Ten Things Life Insurance Agents won’t say: #1 you have too much Life Insurance?

Back in July, market watch published a list of 10 Things Life Insurance Agents won’t say, which is an on going theme for the articles author, Daniel Goldstein. The piece attempts to be provocative and cast doubt on the life insurance industry within the eyes of the consumer. This allusion is not a new one. The evil {insert name of industry here} is out to get you, but we, the good guys in the media, are looking out for you and here to help you navigate your way out of their complicated web of lies.

While I applaud any attempt to bring truth and justice into the spotlight, I also appreciate the truth. And since this piece was so terribly embellished (and poorly written), I’ve decided to yet again get out the old Insurance Pro Blog bleach and disinfect the internet. We’re going to address each point for the next ten weeks (oh boy!) with facts that will help bring clarity and reality to disinterested media’s dim-witted attempt to pants the life insurance industry.

So claim #10, you actually have too much life insurance…

Too Much? Or the Wrong Kind?

The article starts by noting that life insurance sales increase from 2012 to 2009. Actually, it’s the increase in outstanding death benefit, not that the article made that clear—I just happen to know the statistic—and then goes on to state that people have bought too much. Or maybe the wrong kind, after all what’s the difference?

The wrong kind, as it’s pointed out, is supported by the fact that 64% of life insurance policies are whole life policies. And apparently this is bad. Of course, we all know that whole life insurance is bad because if you place your money into life insurance contracts, you can’t put it into managed investment accounts where financial advisors can collect commissions fees in perpetuity. Further, I should point out that not all of those policies are whole life insurance policies. Many of them are universal life insurance policies, but since the media doesn’t have time to figure out what the difference is, they have a penchant to referring to the two interchangeably—it’s been going on for years now.

Let me Throw a Bunch of Statistics at you that don’t Make Sense

The piece then goes on to claim that you already likely have all the life insurance you need. And how do we know this? Because the growth in outstanding life insurance policies has grown 37% over the last decade, which is faster than the rate of wages in the United States. Seems legitimate—or perhaps a slight of hand that would make Darrell Huff smile.

The article further notes that the average life insurance policy in force in the United States is roughly $163,000. And how does this little piece of information support the claim that you have too much life insurance? If you figure it out let me know, because I’m still scratching my head on this one.

There is mention that some financial advisors recommend having enough life insurance to retire a mortgage and from there it’s a toss up on whether or not your surviving spouse and kids will need additional funds to pay for living expenses and other goals like college. I admittedly added the term “toss up” but the tone of the article made the implication.

Notice we don’t how much the average mortgage debt in the United States is. Well actually I do know, because I looked it up, and not because Mr. Goldstein decided it would be a good idea to include it. Turns out it’s about $157,000 according to the Federal Reserve.

Let’s pretend for a minute that the suggestion is a good one (it’s not, just so you know) and that the $6,000 in excess the average American has in life insurance to mortgage debt is proof that everyone is paying way too much money for life insurance they don’t need. Based on the per thousand cost of death benefit for a 54 year old with 30 year level term insurance from the most expensive term carrier I could find at that age would equate to about $106.27 per year you’d be flushing down the toilet (if you checked the tire pressure in your tires regularly, you’d just about break even).

But Who says it’s just about the Mortgage?

I’ve been trained in the “art” of financial planning, and I can tell you, even the methods that downplay the importance of life insurance the most find value beyond just the mortgage. And by most accounts, 10 times income is the recommendation (not that it’s a good recommendation, but a lot of “financial advisors” have chosen to run with it).

life insurance agentWhat exactly is the average wage of a fulltime worker in the United States? Mr. Goldstein left that statistic out. Perhaps because, like the average mortgage debt, he forgot to include something that seemed so logical. Or perhaps it’s because including it sort of disproves his theory entirely. According to the BLS the weekly salary of a fulltime worker in the United States is $780 per week. Assuming they get paid for all 52 weeks in the year, this comes out to $40,560 annually. Following the 10 times rule, this means that Americans are actually about $242,600 short on their life insurance coverage. But hey, that’s just one way of looking at it.


One Response to “Ten Things Life Insurance Agents won’t say: #1 you have too much Life Insurance?”

  1. Cary Cates says:

    I have to agree with you on this one, Brandon. The number of people I see that are over-insured is less than 10%, with probably 30% being somewhere close to properly insured, and the remaining 60% being under-insured (and usually REALLY under-insured). Not only that, but I don’t work with the average American. My guess is the average American is probably even more likely to be under-insured.

    It’s a shame someone would publish a piece saying people are probably over-insured because we all know that is baloney. The can debate the best way to insure (e.g., term or permanent) but to claim “You actually have too much life insurance” is not doing the public a service.

    Thanks,
    Cary Cates, CFP(R)

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