Thinking About “Investing” In Whole Life Insurance? Don’t!

Last month, I put out a request on social media for topic suggestions to write about on this blog.  The most common request I received, both via email and comments on my request, had to do with life insurance.

And for good reason.  Life insurance companies dominate the airwaves with ads, and sponsor sporting events across the country.  If you’ve ever been to a networking event or business mixer, odds are you bumped into multiple life insurance sales reps.  Insurance is a topic that seems to come up everywhere.  And it’s not something that most people were ever taught about in school.

There’s a lot of information out there about life insurance. A good chunk of it, in my opinion, is misleading, at best.  The good news is that if you do a little homework, this is a relatively straightforward issue for most people.

Unless you are in the top 1% of earners and are nearing retirement, run like hell if someone tries to sell you a whole or permanent life insurance policy.  For millennials, buy term insurance or don’t buy at all.

You Need Life Insurance If…

Let’s keep this simple.  If you just graduated college and aren’t married, you probably don’t need life insurance at all.

You need life insurance when you…

  • Get married
  • Have a child
  • Buy a house and take out a mortgage
  • Generally, you need life insurance when you have a financial obligation that would still need to be met if you were to pass away unexpectedly

In other words, you need life insurance when there is actually a need for you to, you know, have insurance.

This seems inherently obvious.  But, as we’ll get to in a bit, if you sit down to meet with a life insurance salesperson, they’ll likely primarily emphasize the investment benefits of a whole or permament life insurance policy, rather than the insurance itself.  I can’t say it enough, my advice to you when that happens: run like hell.

Types of Insurance

One more thing we need to run through before we talk about why I dislike most life insurance products.  And that is, the difference between the types of insurance itself.

Term Insurance

Term Insurance is insurance that is good for a set length of time, typically from 10 – 30 years.  If you pass away before the insurance expires, your family gets the specified amount of the policy.  If you pass away after the insurance expires, no benefit is paid out upon your death.  Think of it as “renting” life insurance for a set period of time.

In almost all cases, this is the type of insurance I recommend to people who need life insurance.  The reasons are numerous:

  • It’s much less expensive than other types of insurance policies
  • It’s temporary. Life insurance salespeople often argue that the temporary nature of term insurance is a reason not to get it. They couldn’t be more wrong.  Very few people need life insurance once they hit retirement.  Let’s walk through the reasons I specified as reasons to get insurance above:
    • You get married- you need insurance to replace your income if you were to pass away unexpectedly. Once you hit retirement, your income typically goes to zero anyway.  So, get a term insurance policy that lasts until retirement, and expires afterward.  Typically, there’s no need to pay for insurance beyond that point.
    • You have a child- you need insurance to cover the cost of raising your child and to pay for college. So, get a 20-25 year term insurance policy when your child is born to cover that amount.
    • You take out a mortgage- you need insurance to make sure the mortgage is taken care of if you were to die. So, get a term insurance policy that matches the life of the mortgage.
    • Generally, you need life insurance when you have any sort of financial obligation that would still need to be met if you were to pass away unexpectedly- get a term insurance policy that matches the length of the commitment.

Think of it this way: you get health insurance to make sure that you are adequately protected in the event something bad were to happen to you.  Life insurance should work the same way.  Quite frankly, if the money is “wasted” in that you never actually have to “use” either your life or health insurance policy, that’s a good thing!

Permanent Insurance

Permanent Insurance, of which Whole Life Insurance is the most common type, does not expire.  These types of insurance policies (of which there are numerous variations that work slightly differently) will automatically pay a death benefit when you die, and they do not expire as long as you continue to pay the premiums.

When you hear people refer to “investing” in life insurance, this is the type of policy they are referring to.  The premiums you pay are invested by the insurance company, who in turn passes on a portion of the resulting gains to you in the form of a “cash value”.  This cash value is an amount of money you can either take out of the policy to pay for [insert financial need here], or kept in the policy and paid out as a life insurance benefit upon your death.

See the problem here?  Keep reading…

Why I Hate Permanent/Whole Life Insurance Policies

Let me count the ways…

  • They’re expensive. Premiums for whole life policies can be significantly higher than term insurance policies.  I’ve seen quotes for whole life insurance be 10x higher than quotes for 30 year term insurance for the same person.
  • They’re complicated. Go back and re-read the paragraphs I wrote summarizing permanent insurance policies above. “Cash value”.  “Death benefit”.  Quite frankly, it was really freaking hard for me to summarize permanent life insurance policies in just a couple paragraphs, and I still ended up using technical terms.  Not to mention I didn’t get into any of the details.  These policies are incredibly complex, and it can be very easy for salespeople to highlight the alleged benefits of the policies and gloss over the complicated details.
  • Life Insurance is an inefficient way to invest: If I were to ask you to come up with a good way for you to invest your money, your answer would probably be a variant of “put my money into the stock market” or “buy a few stocks or bonds”. What you probably wouldn’t come up is the following: “I think it would be a great idea to pay my money to an insurance company, have them invest the money I give them into the stock market, that investment will make money, then the insurance company will take the profits from the investment, keep a portion for themselves (since, after all, they’re in business to make money), and then give me the remaining share”.  Your gut is probably telling you that that last sentence is insane.  Your gut is right.
  • It’s hard to take money out of life insurance: If you were to ever need to access money you have invested in the stock market, almost all of the time you’re able to get your money into your checking account within 24 hours. Money that’s “invested” in a whole life policy is much less liquid- meaning that it’s much harder to take money out of the policy than it would be for other investments.
  • “Guaranteed” does not equal “Better”: Whole life insurance generally has a “guaranteed” investment return associated with the cash value of the policy. Very conservative investors tend to highlight this as the primary reason to invest in a life insurance policy.  The only issue?  These guaranteed returns are usually way below the historical average for investments in the market.  Again, investing in life insurance is just a terribly inefficient way to invest.
  • Hidden Fees and Commissions: Finally, there are a lot of hidden fees and charges baked into the premiums you pay for whole life insurance. And, they can be huge.  Frequently, the life insurance salesperson who tries to sell you whole life insurance gets paid 100% of your premium for the first year you buy the policy, and a good cut of the premium each year thereafter. No wonder these life insurance reps almost always recommend whole life insurance over term insurance!  Simply put, life insurance salespeople are paid an astronomical amount to push whole life policies, even when term life insurance may be more appropriate.  Just say no.
So, What to Do?

If you need life insurance, find a fee-only insurance agency or financial planner to discuss appropriate coverage amounts.  “Fee-only” generally means that the advisor isn’t paid by commission and charges a level fee regardless of what you buy.  This helps to put you and the advisor on the same side of the table and removes conflicts of interest, to allow you to get the best advice possible.

An advisor who charges a flat fee is able to analyze your situation and get paid the same amount regardless of what type of policy they recommend.

And whatever you do, look for low-fee, low-cost term insurance first when you are considering life insurance.  If you want to invest, invest in the stock and bond market.  Use your life insurance for just that- life insurance.  Your wallet will thank you!

How to Manage Your Finances When You Don’t Have Enough Time

I started my career as a financial consultant with PwC, one of the Big 4 accounting firms.  While my career ultimately took me down a different path, I have nothing but fond memories of my time there.

At any of the Big 4 firms, you work hard.  Providing excellent service to your clients comes with long hours, sometimes for weeks and months at a time.  And for those in the accounting and tax side of the business, “Busy Season” – the time of year leading up to audit and tax filing deadlines – are exponentially more grueling.  During Busy Season, a 70 hour work week might be considered relatively light for the time of year.

Working long hours over six or seven days of the week isn’t unique to the Big 4 firms, of course.  But, given that we are heading into the Big 4 busy season, I wanted to take a look at strategies for keeping your finances on track when barely have any time to do anything other than work.  And to that point- I’ll try to keep this article as succinct as possible.  After all, if this is in any way relevant to you, you’ve probably got to get back to work!

Set Goals Ahead of Time

If you’ve ever had a few weeks or months when work has been all-consuming, you know how easy it is to not make time to think about your finances.  By the time the dust has settled and you check your bank accounts for the first time in a few months, you realize that you haven’t made any progress toward your goals.

There are ways to avoid this.  And it begins by setting goals for yourself before busy season starts.  Ask yourself, “What’s something that I could achieve with relatively little time involved that would make me feel great about the state of my finances three months from now?”.  For example, “I want to save an extra $50/week in the next two months because my firm is paying for dinner every day”.

Setting these goals up front is the best way to make sure you actually make progress.

Let’s take a look at some tips for how to manage these goals around certain financial topics:

Cash Flow and Budgeting
  • Set calendar alarms on relevant dates as reminders to pay the bills and credit cards every month. When you’re swamped with work, it can be easy to miss a rent or credit card payment.  Set up alarms for yourself in advance  to make sure you don’t forget!
  • Utilize software and apps to their fullest potential. Whether it’s free app like Mint or a more comprehensive solution provided by your financial planner, set up a system to automatically track your spending and provide alerts to notify you if you’re spending more than you planned in a particular category.  Plus, having an easy way to view all of the pieces of your financial picture on your phone can’t be beat when you’re busy.
  • Know your budget. As annoying or boring as it may be, you have to know your numbers. Know how much you can afford to eat out every month.  Know how much transportation will cost you.  I’m not one of these people who tells you that you need to give up your $4 cup of coffee a few times a week or you’ll never be able to retire.  Get real.  Focus on the large categories in your budget (rent, transportation, and food), but monitor for irregular expenses and big chunks of your budget going to small purchases (the ones that really add up each month).
Savings
  • Automate, automate, automate. In this day and age, there’s no reason for your saving habits to rely on you remembering to manually transfer money from your checking to your savings accounts each month.  Based on your budget, take 10 minutes to set up your direct deposit to put a set amount per paycheck directly into your savings account.  Or, set your savings account to automatically debit your checking account each month.  In addition to saving time, it’s a great way to increase your chance of actually hitting your savings goals.
  • Multiple savings accounts are your friend. I encourage all of my clients to have multiple savings accounts for each of their goals.  It’s easier to track your progress toward building an emergency fund, saving for a vacation, money for a down payment on a home, etc. if you have a dedicated account for each of them!
  • Block off ten minutes each month to do a quick check in on your goals. And yes, I literally mean that you should send a meeting invite to yourself and have the time blocked off on your calendar.  Have you ever noticed that even when we have more important things to get done on any given day, we still tend to show up for any meetings that are on our calendar, even if they’re about a low priority task?  Why is that?  Because we tend to prioritize things that are set in stone in our calendar.  Do the same for your finances, a little at a time every month, to review your progress.  It doesn’t have to take long, but blocking off ten minutes to review your budget and savings progress can work wonders.
Investing
  • Review and rebalance before busy season begins. I know better than to try to schedule meetings with my clients who work for Big 4 firms from mid January to April. So, we sit down in December instead and make any adjustments to their investments at that time.  You can do the same thing on your own, particularly if you are a proponent of passive investing.  Rebalance your accounts before busy season starts, and when it ends.  If you have a well diversified portfolio of low cost ETFs or index funds, you (usually) can get away with not checking your accounts regularly when things are busy if you take care of them before and after.
  • Consider stop loss orders… at your own risk. If you are the type who can’t bear a drop in your investments and are particularly nervous about monitoring them less frequently than usual when you’re busy, stop loss orders may be a potential solution for you.

For those unfamiliar- stop loss orders essentially allow you to automatically sell your investments once they fall below a certain price.  If the stock in question never falls to that price point, you keep your investments. As such, they can be a good way to limit your losses if the market plunges.

However, be warned- this is not generally a strategy I recommend for busy people.  While stop loss order can be effective in selling your investments before the market plunges, if you aren’t paying attention to when to buy back into the stock, you can end up losing – big.  For example, say that from January to May of this year, the S&P 500 Index falls 15% from January to February, and then rises 20% from February to May.  If you have a stop loss order to sell your S&P 500 ETF if it falls 5%, you would automatically sell the S&P fund once it drops 5%.  This essentially saves yourself 10%… at the time.  But, if you don’t check your account until May, you wouldn’t buy back in when the market is low, and you would lose out on the 20% growth.

So, stop loss orders could be an option for you- but be careful with them.

Delegate

Managing all of these things on your own is doable, but it is still hard work.  There’s nothing wrong with delegating some of these tasks to a professional if you don’t have time to do them!

Anything from a traditional asset manager to a robo-advisor (or both!) can handle your investments for you when you’re busy.  That’s right, you just read a financial planner recommending you to use a robo-advisor.  I do things a little differently than most planners in the industry.

A financial planner can also help you monitor your spending and budget, progress against your goals, and keep you up to date on market conditions.  If you think that would be helpful to help keep yourself on track, we should talk.

Post Busy Season

After busy season settles down, block off a full hour to take stock of where you’re at. Review your progress against the goals you set for yourself before busy season.  Correct any issues you’ve identified.  And consider how you might approach next year’s busy season similarly, or what changes you will make.

Rising Interest Rates and Student Loans- What’s the Impact?

Interest rates are going up.  In December 2016, the Federal Reserve announced their decision to raise interest rates by .25%.  Not only that, but the Fed also indicated that they intend to raise rates three times in 2017.

For most student loan borrowers, this will not make a huge impact on your payments.  However, it’s critical to review your loans for any privately-issued student loans that have variable interest rates.  In a rising interest rate environment, variable interest rates translate into owing more on your loans.

Make a plan to address this gap on your own, or schedule a free consultation here.  It’s your call.  But if you have variable rate loans, the time to revisit your student loan payment plan is now.

Generally, Rising Interest Rates are Good

The Fed’s decision to raise rates, broadly speaking, is a good thing.  The Federal Reserve raises interest rates when the economy is gaining strength.  Rates have been held at historically extreme lows ever since the recession in 2008-2009.  Increasing them is a great sign that unemployment is low, jobs and wages are expected to grow, and that we are finally getting back on course following an unusually slow recovery from the recession.

While the Fed raises interest rates when the economy is good, the flip side is also true.  They cut interest rates when the economy is shrinking to encourage consumer spending. We should be cheering rising interest rates now to allow for this to happen later.  When the economy does inevitably turn south again sometime in the future, the Fed needs to be able to cut interest rates to help spur growth.

Quite frankly, the Fed kept rates so historically low for the better part of the past decade that many experts were concerned about the possibility that if another recession were to strike soon, the Fed wouldn’t be able to cut rates any lower.  Raising the rates now, while the economy is growing, will protect us in the future.

And finally, higher interest rates will (eventually) mean higher interest rates in your savings accounts.  While it’s true that the first rates to go up will be on loans and mortgages, eventually the bump in interest rates will carry over to your savings.  If you’re sick of earning next to nothing in your bank accounts, there’s some good news ahead in the coming months!

…But Not for New Borrowers or People with Variable Rate Loans

Of course, just because something is good for the economy as a whole, doesn’t mean it will necessarily benefit you.  And rising rates are a great example of that.

For starters, people who take out new mortgages or student loans will have higher rates in 2017 than if they had borrowed in 2016, assuming the Fed proceeds as advertised.  New loans are issued in accordace with the new interest rates.  So, borrowing the same amount of money will cost more this year than it would have if you borrowed last year.

But more importantly for this article, borrowers who have variable rate student loans will be impacted as well.  When I say “variable rate” loans, I am referring to student loans that have their interest rates tied to the current market rate.  As in, a loan whose interest rate will fluctuate over time depending on decisions made by the Fed.

Most student loans, and all loans backed by the federal government, are fixed-rate loans.  For these loans, the decision by the Fed will have no impact. (Although, as previously stated, a new federal student loan borrowed in 2017 will have a higher rate than one borrowed in 2016, all else equal).

But certain privately-backed student loans are issued with variable interest rates.  And if you have these loans, you will be paying more in interest as a result of the Fed’s decision.

There’s no rhyme or reason as to whether your private student loans are fixed or variable rate.  You need to grab a copy of your statement, or Master Promissory Note, and check.  I’m here to help with this step, if you need it.  But you absolutely have to check to determine whether you are impacted.

What to Do If You Have a Variable Rate Loan

Ultimately, there’s no one-size-fits-all solution here.  But there are certain options you have to address this scenario, the most common of which is to refinance the loans.

Through refinancing, you are in essence exchanging your current loan for a new one.  You still owe the same amount left on the loan, but the issuer who lends you the new loan will subject you to different terms than your previous lender.  This can include a different loan term and repayment options, but the key one here is that your loan will have a new interest rate.

This new rate largely depends on your credit score.  Has your credit score improved since you originally took out your student loans?  Then great news, you can (probably) qualify for a better interest rate.  What’s more, you could qualify for a fixed interest rate, rather than a variable rate.

Which means, through refinancing your loans into a new, fixed rate loan, you’ll no longer be subjected to the rising interest rates that the Federal Reserve has indicated are coming in 2017.

Of course, things change.  If economic conditions change later this year, the Fed could decide to hold off on the raise.  But all signs at the moment point to multiple interest rate increases this year.  If you have variable rate loans, the time to review your plan is now.

If you want more information on whether this might make sense for you, let’s schedule a free consultation.

WARNING

This is critical. Be very careful in evaluating your options before deciding to refinance your loans.

For the most part, refinancing privately-issued student loans won’t do you major harm.  But keep your overall goals when it comes to your loans (are you trying to pay them off as quickly as possible, or minimize your monthly payments?) before you decide to refinance.  Review the new terms for the refinanced loan carefully before you accept the offer.

But most importantly, think two, three, four, five times before refinancing any federal student loans that you have!  While you may be able to get lower interest rates on private loans if you have a great credit score, keep in mind that refinanced federal loans in most cases will lose all the flexible benefits associated with them.  For example, refinanced student loans aren’t eligible for Public Sector Loan Forgiveness or for the various income repayment plans that are available for federal loans.

In short, it can be a big mistake for certain borrowers to refinance.  Student loans are much more complicated than they appear at first glance.  If you want a second opinion, reach out and let’s talk.