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WOULD YOU ADVISE someone—who doesn’t drive, doesn’t need a car and doesn’t plan to get one in the foreseeable future—to buy car insurance? I wouldn’t. But it seems some financial advisors think otherwise. That, at least, is the impression I got when an acquaintance, whom I’ll call Laura, mentioned her variable universal life insurance policy to me.
A single woman in her mid-40s, Laura has a decent income and lives on her own. She has no one other than herself to support financially. Her parents and other family members have enough savings. She has no plans to start a family, let alone with someone who might be financially dependent on her. I just didn’t get it.
It turns out that a “wealth advisor” talked her into the life insurance policy as a sophisticated, tax-advantageous strategy. Laura is far from stupid. But she’s naïve enough to follow professional financial recommendations blindly. She neither spotted the layers of fees involved, nor realized that permanent life insurance wasn’t the best way to build wealth. Now she does, and she isn’t happy about it.
It wasn’t apparent to Laura that she could’ve simply put her savings in a Roth retirement account—an even more attractive tax-advantaged vehicle—instead of investing in an insurance policy she didn’t need. To add insult to injury, when she tried to get out of the policy last year, she learned there are steep surrender charges.
This costly mistake has a silver lining. Laura realized that financial ignorance isn’t an option for her, and now she’s seeking financial education rather than financial advice. Not surprisingly, she’s highly motivated—and learning fast.
Life insurance is an important product, but one size does not fit all. And not everyone needs it.
I wish more people would “seek financial education rather than financial advice.”
Depending on what type of license(s) this financial advisor has, there is a government and/or professional body which regulates him or her. I had occasion not too long ago to look up the disciplinary history of one such advisor who was working with a family member. Turns out that in the past he and his employer had been forced to make a substantial refund to one of his clients who didn’t understand all the negatives of a product he sold them. Maybe a possibility for Laura?
Thanks for the suggestion, Andrew.