costs?!
3. what about the cash value and tax shelter of whole life insurance?!
Yes, it is cheap at her age. It still doesn’t mean she needs the product given her situation and other, more pressing financial needs. (If she had someone she was taking care of, yes, then she needs term life insurance. But she doesn’t.) It is extremely unlikely she will die so young, that’s why it’s cheap. The insurance company knows that, of all the 23-year-old women they have, only a teeny, tiny portion will die. The insurance company will, most likely, earn more from her than they’ll ever be required to pay out to her beneficiaries. They have professional mathematicians and statisticians; mountains of life-expectancy data; and very sophisticated calculations to know exactly how much they need to extract from you so that they are making more from you than you are paying in. If insurance companies were paying out more than they were getting in, they would be out of business.
IF she gets a solid financial foundation under her in her twenties, higher rates in her thirties will be less burdensome than lower rates in her twenties. Hell, if she puts away $10K a year towards retirement (unlikely but go with me here) every year in her twenties, she wouldn’t have to put any more away for retirement. That’s $10K EXTRA she’d have per year in her thirties. She can handle the extra cost at that point.
She can stash away the money she would be spending on a premium into any other savings vehicle, like a Roth IRA, to cover funeral costs. Which - oh, hey, yeah - if she doesn’t die she’ll get in her pocket after 40 years of accruing value. If she were to die five years after she opened a Roth, her beneficiaries could have all the money, tax-free, in one lump sum. If she dies beforehand, they only pay taxes on the earnings. And again, there is only a teeny, tiny chance this will happen.
Are you freaking kidding me trying to sell whole life insurance to someone in her financial position?! You’re planning her money as if she were rich. She is not. The likelihood of her car needing +$1,000 worth of work in the next few years is almost guaranteed. The likelihood of her getting into a tax bracket where an insurance product as investment vehicle makes sense in the next few years is almost nil. You are therefore not acting in her best interest. You unmitigated scoundrel.**
I sound rather anti-life insurance. I’m actually not. Some people NEED to have life insurance. If you have people dependent on your income and/or mountains of debt that *could* fall on loved ones (sometimes others have to pay your debt when you pass, sometimes not. See: CFPB) then you need to have life insurance! It can be a great product and has done a lot to help loved ones manage through terrible times.
Thing is, you don’t want to use it. Something very bad happened if you have to use it. Or, well, that is, you won’t be the one using it because you’ll be dead. I’ll rephrase: your family doesn’t want to use it…I hope… It kinda feels like when you pay $2,000 for an MRI. You hope nothing is found, but part of you is also annoyed that you spent $2,000 to find nothing.
Whatever the case, insurance salespeople, please look at the client as a whole and stop selling it to those who have greater needs to address first. Realize that you see the world through an insurance lens but it truly is impractical for many. You’re giving your industry a terrible name and potentially turning off people who genuinely should have it.
If a colleague tells you they are selling products out of line with their clients’ interests, call them out. Let them know their shady practices are immoral and will ultimately backfire.
To learn more on life insurance, please see:
https://extension2.missouri.edu/gh3422
Cheers,
Ms. Moody
A note on reading all media critically
*Be critical of all media, including me. The problem for this post is that there are too many variables and estimations, and people hate math. For clarity of message, I can’t explain it all in the text. I’m including it here to be as transparent as possible.
Most likely she would have gotten a 10- or 20-year term plan and then when it expired all the money she paid in would be gone. She would have paid $20 a month for 10 to 20 years and have nothing to show for it; whereas in the investing scenario, she would have paid $20 a month for 40 years. So it’s a bit like comparing apples to oranges.
I came up with my premiums after a bit of digging online. I’m estimating her premium would be $20 a month for a $500,000 payout. The premium depends on the company, what the policy covers, how healthy they deem her to be, how long the term is for, and what the payout is, probably other things, too. The longest her term could go is 40 years, so I could have said her family has a 11.2438% chance of getting that $500,000 payout in 40 years, but the premium would be closer to $42 a month and if she put that away in an investment account it would grow to $170,885.71 at 8% - - and who knows, it could be an average of 11% or 2%, 8% is a standard percentage to use for the American stock market. I would have to do all that for 10, 15, 20, 25, 30, 35, and 40 year terms. And explain it. Do you see how much text there is down here? NO ONE WOULD GET TO THE POINT OF THE POST. I feel far too many of you would stop reading and miss the point of the post if I bombarded you with all those numbers.
Shoot, I’d stop reading, too.
These are my calculations for the chance of death, of American women, beginning at age 23, taken from the Social Security Administrations actuarial tables, link below. For example, there is a 2.0657% chance a 23 year old woman would die at some point within the next 20 years of her life. There is a 0.7439% chance she would die in 10 years.
10 years: 0.7439%
15 years: 1.3113%
20 years: 2.0657%
25 years: 3.1841%
30 years: 4.9366%
35 years: 7.5489%
40 years: 11.2438%
I have been using the government’s actuarial tables, https://www.ssa.gov/oact/STATS/table4c6.html#fn1, and the SEC’s Compound Interest Calculator, https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator, to get my numbers. You are welcome to calculate how much the investment is worth for all those time frames. I’ve spent way too long on this already. Thank you for reading!
**This particular line from Danger Mouse, has, for some reason, locked itself in my brain and escapes whenever it can. https://en.wikipedia.org/wiki/Danger_Mouse_(1981_TV_series)