Why Is My Broker So Eager to Sell Me Whole Life Insurance?

Insurance policy and claim form, focus on words
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A friend of mine recently complained about an old college roommate who was trying to pressure him into buying a whole life insurance policy. He was having trouble figuring out how to tell him no, because they'd been so close back then.

This is an all-too-common occurrence for young professionals in their late 20s and 30s. This is the time when friends and family are test-driving new professions -- like sales gigs, for example.

Many insurance brokers push whole-life policies because they provide them with the juiciest of commissions.

Several governmental surveys suggest that the average American will change jobs more than 11 times in his life. For many of us, it's only a matter of time before we take a sales job that pays on commission.

Why Are Your Friends Turning on You?

For many people starting off in the financial services industry, the mantra is "you eat what you kill." They have to sell their product, insurance policies, investments, brokerage services, etc., because the lion's share of their paycheck comes from commissions on the sales they bring in.

But when people take that first sales job, they're not likely to have a big, established client base to sell to. So they turn to the contacts they do have -- friends, family and coworkers -- whom they bombard with pitches to buy products that might not always be the best fit for them.

Understanding the Difference Between Whole Life and Term

Whole life and term life insurance are two very distinct and different types of insurance and financial products. In fact, whole life is more of an investment for many people who buy those types of policies.

Whole life insurance builds cash value while you're paying those premiums. Eventually, after years of premium payments, you build up a cash value in the policy that often gives you many options.

The cash value becomes an asset itself. It can grow, increase in value, and even pay dividends in some cases depending on the type of policy you purchase. Many whole life insurance policies let you borrow against the cash value you've built up, cash out completely, or even build up enough cash value where it can make your premium payments for you. And your would-be broker will mention all of these fine features when he tries to convince you to buy a policy. It's not just insurance -- it's an investment.

This accrual of cash value is the primary reason that whole life insurance policies are more expensive than term life insurance policies, which do not build any cash value. Term life insurance only covers you for the length of the term you've bought the policy -- and for as long as you make the payments. When the term is over (or you stop paying), you have nothing to show for it. Unless you die and your heirs collect the policy, it simply expires, and you would have to purchase new coverage if you want it.

So, if whole life insurance has inherent value and is more an investment than an insurance plan, why don't more people buy it? Probably because life insurance is often a poor investment. While it produces a low but steady annual return, other types of long-term investments often outmatch the gains you can earn from it.

Why Whole Life Insurance Gets a Bad Rap

Most Americans are just fine with a term life insurance policy -- a relatively low-cost safety net to to protect the people who depend on your income and other contributions should you die prematurely.

How much you need depends on the expenses you expect it to cover -- if you're responsible for mortgage payments, or expect your income to fund your children's college tuition, you'll need more. But when those needs are in the past, you often don't need much life insurance.

A whole life policy is with you for your entire life as long as you make the insurance premiums. But what do you need that money for if your kids are grown and your mortgage is paid?

A 20- or 30-year term life insurance may be a better option for many families. And it's a whole lot cheaper. A $100,000 whole life policy for a healthy 20- or 30-something may cost about $150 per month. But the same person can often get a 30-year term-life-insurance policy that pays out $500,000 upon death for as little as $20 a month.

Many insurance brokers push whole life policies because they provide them with the juiciest of commissions. And of course, every family's situation is different. For example, there are a few interesting uses for whole life insurance that make it a good deal for wealthy individuals. But the vast majority of Americans would benefit more from term life policies.

We Don't Want to Disappoint Our Friends

Our friends mean well. And it's hard to tell them that we don't want to buy the whole life insurance they're selling. That's the problem my friend recently ran into. How do you tell someone you've known all your life -- someone who was a groomsman in your wedding -- that you're not interested?

Most of our friends are just trying hard to make a living. They want to succeed. And we want them to succeed in their new professions, but not at the expense of our own financial security.

So, no, I don't want to buy whole life insurance, nor a life insurance policy for my new baby, who, though adorable, has no income to replace. Far too often, it feels like a multilevel marketing pyramid scheme where the brokers and those at the top are making money feeding off those of us at the bottom.

My brother-in-law recently joined the ranks of investment managers at a large national brokerage house, where he'll have to sell the brokerage services in order to earn a commission and a paycheck. It's only a matter of time before he approaches his sister and me for a sale.

So How Do You Tell an Old Friend No?

We've known these people for years -- even decades. How do you tell an old friend you don't want to buy the product he's selling? The longer you indulge your friend, the more trouble you'll have. Like a Band-Aid, it's best to simply rip it off fast and say no.

My friend made the mistake of stringing his buddy along. He kept telling him that he wasn't sure or that he needed to talk to his wife. Deep down he knew that whole life insurance wasn't a good deal for him.

I recommend being open and honest. If your would-be financial product salesperson is truly your friend, he'll understand that you're not interested. It's not personal; it's just business.

Have you had to face a friend selling you a financial product that wasn't right for you and your family? How did you tell them no? What tactic did you use?

Hank Coleman is a financial planner and the publisher of the popular personal finance blog Money Q&A, where he answers readers' tough money questions. Follow him on Twitter @MoneyQandA.


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48 Comments

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robert_lawson35

The truth is that whole life insurance earns agents wayy more money. It is completely unnecessary for most Americans to own. Unless you have a lot of money and you have an estate tax possibility, or if you need to break up your assets fairly among your kids you don't need insurance past retirement age. Cheap term can be found online at places like LifeAnt, and you don't have to waste a big portion of your money on someone else's commission. Whole life has a use, but for most people it shouldn't even be in the discussion.

March 23 2014 at 6:17 PM Report abuse +2 rate up rate down Reply
Jesse Fernandez

Life insurance is very important to have but how do you know which one is right for you?

I have worked in the Banking Business for over 7 years. After years of working for a company/corporation, I decided to start my own business in the same business field. I am now a Financial specialist with New York Life Insurance Company for almost 2 years. I get to do the same thing as before but now I’m running my own business. Trust is everything and I make it my mission to earn my clients trust.

Whole Life can get very confusing but it doesn’t have to be. It does have A LOT of advantages and yes it does create a TAX FREE income when you retire.

I have to say that Whole Life is not for everyone but neither is Term. The only way to truly find out is to which one is right for you is to….

1. Sit down with a financial planner/professional/specialist and do a financial analyst of your current financial situation.
2. Go over your financial goals and needs for the future.
3. The Specialist will then create a plan that fits your financial goals and needs.
4. Go over the plan that was created for you, ask a lot of questions until you know it (don’t be timid) and then decide if it’s a plan that with help you reach financial success.

You should never have to be sold into buying something your not sure of. You should know everything there is to know about what you’re getting and feel 110% satisfied of the service that you are provided.

Knowledge is power…(do your research)…. but if you don’t do anything about it, then you’re powerless.

I hope this helps.

March 11 2014 at 12:31 AM Report abuse rate up rate down Reply
Carl A Logan

The real question is "Why do you need Whole Life Insurance for your whole life, and is the cash value really yours or your beneficiary should you die prematurely or when it is suppose to happen, If you borrow from it, do you have to pay it back and why?
If you are disciplined to save the difference on a Term Life Insurance, the savings is yours whenever you need it and you never have to pay it back. When you retire, and you are disciplined, you are Financially Independent. Do you really need a life insurance policy or you need the cash to live. Your estate is established and can afford to pay for you funeral.

January 29 2014 at 12:41 AM Report abuse rate up rate down Reply
2 replies to Carl A Logan's comment
gpfs

The reasons:
1. most don't save the difference
2. Many whole life plans can and do pay up in less than 20 years.
3. Most Term plans expire at 70
4. The vast majority of American's are NOT financially sound at retirement.

January 29 2014 at 1:22 AM Report abuse rate up rate down Reply
Elden Charles

The problem is most people are not disciplined and even if they were there are not many ways to grow tax free income. Permanent life insurance is one way. I think whole life is garbage. It is an outdated product but term can put you in big problems. Why not own your policy. Look up IRC code 7702 and go with a better permanent policy.

March 24 2014 at 3:28 AM Report abuse rate up rate down Reply
fakeconomics1

Who is on your side Consumers? Citizens? when? where? on what issue? -- Ask the Dems and Goppers ---

January 28 2014 at 8:12 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Why are these Democrats or Republicans or Tea Baggers taking us for granted? I resent these partisan perverts --- Please become an independent

January 28 2014 at 7:20 PM Report abuse rate up rate down Reply
fakeconomics1

I am not watching any speeches tonight -- I really don't trust Democrats or Republicans ---

Same fricking drama year after year--------I am fed-up with our political, legislative, judiciary and executive branches.

January 28 2014 at 7:18 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Voice Against "Con Artists"

January 28 2014 at 6:39 PM Report abuse +1 rate up rate down Reply
fakeconomics1

I feel sorry for my broker--- "Desperate Wall Street Brokers"

January 28 2014 at 6:39 PM Report abuse +1 rate up rate down Reply
fakeconomics1

I beg people in the Northern States --- Please be careful and drive only if you must. You need to be safe for yourself and family members' sake.

January 28 2014 at 6:34 PM Report abuse +1 rate up rate down Reply
steblawar

Whole life is good for younger folks because in addition to life insurance they also have a ready credit source where they can set their own payments (aside from the annual interest). 'Course credit cards these days are dime a dozen, but "back when" credit could be hard to come by anytime you moved or changed jobs. Interest is also set based on what they pay you "plus" about 3% -- so it is always cheaper than CC interest. If dividends go to buy paid up insurance the cash value also bumps up faster. 'Course with todays interest rates it may not be so hot ... but my "oldie" is paying the equivent of 5.21% (including dividends). That loan thing alone though saved my tail a few times early on. Like they say though, at some point it may not be as good as term (or annuity that'll pay to bury you) -- unless the return (as in my case) is better than any other investment I have, sadly. :-)

January 28 2014 at 5:57 PM Report abuse rate up rate down Reply