My brother owned a Harley and said HD stood for “Hundred Dollars” as everything related to his bike cost him a fortune. I believe some “financial advisors” think MD stands for “Made of Dollars” as I keep hearing horror stories from some of my physician clients of the sales pitches masquerading as financial advice they deal with on a recurring basis. The most recent pitch has been life insurance for kids. I saw a great post from White Coat Investor on this topic and thought I would share some of the highlights. The article is titled 6 Reasons Not to Buy Life Insurance for Your Children and I have linked it for you.
I worked with an advisor years ago who loved to tell prospects you can either “rent or own insurance.” He was always positioning to sell permanent insurance to clients (he called term insurance “renting” coverage). While some people may have a legitimate need for life insurance until they die at age 100, the majority of people simply need insurance to replace lost income during your working years. As the father of two teenagers, one of which is old enough to work, there really isn’t a big income replacement need for my kids. Now, if one of them was a highly paid entertainer that may require a different approach.
Insurance for funerals always comes up. The average funeral costs less than $10,000. It’s true you can purchase a $10,000 life insurance policy for a minor at a very low price. The reason is the insurance company’s experience tells them it is a low probability your child will die. If you still feel the need to buy insurance to cover this possibility, please “rent” the insurance through a short-term, term policy.
There have also been conversations with clients about buying insurance while the child is young and in good health just in case their health disqualifies them later. Well, the issue here is finding an insurance policy that would allow the policy to be extended from say the $10,000 worth of coverage you bought when they were 2-years old to a $500,000 policy as an adult who has a condition that would otherwise disqualify them. This concept makes sense, but odds are you would have to buy the larger coverage policy while they are a minor.
I have talked before how most insurance policies are terrible when they try and be an investment vehicle too. I won’t rehash the facts or beat a dead horse here. It is simply hard to overcome the high internal costs with insurance policies doubling as investment platforms, especially over the short period of time your child is a minor.
One final point is advisors who push insurance policies as great options to pay for kid’s college expenses. The pitch is the cash value in a life insurance policy is not considered by FAFSA for college financial aid. As a friend of mine with one in college stated – “If you make a decent income you are not qualifying for financial aid. Period.” While my physician friends who have 4 and 5 kids in private schools may consider themselves middle class, FAFSA doesn’t agree.
Now, let me be clear – insurance/risk management is a critical component of comprehensive financial planning. It must be done properly and for the right reasons. The large commissions attached to some insurance products makes it a little tougher to clearly see the reasons certain policies were recommended. Never be afraid to challenge your advisor to make sure he is acting as a fiduciary and putting your interests first. This includes getting a clear answer on how and what he will be paid on any policy. Don’t let any advisor treat you as though you are Made of Dollars. Your kids probably already make you feel like an ATM some days.