Question about a "financial advisor"

[A10Chief]

A guy came to my house calling himself a "financial advisor," referred by a friend. The friend knew I was wanting to start investing some money and said this guy was helping him. The guy came over and basically tried to sell me life insurance. He said in order to invest, it's like building a house, and life insurance is the foundation. I am in the US Air Force and I have life insurance thru them. I told the guy I wasn't interested and I wanted to hear about mutual funds, stocks, etc. (you know, traditional investment type things that will make me money). The guy blew me off and said that what I need first is this life insurance, and also said that by law he has to try to sell me life insurance before he offers any other type of investment. I said I wasn't interested and he left. How true is the spill he gave me? Was I the [censored] or was he trying to sell me something I don't need? Other thoughts?

P.S.-He told me that my friend (the one who referred him to me) had a $2 million life insurance policy with him. I think that's rediculous. Am I the retard or is he?

[jively]

If you don't need life insurance, then you don't need it. Do you have any dependents? Either way, you only need term, and do not need any type of permanent insurance.

Also, you should be concerned with his lack of a privacy poilicy, talking about your friend's business...

-Tom

[Pendimethalin]

If you want/need life insurance then go buy life insurance, but don’t treat it as an investment. Buying insurance and investing are two different things so you were right to be leery when someone tried to sell you both at once. Kudos for not getting ripped by this guy! [img]/images/graemlins/cool.gif[/img]

[rsk111]

As others have said, in most cases, insurance is not a good investment. If you need insurance, then buy it for that purpose (i.e., insuring against something).

I've heard the house building analogy from financial advisers before, I think he didn't present it well. Here's the basic idea as I see it. Let's say you are someone with a wife and 4 kids, and you are the only one in the household with an income. Now you are trying to decide what to do with whatever extra you have every month after paying for essentials. In such a case, I would recommend that before you start even thinking about investments, you should first purchase a life insurance policy, so that the family is taken care of should something unfortunate happen. Depending on the type of work that you do (e.g. pilot, professional athlete, heart surgeon, etc.), you may need to consider a disability policy that is specific to your occupation as well.

Once you've done this, then you should start putting any additional savings towards investments. In this sense (using your advisor's analogy), the insurance is the foundation (i.e., what you do first) of your financial plan.

So, in this example, there are a couple of things to note. First, life insurance, is not an investment per se. Instead it is an important expenditure. Secondly, if you are a single guy without anyone depending on your income, you probably don't need life insurance (but you may need disability). Finally, these policies are often available through your employer (as it appears in your case).

Another thing to consider is whether you have enough life insurance. I know a lot of people that have familes who get life insurance through their employers that purchase some extra because the employer's policy is not enough. Obviously, whether or not you need this depends on your situation.

[MasterChen]

How much does your friend make a year? 2 Mil is hard to get unless it is warranted. Life insurance is not an investment but a transfer of risk. You are securing dependents future with life insurance in case something awful happens to you. If he left just b/c you said no to life insurance I would tell your friend to be cautious

[bav]

It downright pisses me off when insurance salesdroids try to pass themselves off as "financial advisors". They're as bad as used car salesmen. This guy is all about earning his commission. $2M is ludicrous for 98% of the population and is further evidence of this salesdroid's real motives.

Insurance is one thing. Investments are another. Never the twain should meet. The reason they do often meet is because that's the successful gimmick the life insurance industry has come up with to get people to buy insurance that is far more expensive than they need.

Your friend has been taken. Don't follow in his footsteps. Just Say No. If you need insurance, figure out why and how much, figure out how much you need now, how much you'll need in 10 years, 20 years, and 30 years. Then go buy the right set of term insurance to deal with this.

[DesertCat]

All the responses so far are right on, but I'd like to add a little color.

First, you need life insurance if you are the bread winner in your family. But since your life insurance isn't taxed, your spouse and kids will get the entire amount. $2M should easily generate $100k per year in income forever. Allocate it partially in stocks to protect against inflation and your family could still have $60-$70k per year in income indexed against inflation forever. My guess is that most families would do fine with half or less than that.

Second, the right type of life insurance to get is term insurance. Term just means you pay for the insurance itself, no gimmicks. Term rates rise every year you get older, so sometimes people will buy "level term" where you pay a higher initial rate, but the rate stays the same for ten or twenty years. That's about as complicated as you want to make it.

Salesmen don't make money off of term insurance. They make money off of "Whole Life" insurance or "Universal" insurance or some derivatives. This type of insurance has you pay much more than the term policy costs, and puts the difference in investments. Over time the investment portion grows enough that you don't even have to make payments on your insurance because of the income from the investments. The salesman will also point out that investments in a whole life or universal policy grow tax deferred and you can borrow against them. That's why they'll tell you they are "great investments".

They won't tell you what makes them horrible investments.
- The sales person usually gets big commissions that come out of your contributions. So your investment account starts behind the eight ball 6%, 8% or even more.
- If you just get interest on your investments you are going to trail equity investments. If it's the type of policy that allows you to select from a menu of funds, you'll pay much bigger fees than if you got similar funds outside of the insurance policy, reducing your returns.
- The insurance company can overcharge you for the term insurance portion of the policy and you probably won't know.
- If you terminate early the insurance company can stick you with surrender charges (on top of all the other fees they've already taken).

IRA's & 401ks grow tax deferred and you can borrow against the 401ks. If you don't have an IRA/401k, a generic index fund has such little turnover that it doesn't trigger many taxes and is so low cost it should easily outpace any investment you can have in an insurance policy or annuity over time. And whether an index fund, an IRA, or 401k, you control it, and you don't have to pay excessive fees.

[dostofan]

People pass themselves off as financial advisors way, way too often. Anyone can call themselves a financial planner. But these guys are usually selling some product and they'll do what they can to convince you it's right. It may sound good,but probably isn't in your best interest. It irks me to see these guys pass themselves off as financial planners. Most of the time, they are under qualified or not qualified at all to give anything coming close to comprehensive financial advice. You really need to be careful and you did the right thing showing this guy the door.

If you want to get good financial advice look for a financial planner with the CFP designation. They are board certified and have to uphold ethical standards, besides having extensive training and experience. Do some searches in your local area and you should be able to find someone.

[dostofan]

Here's a site with a list of CFP's. Unfortunately, you have to log in to see the actual results.

This is for someone who isn't a do it yourself'er. Personally, I do all my investing on my own, but if I didn't have years of experience in finance I would consider a CFA.

www.fpanet.org

[SplawnDarts]

As others have alluded to, this is nothing more or less than a scam. You may or may not need life insurance, but this salesman is obscuring the real deciding factors in the question in order to get a sale.

In the modern job hopping 2-income family world, I think the answer is more frequently that you don't need it (or only need about 1 years salary worth at most), but personal circumstances may dictate otherwise. Anyone who does not have dependents and has any cash on hand obviously does not have any need for it.

There was a time, however, where families had 1 income and the wife had no real potential to be a big earner. So back then it made some sense.

Here's how you figure out if you need life insurance and how much: get together with your dependents and run the hypothetical scenario. What would they do if you had a heart attack and died tomorrow? Figure out what jobs various dependents have or could get, how much income those would provide, what would be done with your house, cars, etc. You need to come up with a plan that gets to a steady state where income < expenses again. Then figure out how much cash will be needed as a "bridge" to the new steady state (while you're still making car payments on a car you're too dead to drive, etc.). Take that amount, subtract the value of your liquid holdings, and that plus a little bit of pad is the amount of life insurance you would need. Possibly add on some for one-time expenses like kids going to college that the new steady state might not be able to cover.

When doing this planning, I strongly recommends that you don't assume your family's lifestyle has to be as high after you die as it was before. You dying is a relatively rare event, so it's OK for it to cause somewhat of a downturn in your family's fortunes. That's sad to say, but [censored] happens and hedging against all of it will likely leave you broke. You want your dependents to be financially secure, not living the high life, if you die.

Note that the more effective you are at other form of investing, the less need you have for insurance because you have more cash on hand and more income generating holdings that your dependents can take over. Insurance salesmen know this, so they want to keep you away from real investment at all costs.