Wednesday, March 17, 2010

Whole Life VS Term

I'm going to step away from the Financial Planning dissection and write something that has been on my mind, because if I can't say what's on my mind what's the point of having a blog? I live my life to help people. I've always been good with money and I love helping people, so it's natural that I enjoy helping people with their money. Everything I recommend to my clients is something that I truly believe is best for them. That being said, I come from a securities trading background. I studied portfolio theory in school. I was the Vice President of the Investment Banking Club. I follow the markets like most people follow sports. If anyone was for the strategy of "buy term and invest the difference" it was me. Buy term and invest the difference is the strategy of getting term life insurance instead of whole life insurance, and investing the difference of the premiums usually in the stock market.

Originally I planned on going into investment banking. Then the crash of 2008 happened and the entire industry was turned upside down. I had to start looking for other options. I did research in other parts of the financial field. I went to some career fairs at universities and met a man from a company called McPartland Group Financial Services. They had a pretty balanced approach at investment and retirement planning, so I applied and got the job. When I started my training they started talking about Whole Life Insurance. I was skeptical because I felt I had better things with my money, but I was open to learn.

I wouldn't be surprised if there are more strategies for financial planning than there are financial planners. There are dozens of reasons for this, but I think the main reason is ERISA. ERISA transferred the responsibility of retirement accounts from companies and professional to individuals. Essentially it turned millions of people into investors, good and bad. Though many people do reach retirement with enough money to retire, most of the typical financial planning strategies are naturally flawed and fail. Again, there are many reasons for this. I think the biggest reason is a failure to save. Another big reason is the fact that most of these strategies encourage risk without building a foundation first.

Building your retirement is like building a really tall tower. Let's say a couple thousand of years ago someone wanted to build the tallest tower they could with limited time. They could build a really skinny structure. It would gain height very quickly, but as soon as it started gaining significant height it would be come unstable. You could only build so high without compromising the structural integrity of the tower. If you tried to build higher the tower would fall over. As the ancient Egyptians knew very well, if you wanted to build an extremely tall structure it would require an equally wide foundation.

Most financial planning, and even our culture, encourages people to start building upward without building outward. Everyone knows they need to save for retirement. With many people this knowledge is limited to a 401k. However, your retirement does not solely depend on your 401(k), and a 401(k) is not a solo instrument. Whether or not you will be able to retire successfully depends on your entire financial picture. That includes your house, insurance, car and many other things. When I talk about building up instead of out, I'm talking about your entire financial picture. You have to build a foundation for your entire financial picture.

Life insurance is part of that foundation. Not only is it a very important part of your protection, but participating whole life can be used very well as part of your savings and short-term investments. Yes you can save in a high interest savings account, but it will never beat the return on participating life insurance. And yes you can have other short-term investments that pay out just as good, but they will never be as secure. Not only that but for anyone that has life insurance for at least 5 years, because of the cash value growth it is less expensive for them to have participating whole life rather than term.

So why do so many people get term rather than whole life? Mainly because they don't know how whole life works, and all they see is the "price" difference, not the cost. So if you are going to get life insurance or have it for another five years, please consider talking to me. I will help teach you the differences and help you make an educated decisions. Then I will be fine with whatever your decision. As I have learned with many of my clients and by observing others, you can lead a horse to water, but you can't make it drink.


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