Fast-talking sales pitches can make you ‘insurance poor’

The Bakersfield Californian
December 12, 2011

Bombarded by advertising – on cable television, in the mail and even from telephone solicitors – a recently retired couple came into my office last week with a simple question: Do we need to buy more life insurance coverage?

The couple, who I will call Bob and Mary, have been my clients for about two years. I have been helping them “fine tune” their retirement plans.

Although I sell life insurance – among many financial “investments” – my answer to them was simple: No, you don’t need more life insurance.

Bob and Mary recently retired from jobs as managers with separate local companies. While they were working, their companies provided them, as “management benefits,” sizeable life insurance policies. On their own, they also purchased large amounts of “term life” when their children were young.

Now that they have retired and their children are adults – off on their own – my clients no longer have their company-provided policies, nor do they have their term life. They basically have two modest $10,000 “whole life,” or “permanent” policies to cover a portion of their burial costs. They are also paying premiums on two long-term care policies.

Both have “defined benefit” pensions supplied by their employers. While they won’t get rich on their pension checks, combined with their Social Security, they have a decent income. Both also squirreled away several hundred thousand dollars in their companies’ tax-deferred 401K plans.

Bob and Mary do not need more life insurance. The primary reasons for people to buy life insurance in retirement is to cover burial expenses, to pay off debts that otherwise would leave a surviving spouse penniless, to leave a legacy, or to offset estate taxes. Currently the estate tax rate is 35 percent on estates valued over $5 million. That could change depending upon acts of Congress.

Bob and Mary probably already know they don’t need more life insurance. They just want to be reassured that they are not missing out on something – maybe a windfall – that numerous sales people are promising.

Consider another client, who I will call Marge. She is divorced and has two adult children, who are no longer dependents. Marge has a condo, car, a pension, Social Security and a modest savings. She only needs a “burial policy,” or to set aside money in her savings to cover the funeral costs.

Still another husband-and-wife client purchased their “dream home” during the housing boom. At the time, they wisely bought “mortgage insurance,” which basically was term-life insurance policies for both of them. The 30-year term of the insurance policies cover the 30-year term of the loan.

Like many today, the couple is upside down on their house. They owe more than it is worth. But they still love it as much as they did on the first day. Selling it or allowing it to be foreclosed is not an option. They plan to retire with 15 years left to pay on the mortgage. In this case, it is crucial that they continue paying the life insurance premiums until the mortgage is paid off. Otherwise, the surviving spouse could face losing the house in retirement.

Maybe it’s not your house. Maybe it’s some other debt, or the loss of a spouse’s Social Security or pension that may impact a survivor upon a death. Those are reasons to consider insurance. For this couple, their insurance policies ensure that no matter what happens to either one of them, they will always have a place to call home.

As a third generation life insurance salesman, I tell clients: While there are kids at home, there should be enough coverage to pay off debts and/or to provide for a continuity of income until the children reach or finish college. Otherwise, the only reason to have life insurance is to cover burial or estate taxes.

Everyone’s circumstance is unique. Risk factors may exist – such as chronic health problems – that can increase end-of-life debt and require more insurance coverage. A disabled child may require life-long care that needs to be financed by a parent’s insurance policy.

Some companies urge us to go online to one of many “calculators” that will automatically assess insurance needs. Unfortunately for consumers, these calculators often create answers that greatly inflate the needed amounts.

People must carefully evaluate their unique circumstances and consult with experts, such as tax attorneys, accountants and financial planners before buying expensive insurance policies that provide benefits far beyond their needs.