One of the most commonly asked questions in financial services – and also one that creates tremendous confusion among both clients and advisors alike. As a family’s wealth grows, does this prescribe they need more life insurance or less?
One point of view
I used to know an extremely successful life insurance agent who argued several points such as:
1. The younger you are, the more life insurance you need
2. The older you are, the more life insurance you need
3. The wealthier you are, the more life insurance you need
4. If money is short and you need to protect it, life insurance is a great solution
You can see where this is going. In this guy’s mind, virtually any variable meant you should buy more life insurance. Go figure….
Another point of view
Life insurance is very costly. Only buy the minimum.
We’ve probably all heard this one before as well.
The math is presented
I have seen countless presentations and spreadsheets on the benefits, or lack thereof, of utilizing life insurance. You have to approach these calculation with skepticism. Tweaking just a couple of variables can make long term projections come out completely different.
Long term spreadsheets aside, with life insurance one simple fact remains. If you die early, it will usually pencil out to a high rate of return. If you live for a long time, it will pencil out to a low rate of return. Likewise, annuities (basically the reverse of life insurance) pencil out in the opposite fashion.
Beyond the math
In complex situations like this, it can be helpful to step way, way back from the “numbers” and think about what is really going on.
When you buy life insurance or an annuity, you are agreeing to give the insurance company your money. The insurance company also collects other people’s money. This gives them deep pockets so they can cover their customers’ risks and keep some of the money for themselves.
Another way to look at this – the wealthy collecting a long-term profit for the service of covering the shorter-term financial risks of the less wealthy.
In this way, life insurance companies actually divide society into three economic classes:
1. Those who don’t have enough savings for any insurance or investments.
2. Those who have some money, but are willing to sacrifice some return in order to have some of their financial risks covered. These people buy life insurance and annuities.
3. Those who own the insurance company itself.
The goal for most families is to graduate from class 2 to class 3. This is what I help families achieve.
The aim of most insurance companies, however, is to take an individual wealthy enough to be in class 3, and convince them to be part of class 2.
It reminds me of a Chris Rock joke (click here). “Shaq is rich, but the guy who signs Shaq’s check – he’s wealthy.” Stated in the insurance context, “The guy with a big life insurance policy is rich. The guy who owns the company that cuts the insurance checks – he’s wealthy.”
Wrapping this up
I’m not saying insurance is all bad or that the wealthy should never use insurance. There are always personal circumstances that have to be considered.
But if you are already wealthy and life insurance (or annuities) are being pushed on you, remember there is another side of that coin. You can buy stock and actually own the insurance company itself. With that in mind, on which side of this transaction would you like to be?
Photo by aisletwentytwo