I wanted to continue my series on retirement planning for entrepreneurs by dealing with one of the most common mistakes perpetrated on us by the so-called financial planners.
Have you ever noticed how you call a financial planner, they get a bunch of background information, and the first recommendation they have is for you to buy some ridiculously large whole life policy? Ever wonder why?
They actually extol the virtues of the policy normally using the term “investment grade” talking about how it is a “savings vehicle” for your retirement. They talk about the fact that your money grows tax free which is true, and the fact that you can take a loan out of your policy once you have built up enough cash value.
All of this is true, but here’s the problem.
According to Consumer Reports, the average annual rate of return paid on a guaranteed value whole life insurance policy is 1.5%. Variable life policies and other non-guaranteed policies pay as much as 3.5% on average.
When compared to the average rate of return on stocks at 10%, there’s no comparison. If you don’t like stocks, then how about investing in bonds that return an average between 5% and 6%?
Once you factor in inflation and income tax there’s still no comparison.
Why do the retirement planning specialists immediately recommend Cash Value Life Insurance, when it so obviously is one of the worst investments anyone could possibly make? One word.
Compensation on these policies varies dramatically between companies, but most pay anywhere from 80% to 110% of the first year’s premium. The next time an agent is trying to get you to buy a policy that will cost you five or ten thousand a year, do the math and realize what’s behind all of this.
I’m not saying that life insurance is bad. It’s a wonderful thing if purchased for the right reasons. We buy life insurance because one day we are going to die and want to leave something behind for our loved ones. If your house isn’t paid off, you still have kids in school, or haven’t saved properly for your retirement, it may be one of the best ideas that anyone can offer.
But buy term life insurance and invest the rest. No matter how the residual is invested, you will probably get a better rate of return.
I’ve had new customers come to me who are in their late sixties with their kids out of the house, plenty of money in their retirement accounts, a house that’s paid off, who are still paying eight or nine thousand dollars annually on an old whole life policy. At that point in life, why waste the money? What’s the point?
Again, I’m not saying that life insurance is bad. If you have needs, then term policies are inexpensive, and will certainly get the job done. Yes, it’s true that as we get older, they become more expensive, but do we really need them once we reach a certain age? If you buy term and invest the rest, you probably won’t.
Many might talk about the cash that builds up in these policies that can be accessed as a loan. Yes, this does happen, but it’s a loan that has to be repaid. If you buy term and invest the rest, you wouldn’t need to take out a loan. It would be your money that you could access at will for whatever needs you might have.
Again, life insurance can be a good thing if done in the right way. In many instances it’s a necessity, just don’t get succered.
How do I know all of this. A thousand years ago in another lifetime, I had an insurance license. Once I did the math, I let it lapse.
Let me leave you with this.
Many in the popular media are using a dirty word called inflation. Looking at the prices that seem to be shooting up with no end in sight, it’s a worry for all.
There’s a lot of concepts using Keynesian Economics that I could use to explain but the basics work like this. If you only make a certain amount from your business, and the prices of the basic things you purchase every day continue to increase without your income increasing as well, your life will become more difficult.
You’ll need to start making choices about where you spend your money, possibly adhering to a strict budget. The concept of going out to dinner on a Saturday night becomes obsolete.
Inflation isn’t fun.
The only way that you can combat this, is to watch your financial statements like a hawk. As your costs go up, you’ll either need to eliminate them or increase your prices as a response. There’s nothing easy about this, but it makes your accounting that much more important.
I’ll be writing more about this as the story progresses.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything you need, whether you are a current client or not, you have but to ask. I’m here and I remain,
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