Payday loans of the middle class

 

 

 

I spent 53 minutes on the phone yesterday talking to the nicest life insurance agent who was wanting me to start selling his companies life insurance products.  He works for one of the largest life insurance companies in the U.S.   It was an interesting conversation because he whole heartedly believes in whole life, universal life, and variable universal life insurance products because there is a semblance of investing built into the policy and he’s been fed the party line through his training to believe that this is a great product.  It’s NOT!

Whole life, universal life, and variable universal life are payday loans of the middle class.  He was giving me an example of a 64 year old lady that he was able to recently “save her some money”.  He took her monthly payments on her life insurance from $290/month to $250/month.  Sounds good, right?  I asked what the face value of the life insurance policy was and he informed me it was $190,000.

Life insurance is a tool that should be used replace an income for people dependent on it.  In this example above, the lady had a grown daughter and 2 grandkids that were dependent on her income.  Starting to sound like a country song, isn’t it?

I’m not a licensed financial advisor so I’m not allowed to give detailed investment advice to anyone so I won’t.  Using a simple financial calculator I’ve had on my desk for 15 years, I can tell you that if someone were to invest $250/month for 25 years earning a modest return of 10%, you would have $331,000 (the average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%).  Sounds a little better than the $190,000 mentioned above right?

Assuming the client in this example started investing in this life insurance policy at age 55, she would have more than the face value of the policy after 20 years of investing using the assumptions made above.  Life insurance companies have actuarial tables they use to mathematically calculate the anticipated life expectancy of a person given their health and family medical history.  Life insurance companies have large buildings just like the casinos do in Vegas.  Who do you think is doing better math?  The people with the big buildings or the average Joe consumer in America with lots of debt and no savings?

The average new car payment in the U.S. is $471 according to Experian.  Again, doing simple math, if the average person has a car payment most of their life, they will miss out on some serious money that could have been used for retirement.

One more calculation just to be fancy – -Put that $471/month car payment in an investment from the age 25 to 65 earning 10% would equate to $2.97 million dollars.  You don’t have to invest much to be a millionaire, but you have to start!  If this number is half wrong, you’ll still have $1.5 million.

The point of this ramble is that you should do your investing outside of a life insurance policy.  Term life insurance policies can be set up for 5-30 year terms and are a great way to supplement lost income due to the untimely passing of a loved one.

Let’s all work on getting out of debt so we’re not making the banks rich and then start saving so our lives doesn’t sound like a country song.