Why You Should Never Be Sold Insurance
Key Points in Why You Should Never Be Sold Insurance:
- Dean’s thoughts on the insurance industry
- The insurance salesperson & sales tactics
- Examples of insurance as a financial planning tool
- Deciding how to buy insurance
- 13 minute read | 17 minutes to watch
Why You Should Never Be Sold Insurance
Dean Barber: Hello everybody, I’m Dean Barber, founder and CEO of Barber Financial Group. Along with Bud Kasper, he’s president of our Lee’s Summit location. Today, we’re going to talk about why you should never be sold insurance.
Insurance is a Risk Management Tool
Insurance is a tool for risk management, transferring the risk from you to an insurance company.
Bud and I will discuss with you how you determine what insurance you should purchase and why. And how do you stress test the difference between self-insuring and buying the necessary insurance?
Enjoy this short video on why you should never be sold insurance.
Dean’s Thoughts on the Insurance Industry
I’ve always loathed the insurance industry. Let’s be honest, though. I love what insurance does or can do if I need it.
Insurance should truly be a risk management tool. We buy insurance on our home because if our house burns down, gets broken into, gets flood damage, new roof, hail damage, we want to transfer the risk of that cost to the insurance company.
Why Don’t People Self-Insure?
There are a lot of people that could self-insure against those things. Why don’t they?
Bud Kasper: I guess one of the reasons they don’t self-insure is that you have another use for that money.
The other part is that if you can leverage for a lower amount of money an insurance policy, which would cover a larger need, you probably have an advantage. That might need to be explored.
Two Types of Policies that Get Sold More Often than Purchased
Dean Barber: The two types of insurance that I think get sold more than get purchased are life insurance and long-term care insurance.
The Insurance Salesperson & Sales Tactics
Let’s face it. The insurance industry has created probably the best force of salespeople in the history of the world.
They always come up with these gimmicks and these tricks of how to get you to buy insurance and how to get you to buy maybe more insurance than what you need.
I can remember way back in my early days when I got into the financial planning industry and one of my good friends got into the insurance industry.
They had this elaborate program that they put together that was designed to do one thing: to sell whole life insurance, using insurance as an investment. The reality is that life insurance should be a risk management tool.
When Do You Need Insurance?
Let’s think about this. When do you need insurance? You need insurance if you’re no longer here, and people you leave behind are going to suffer because of your loss of income.
Bud Kasper: Absolutely.
Dean Barber: How much you need will depend on how much debt you have, how much you’re earning, and what the lifestyle is you want to leave behind?.
Do you still want to educate kids? What stage of life are you in? We can determine those things. In that particular instance, I favor term life insurance.
Dealing with Insurance Salespeople
Bud Kasper: Sure. You have to remember that you’re usually dealing with insurance salespeople and, therefore, what is their motivation?
And the answer is to get a bigger commission. It’s not to say that the insurance they’re selling is necessarily the wrong type of insurance.
If you don’t have a financial plan and understand where insurance is needed, you’re probably buying insurance just because the person was good at selling insurance.
Insurance is the Foundation of the Financial Plan
Dean Barber: If you can imagine building a pyramid, the very foundation of that financial plan is the base of that pyramid. That is risk management.
Insurance is the foundation of a financial plan. It’s making sure that you have proper insurances in place to cover unforeseen things that could set you back financially.
Example: Insurance as a Part of a Financial Plan
Bud Kasper: Let’s use an example and say a gentleman’s worked for a company for the last 40 years. He’s got a nice pension going on, but when he took the pension, he took only the single, meaning based on his life expectancy, not on his wife.
Which means what? If he were to pass away, his wife gets nothing in terms of a pension. After he made that irreversible decision, he comes back in and says, “Now, what am I going to do for her?” The answer is, “Maybe we better go in and look at insurance.”
That is a type of insurance that you would do to replace under the worst conditions that I just explained.
Dean Barber: Right. We call that pension maximization.
Bud Kasper: What the need was. Legitimate!
Dean Barber: Now, for that type of insurance, you can’t use term insurance. However, you could use what we call a universal life. They call it a GUL, Guaranteed Universal Life that guarantees the premium for, say, to age 100.
You can massage those things and say guaranteed premiums at age 90, guaranteed premiums to age 95 or 100. That’s the type of policy you want to use in that instance, but that type of policy will typically never build any cash value. It’s kind of like a lifetime term policy.
Bud Kasper: The reason you say that the term wouldn’t be appropriate there is because you don’t know when you’re going to die. Therefore, you need something that has a continuation associated with it for the benefactor of the insurance policy.
Long-Term Care and Life Insurance
Dean Barber: Right. Let’s switch gears. I want to do long-term care because I think long-term care and life insurance tie together in a big way.
You’re in a unique situation, but not unlike a lot of people, though, where you’ve got a wife who’s quite a bit younger than you. If something happens to you, and you have to go into a long-term care facility at some point in your life, let’s say that’s costing $90,000 to $100,000 a year now.
Then, here’s your wife still out here, living her life, doing whatever she’s doing, and still spending money. That could eat up the nest egg that you have set aside for your retirement.
You need to have some sort of long-term care coverage. The problem is we don’t ever buy insurance, saying, “Gosh, I can’t wait till the day I get to file a claim on this, especially not long-term care. You buy long-term care, hoping that you’re never going to need it.
Bud Kasper: Right. But there is a need there, and you’re right that there’s a void. This is all discovered in the financial planning process. Where is there a hole that there might be a need?
However, you don’t want to buy insurance for any greater amount than is necessary to make the plan successful.
Dean Barber: Correct.
Bud Kasper: In the example that you were giving with long-term care, if we have that void, we want to address it efficiently, effectively, and at the lowest possible cost. Again, we’re licensed in insurance, but it’s not our principal business. Planning is our business.
When You File a Claim, the Insurance Companies Win
Dean Barber: That’s the key. Since you never want to file an insurance claim, that’s when the insurance companies win.
When you pay premiums for an extended period, and you never have to file a claim, that’s when insurance companies win. With long-term care insurance by itself, people are looking never to file a claim.
The insurance company hopes you never file a claim. Several years ago, the insurance industry introduced a hybrid policy. This policy was, at the heart of it, a life insurance policy.
They had a critical care rider that they can attach to this that says, “You can use 50%, 60%, 70%, 80% of the death benefit.” Or something like that; they’re all different.
You can use a portion of that death benefit to pay for long-term care if you have a long-term care stay.
How Bud Prepared for His Situation
So this is what Bud did, and it’s brilliant. There are a lot of people that should be looking at this exactly the same way. I’ll tell you why in a second.
Bud has a $1 million policy. Up to 50% of that $1 million can be used to pay for long-term care.
Bud Kasper: Of the death benefit amount.
Dean Barber: So you have a $1 million policy, and premiums can never go up. By the way, you did yours in a 10-pay. So you’ve paid for it. It’s completely paid.
However, if you go into long-term care and your wife needs to pull $300,000 out of that over the years to pay for long-term care, and then you pass away, there’s still $700,000 of the death benefit leftover.
Bud Kasper: Income tax-free.
Dean Barber: So I’m going to go out on a ledge here and saying you probably didn’t put $1 million into that policy.
Bud Kasper: No, no.
Getting More than You Paid into It
Dean Barber: But, it’s the only type of insurance that you’re always going to get more out of than what you paid into. It may not be you, but it’s going to be you, or your beneficiaries will get more out of that policy than you ever put into it.
Bud Kasper: Yeah. Because if it was one of the traditional old long-term care policies, what are we seeing happening right now? The premiums are going up.
Dean Barber: Like double-digit, 15 to 20% a year. It’s crazy.
Bud Kasper: So, in my example, I had a fixed-premium amount. I accelerated the payments, as you stated, so that I wouldn’t have that drain on my money when I got actually into retirement.
Quite frankly, it’s worked out perfectly from that perspective and given me peace of mind, knowing that she’ll be taking care of.
Dean Barber: So when we’re trying to address that risk of long-term care eating up the assets of a couple and leaving the surviving spouse financially devastated, you have to have something there. Now, some people have enough that they can self-insure.
They got enough money. One person goes into long-term care and the other person’s still OK Even if she spent 10 years there, you’ve got enough money. It’s not going to be a big deal. We call that being self-insured.
It Starts with the Financial Plan
When we look at any insurance, whether it be property and casualty insurance, the type of health insurance or Medicare supplement you should buy, or long-term care or life insurance, what we’re going to do first is build your financial plan.
That financial plan is then going to tell us what happens in an ideal world. What happens if everything is always good, and there’s never one of these risks that come in and hurt us?
Stress-Testing to Address Risk Management
Then we start stress testing. What happens if we have a premature death? Or what happens if we have a long-term health care stay?
What happens if we have a home burned down or something like that? We stress test that and say, “If we didn’t have insurance, how would those events affect our client’s ability to continue their lives the way they want to?”
Bud Kasper: As we would say, is it going to devastate the plan? We have to make plans work under any circumstances.
Dean Barber: If it doesn’t devastate the plan, then we can have a conversation that’s something like this. You know what? You don’t have to buy insurance. Because you’re self-insured, you’re covered.
Choosing to Buy Insurance
Now, you may choose to buy insurance because you want to pass that money on to kids and grandkids instead of having it go to one of these long-term care facilities or something like that.
Deciding How to Buy Insurance
That’s how you decide how much insurance you need. If you need insurance, it’s all through the financial planning processes you’ve been talking about, but that’s the only way you can do it.
If you don’t have a financial plan done first, you’re guessing. Then, you’re going to fall prey to the insurance salespeople. They’re going to try to convince you, “This is the greatest thing ever.”
Bud Kasper: Which goes back to our theme here, never be sold insurance. Get insurance to work within your plan, so you’re getting the benefit you wanted, not necessarily something you are sold.
Insurance as a Tax Planning Tool
Let me give you another example there. Often, we have in the planning process a tax that’s going to be at the death of the first spouse or second spouse. How are we going to pay that tax as efficiently as possible?
This is where you have to do calculations between the premium cost versus what the ultimate benefit would be to do that.
Example: Insurance as a Legacy Planning Tool
I’ve also had clients who have gone in and said, “We want to do some special things as a couple.” For their own personal circumstances.
One thing that a couple wanted to go over was spending at least six months over in Italy. They thought that perhaps they would rob their children of the amount of money that they would leave them if they were to die prematurely.
To ease their minds, what they wanted to do was to go in and buy an insurance policy that would leave $1 million to each of the children. The same thing accelerated payments over a 10-year timeframe. They did that. Now out of the money that they had now, it’s all theirs.
They can spend every dime with it because they’re not worried about it. They did what they wanted to do from a legacy planning perspective. This is the type of effective planning you can do with insurance, but it has to be part of what the objective is in the plan.
Example: Insurance as a Financial Planning Tool
Dean Barber: I got a similar story to that, and I think this is great for the people that are viewing this video. I had a client, and we’d been planning for his retirement for probably six or seven years.
And he finally gave me a call one day, and he goes, “Dean, I’m done. Six months, and I’m out of here. I’m ready to retire.”
I said, “Cool, let’s get that budget together.” He goes, “Come on. I haven’t had a budget for years.” Budgets part of a retirement plan, right?
Bud Kasper: Got to have a target.
Dean Barber: So we get the budget done. We have deep conversations about how much they want to spend, etc.
By the time we get the planning done, it becomes evident that Social Security they will be receiving is not even needed. In other words, they have more money than what they need to live on.
A Financial Planning Opportunity
So I had a conversation, and I knew from our planning discussions in years gone by that they were very interested in leaving wealth behind to their kids and their grandkids.
They had three boys and wanted to leave each one of them, at least $1 million. I said, “Well, you don’t need the Social Security. What are you going to do with the money?” He said he would probably just save and invest it.
Bud Kasper: Build on it.
Dean Barber: Right. I think the Social Security was $36,000 a year for the husband and the wife as a total.
I said, “Let me do some research and see what it would cost to buy a $3 million, second-to-die policy.” That means that the policy pays out upon the death of the second spouse.
It then passes that money tax-free to the children. For a little bit under $20,000 a year, they can purchase a $3 million policy.
So for a little more than half of what their Social Security was going to be, they now have $3 million that will go tax-free to their beneficiaries.
What kind of rate of return would you have to get on that $20,000 a year to turn it into $3 million after taxes?
Never Be Sold Insurance
Dean Barber: It’s mind-boggling, so there’s a space when that can work. But again, don’t be sold the insurance. Understand how insurance works into your overall plan.
It Starts with the Financial Plan
The first thing you need to do is get that overall plan done. We’d love to have an opportunity to help you work through that plan using our Guided Retirement System™.
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Please click here to schedule a complimentary consultation and visit with us, whether by phone, whether it’s a virtual meeting, or in person. Anything else you want to add, Bud?
Bud Kasper: No. I think we could easily talk for another half hour on all different insurance applications in the planning process. I think the most important thing is understanding the need.
What’s the objective? How does it fit into the plan? Don’t pay any more than is necessary to accomplish that.
Dean Barber: Absolutely. I hope you’ve enjoyed this discussion on why you should never be sold insurance. Thanks for joining us.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.