To what extent are we suckers, and... what should we do now?
March 14, 2011 11:43 AM   Subscribe

This guy told me and my wife to buy insurance policies, so we did. To what extent are we suckers, and... what should we do now?

A few years ago, a few trusted friends recommended their financial advisor. We went to his office a few times, talked about saving (no charge), and after a few visits he recommended we get some MassMutual Legacy 100 Whole Life with LISR (Marketing brochure).

His claim was that these policies would not merely perform as life insurance, but would perform not terribly as investments. This seemed too good to be true, but the (fairly uninformed) research I did seemed to back him up. So, we took the plunge.

Cut to two years (and $11k) later, when I learn off-hand at a party that pretty much all of these friends have bailed on this advisor. (One said he didn't know what he was talking about, another two said he shared their financial details with a mutual friend.)

Then the advisor gave us some advice regarding a mortgage that sounded fairly nonsensical to us -- and when we asked our mortgage lender his opinion, he told us the guy wasn't making a lot of sense.

So: we're definitely going to look elsewhere for financial advice, but the question now is: what do we do with these policies? Are they OK investments? Are they even good as just life insurance? (We would kind of like to do the whole Life insurance/frozen head deal, so life insurance is actually kind of useful.) We could cash them out, but in the first few years, they're only worth a few hundred bucks, se'd be writing it all off as a loss. But if these aren't worth keeping, it's obviously the right thing to do.

Throwaway email:

(anonymous 'cause I don't want everyone to know what a sucker I am)
posted by anonymous to Work & Money (7 answers total) 3 users marked this as a favorite
As life insurance policies go, these probably do just about exactly what they say they'll do: pay out if you die. They also provide returns according to their schedule in addition to the cash value of the policy at maturity.

The reason a lot of people consider whole life policies like this one to be a less than optimal way of handling yoru money is that it's really hard to do worse than whole life policies as an investment. They rarely pay more than a couple of percent, if that. So buying a term life policy, which is a lot more like auto or property insurance than whole life, the latter being an investment vehicle in addition to straight-up insurance.

There are two main advantages to whole life insurance over term life. First, the premium you pay now is the same as the premium you'll pay when you're 80. Second, the policy does have a cash value, and if you keep paying until the maturity date, you get all of that plus some minor return back at the end of it. As an additional benefit, if you get a whole life policy now the carrier can't ever decide to non-renew you or turn you down for coverage.

The disadvantage to whole life is that it tends to be way more expensive than term life for most of your lifespan for the same amount of coverage. Like several times more expensive. You could do term life, take the difference in premium and buy T-bills, and you'd come out ahead in the long run. The only benefit term life provides is that it'll pay out if you die during the policy period. No maturity, no return, no dividends, just death benefits. Which is why it's cheaper.

The reason whole life policies have such a lousy return is that the insurance companies are investing in the same market as everyone else, taking profit, then passing on some smaller portion of that profit on to you. You'd be better off investing directly, and these days the barriers to entry are so low that if you're really interested in maximizing your long-term wealth, that's the better option. Even viewing whole life as a kind of enforced savings doesn't help things much, as you really can't get any reasonable percentage of your money back before the maturity date, while you could if it was saved or invested elsewhere.

So you haven't been swindled--whole life insurance policies are fine and useful financial products--but you are kind of a sucker.
posted by valkyryn at 12:00 PM on March 14, 2011 [4 favorites]

Don't despair! Whole life isn't my favorite investment but it does fit in some circumstances. You very likely still have value in the account. If you're getting new financial advice, just bring the policy in to your new advisor and ask him/her what's what. There's a good chance it's a decent policy. If not, there's a good chance you can roll it into something more suitable.

The problem with insurance is that policies have huge commissions, so it's hard to find someone who isn't in some way influenced by that. Because of this, and because your new person likely won't have a trust relationship with you yet (especially since you're feeling rooked by the last one, though I can't tell from your post if it's justified or not), it might be worth it to go to a fee-only financial planner, preferably one with a CFP designation. The idea behind a fee-only planner is that because they don't get commissions, they'll be more objective about investment products.
posted by small_ruminant at 12:05 PM on March 14, 2011

From a MeFite who would prefer to remain anonymous:
I have no idea about your particular investment, but since "life insurance is for suckers" is a popular idea, I'll share this story.

My ex-husband, a lovely man, is a Certified Financial Planner and the sort of guy whom you could trust with your life, ethically. A guy who would NEVER put his own financial gains above his clients' needs.

A few years ago, he met with friends of ours, a young healthy couple in their 30s. As part of a long-term plan, he recommended some sort of life insurance. I'll never forget how upset and humiliated he was when the husband acted as if Ex were "taking him for a sucker" for suggesting life insurance. They did not work together, although we remained friends.

You know where this is going, sadly. My friend S died 3 years ago, at the age of 37, from complications after surgery. The husband is struggling financially to raise the kids alone. I'm sure he has different views on life insurance now.

Best of luck to you; hope you find an advisor you trust.
posted by jessamyn at 12:07 PM on March 14, 2011

I don't think there is a rational person in the world who says "life insurance is for suckers" but rather "whole life is a bad deal" - and why that is, is laid out very well by Valkyryn. Basically it is term life + a very low risk (and thus inappropriately low return for someone in their 20's-40's) fixed income product that is obscenely overpriced.

It is fine as life insurance and Northwestern Mutual is a fine life insurer. As to whether to keep them or not, really it is a question of math. Sit down with a spreadsheet and grind it out yourself, or find a new advisor and have them do it for you. A lot will depend on how old you are and what " a few years" means.

It is hardly the end of the world, nor are you the first person ever to make this decision. Heck if you are the person who needs to be forced to save, it might not even be the worst thing to be locked into in the world.
posted by JPD at 1:43 PM on March 14, 2011

MassMutual is fine I meant. Freudian slip because some NW Mutual guy is constantly calling me trying to sell me whole life.
posted by JPD at 1:44 PM on March 14, 2011

I have no idea about your particular investment, but since "life insurance is for suckers" is a popular idea, I'll share this story.

I don't think "life insurance is for suckers" is a popular idea. It's typical financial planning advice to recommend some form a life insurance to a young family (though many advisors will say to wait until you have a house and/or kids).

"Whole like insurance is for suckers" is definitely a popular idea, though, for exactly the reasons valkyryn laid out.
posted by mr_roboto at 1:44 PM on March 14, 2011

There are two very different things being combined here and it is for the benefit of the Life Insurance companies.

Life insurance is a bet that pays out if you die. If someone depends on you buy term coverage. For someone in their 40's who locked in young, $400 a year buys $500,000 of coverage. The price goes up as you get older though, but you really don't need coverage when no one depends on you. (I'm ignoring cases where wealth can be shielded via insurance, that discussion is out-of-scope here)

Investments are where you put your money for the future, mutual fund, stocks, etc.

Keep the two separate!

When my parents got divorced my mom was thrilled to find out a woman in her church would help her with her finances. The woman ended up selling my mom a totally inappropriate life insurance policy. I hope that woman burns in Hell.
posted by JohntheContrarian at 5:27 PM on March 15, 2011

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