from a well founded belief that investment is
but a subset of speculation. All of life is
full of risk, insurance is appropriate
for those major setbacks you can not handle
In contrast well executed speculations should
be used to grow and preserve your wealth
Insurance and finance companies, and their salespeople,
have their agenda first - can you be sure they
are recommending the buy or sell based only on
your best interests?
Of course not.
As an example look at life
insurance products that are touted as also
being investment vehicles. These pay the salesman
great commissions, but they provide you with
little additional benefit. A term life insurance
policy will provide you with far more life
insurance coverage than whole life - but pays
little if any commission.
IRA, Keogh, 401k, and other
retirement products have investment matching
and tax advantaged benefits that set them above
regular investments. Regular investments are
usually far more valuable than any insurance
package for retirement planning. Guess which
financial product provides the highest profits
and commissions - guess what you will be told
I should also add that life insurance is very
important in many instances. If you need to pay
a huge premium to be talked into protecting yourself
- do it.
If not find and act on the information yourself
- and get far more coverage for far less money.
I was going to grab some comparative numbers, but the old line companies that
push expensive whole life insurance want a rep to talk to you. These following
numbers may be way off, they are as I remember them from a brief period after
college when I was a licensed life insurance salesman - I had to quit when
I realized the only way to do what was best for the client was for me to
As a general rule when I sold Life Insurance,
a healthy man age thirty could expect to pay
about one dollar a year for one thousand dollars
of term life insurance coverage. One hundred
thousand dollars of life insurance coverage -
one hundred dollars - per year. (not a lot of
room for commissions in that)
A whole life policy could be priced any of a
hundred different ways, and structured thousands
of ways; universal life - term plus annuities
- investment life . Think of a comforting
word and it will probably have been applied to
a life insurance product. Investments included
in a life insurance policy are investments
almost guaranteed to disappoint.
I had one client that had been sold a ten thousand
dollar whole life policy. He paid close to three
hundred dollars a year for this life insurance
coverage - and he was healthy and less than thirty
years old. With a term life policy he could have
had over a quarter million dollars of life insurance.
(we did make sure he was approved and had the
new policy before he chose to cancel the old
Here are some of the standard objections a life
insurance representative will make to the above:
This is true, but total cost will
be far smaller. Except for some estate planning
issues, life insurance is mostly needed for young
families. To decrease insurance latter in life
as other assets grow may be a good thing.
- Yes, but the term life policy will go down
in coverage or up in price as time passes.
Hopefully you learn to speculate,
and retire well before your policy matures. If
not your uncommitted money sitting in a bank is
probably going to yield more than money tied up
in a whole life policy. Buy the best life insurance
policy at the best price - make the best speculations
separately - do both under
your own counsel.
- Ok, but there is no investment in term life,
what will you do when you retire?
If you are in this position, have 10% of your gross
pay removed before you see it - for an IRA - a 401K
- or for a stock purchase plan. If you think you
can't do that - why would you want an expensive life
insurance policy to do it for you? That is a policy
you will probably cancel when the bill arrives.
- Sure, if people would save -- but most people
need a built in expense to force them to save.
Lets look at this one a bit closer. That cash value
is supposedly your money, right? Why if you ask for
it does it cost you interest? Why if you borrow it
does the value of your policy decrease by the borrowed
amount? If you die why is your cash value kept by
the insurance company - not passed through to your
- In case of emergency a whole life insurance
policy will have built up a cash value available
to the holder.
To illustrate this last one. A ten thousand dollar
policy may slowly grow a cash value - that is the
supposed built in retirement feature. Lets say
after twenty years your policy has built up two
thousand in cash value - your "retirement
If you borrow the two thousand:
- you pay interest on the borrowed amount
- you still pay your full policy premium
- if you die your heirs only get eight thousand
- if you pay it back - your
heirs will get ten thousand dollars, not
twelve thousand - the cash value disappears
In essence- you are increasingly self insuring.
The insurance company has over charged you and
pretended to refund part of the over-charge as "cash
If you live to the life insurance policy's retirement
age they will hand you this over-charge as your "investment
return." Assume however the amount of your cash
value is $9990.00 a year before an age 70 retirement.
If you die - the insurance company will toss
in ten bucks and hand your heirs a check for
ten thousand, your cash value was just part of
Notice that you were still sending in that same
payment at age 69 -- in effect for ten dollars
of life insurance coverage. The risk to the life
insurance company grows as you age and they change
the price, with whole life insurance that change
With term life insurance that change in risk
and price is up front and understood. (as a hint,
in the competitive term life market it may pay
to shop for a new policy every five or ten years.
If you do find a much better deal in the future,
be sure to own the new policy before you cancel
the old). Life insurance can also play an important
role in estate
planning and donating
to causes you value. Be sure to
investigate having ownership of any life insurance
policy outside the estate to avoid extra estate
Let's expand this discussion back up to investment
When that investment adviser, financial analyst,
insurance salesman, hedge fund manager, broker,
or other finance professional calls -- they have
a huge list of "financial
products" available -- some with high commissions
and management fees, others that might fit you
Which ones do you think they want to talk about?
Learn to analyze and handle your own financial needs.
The first speculation rule:
No one cares more about your money than
you -- unless they plan to use or steal your money.
insurance can be helpful, be sure it meets
your needs, not those of a salesman.