When I started this Financial literacy journey and the new career path, one of the first things someone suggested was to start hitting up friends and family for business. Immediately bells and whistles start going up, red flags and alarms! I told myself that I didn’t get into this business to start making money off my family members. I refuse to solicit the people that I’m close too. Now if they approach me that a little different even then I will tread lightly and most of them I will refer to my colleague because it’s always a good idea to mix family and business right? Fast forward a few weeks later, and everything I feared was proven to be true. I was enthusiastically explaining to someone close to me (let’s call him Coleman) about my discoveries as well as my accomplishments over the past few months with my courses and since leaving teaching. This friend is the entire package: amazing husband and father, a great friend and from what I hear, he’s good at his job too. What Coleman is not, is properly educated about money, especially death, disability & retirement. Just as I was finishing a sentence about insurance, he goes off on me. Coleman starts talking about how the entire industry is a racket and that he doesn’t believe in it and that his in-laws lost most of their savings. I could have just simply changed the subject at that moment, but I couldn’t resist:
-Buddy, I’m just talking here! I’m not soliciting business, but after what you’ve just shared, you need an education because you do not understand the difference between insurance and investments. You have the right to believe what you want and put your money where you see fit. As for insurance being a racket, maybe you should have a conversation about it with our friend who lost his wife this year (She wasn’t even 40 years old).
I know many people that have the same mindset: I don’t need insurance if I die tomorrow, my mortgage will cease to exist, and my loans will disappear like magic. That’s great if the surviving spouse has the income to continue living in the home. People tend to forget that the mortgage is only 1/2 – 1/3 of the household expenses. Even with no mortgage, you’ll still have property taxes, utilities, insurance and maintenance costs. If you have an older home, the mortgage payment might seem like a deal in comparison to all the updates needed and the maintenance expenses.
Repeat after me: Insurance, Insurance, Insurance
Why the hell would you insure your vehicle, your home, your boat, your dog and not yourself? That’s just irresponsible, especially if you have dependents, loved ones who depend on your income to survive!
People are skeptical about things they do not understand, especially if it costs them money. Like I mentioned in lesson #2, CPP is the foundation of any sound financial plan. Death, disability & retirement. Unfortunately, CPP is only a piece and not the whole pie. Recommendations vary from person to person, but as a general rule (general is used loosely in this example) this is the order, that common sense should dictate.
Permanent Life Insurance or Whole life (WL): This is extremely important. Not enough millennials own WL. The younger you are, the cheaper the insurance. A good policy will cost you a minimum of $1000 a year, but the financial obligations don’t have to last forever. If structured correctly and well-funded, your accumulated cash value will eventually start to offset the cost of insurance. These policies are extremely flexible and can be tailored to suit your needs, especially if you are dealing with an independent broker. Every company offers the same basic coverage, but the options (riders) offered are significantly different between companies, as are the premiums depending on the Insurance provider. Captive agents don’t know this stuff (see lesson #8) Universal Life policies can be very complex and if not structured correctly, could be disastrous. I have yet to see a good UL policy outperform a WL unless the client had a massive cash deposit early on. I stay clear of UL and hand those off to more seasoned advisors. I prefer keeping my clients happy!
Term life Insurance: This is to cover for a specific amount of time, that’s it! The cost increases dramatically as we age that it eventually becomes unaffordable. The term insurance is ideal for loans, mortgages or to ensure income replacement of someone before retirement. After 65 years old, most people could not afford the insurance. If you plan on only purchasing this type of insurance, consider a 20 or 30-year term. It will cost you more over time, but you won’t have to prove insurability every ten years. I prefer term riders on WL policies, but again not all companies offer this option. An independent broker will know where to go!
Disability Insurance (DI): I only offer disability to those who do not have it thru their work group benefit plan or for those who are self-employed. Clients will sometimes ask for it even though they have this type of coverage, but they quickly change their minds when they hear that 99% of companies have an all sources maximum clause. Most are 66% of your salary, but I’ve seen some that were more. Either way, the insurance company doesn’t want you sitting at home collecting a check if you are well enough to work. Therefore, they will never pay 100% of your wage. Disability insurance is a must if you are the sole earner in the household and if you have dependents. Employment insurance (EI) will only cover you for 15 weeks. For extreme cases, CPP disability should only be thought off as your last resort, but for some, it’s the only life line they have.
Retirement savings: In lesson # 11, I’ll cover retirement income, but If you do not insure your golden years now, you’ll end up on the poverty-line. Trust me, both my parents lived for today and never planned for tomorrow. My father worked himself to death, and my mother is on social assistance and CPP. I can’t emphasize this enough!
CI & AD&D: So, this is where I differ from other advisors. Life is a crap shoot! People get sick, some have heart attacks and develop illness’ that can be life threatening and prevent someone from being able to earn income while they get treatment. Personally, I do not believe in critical illness (CI) or accident death & dismemberment (AD&D). If you are going to play the odds with CI, might as well just play the lottery. The return of premium is just a selling feature. They will never pay any interest on that money when they return it to you. Invest the same amount, and you’ll be insured. Even a return of policy would never amount to anywhere close to that. As for AD&D, I’m of the old school of thought: dead is dead! If you are well insured, you won’t have to pay for what-ifs! In the end, the client will decide what’s best for himself and his family. Please do not purchase CI or AD&D before life insurance or disability insurance. (I’ll refrain from insulting anyone here). Those types of policies should only be added at the end when all the other ingredients have been added to the recipe. Just like the celery stick in Caesar, it adds color and makes the drink look better, but it doesn’t add much in regards to flavor. Now bacon on the other hand…
Let’s recap. In today’s lesson I learned:
- There is a logical order to the universe
- Things cost more as we age (Have I repeated myself enough yet?)
- Not all Insurance products are created equal
- Not all blog posts from this guy are funny!
In the end, the advisor’s job is very straightforward: To provide money for his clients when they need it most (death, disability & retirement). Everything else is just the cherry on the sundae. You can research the Internet all you want, but in the end, nothing will beat the expertise of a good Financial Security Advisor. Do your children a favor and purchase a good permanent insurance policy for them while they are still very young. You can transfer ownership to them later on when they are responsible enough to handle something that important. That is, in my opinion, the very best thing you can do for your children, much more valuable than any educational savings plan that you can create and WAYYYYY cheaper!
I’ll learn ya!