Cashing in 401k, pay penalties to buy whole life

[FUEGO]

I did a quick check on life insurance quotes for a 35 year old in Utah. Amount of coverage is $2,000,000 (versus the $2.1 million Mr. Olds has in the WSJ article) Assuming good health, a 10 year term policy is $480 per year, a 20 year term policy is $820. He basically paid $50,000 for the same amount of coverage.

 

[dshibb]

"He basically paid $50,000 for the same amount of coverage."
Well he did because he thought that whole life is a better investment than 401K. He thought that he was "investing" that 50K.

By the way, you can't regulate your way out of salesman like that, it wont help anything. The dumb ones will still get taken, and it will just drive out more good agents(a problem that has consistently caused a higher and higher proportion of bad agents). A large amount of highly intelligent insurance agents left during the 90s and they wont come back. What is left is worse than what it used to be.**You are going to continue to have problems as long as their is no formal education on finances anywhere. The problem isn't regulation it is knowledge. We teach people how to read, how to do math, chemistry, physics, etc., but when it comes to what an Adjustable Rate Mortgage is, the powers of compounding interest, etc. we let leave them clueless.

 

[randyman65]

What we could regulate are the product they are allowed to sell. There are known bad products which seemingly everyone konws about, but which are legal to sell. We're not allowed to sell DDT, asbestos, or heroin because we know them to be almost exclusively harmful products. Why should we allow hucksters to continue to enrich themselves selling harmful financial products?

 

[dshibb]

Well in my opinion, I can't really think of a life insurance product that doesn't serve a good purpose to someone. Whole Life can serve a purpose a good purpose as a low risk vehicle amongst very high income individuals and corporations. I think you'll find this with all the life insurance products.

Also the creation of new products is highly regulated by the states. They all have to be approved by the state first. I can tell you that my state wont approve a product unless they see a that is serves a legitimate purpose. The primary problems are suitability or the agent writing a policy the wrong way. In the first part, you don't write variable life for someone who is 75(extreme example) and you shouldn't get someone to cash in their 401K to buy whole life(similar to stock brokers recommending to a client to surrender their whole life policy and take stiff penalties to buy stock--there are other options in that scenario). The second part is for example writing a variable life policy, but not having the client max fund(non MEC) the policy. Without over funding a policy like that the thing is sure to blow up. Those are the two biggest problems amongst insurance agents, but also is a problem in the securities industry as well(even with all the regulation they have).

 

[MasterBlaster]

Well in my opinion, I can't really think of a life insurance product that doesn't serve a good purpose to someone.

Even though there may be nuggets of "good" in any insurance policy, The takeaway here is that the whole life poilicy will cost the OP big bucks and make his task of funding a retirement incredibly more difficult.

In this case the answer is no, there is no good to be had by switching out of the 401K (with match), pay immediate taxes plus penalty, pay big insurance company fees and commisions, to get a marginal product.

Agent : This policy is really really good
Sucker: Really !
Agent: < to himself> for me !...

 

[dshibb]

I said that this was a horrible idea. I'm in the industry and this is one of the dumbest things a person can do. The sad thing is that I bet the life agent was dumb enough to believe that this was actually a good option. I honestly think I have met more life agents that were dumb than ones that tried to screw people.

I was just responding to the previous posters point that the government should regulate the products. My response was that the state governments already do, they spend a long time analyzing products before they approve them, and that it wouldn't be a good idea to prevent products that served a good purpose somewhere because they could be abused elsewhere.

 

[randyman65]

If the products are so regulated, why is the near-universal opinion of people with on this board that these products are generally predatory, and principally benefit the selling agent? In this example, the agent either saw a juicy commision or was so poorly educated in basic financial planning that he could be seen as incompetent. In either case, he was allowed to advise a person to make a very expensive decision based on a lack of fiduciary responsibility or lack of knowledge.

 

[ChrisC]

Well in my opinion, I can't really think of a life insurance product that doesn't serve a good purpose to someone. Whole Life can serve a purpose a good purpose as a low risk vehicle amongst very high income individuals and corporations. I think you'll find this with all the life insurance products.

Also the creation of new products is highly regulated by the states. They all have to be approved by the state first. I can tell you that my state wont approve a product unless they see a that is serves a legitimate purpose. The primary problems are suitability or the agent writing a policy the wrong way. In the first part, you don't write variable life for someone who is 75(extreme example) and you shouldn't get someone to cash in their 401K to buy whole life(similar to stock brokers recommending to a client to surrender their whole life policy and take stiff penalties to buy stock--there are other options in that scenario). The second part is for example writing a variable life policy, but not having the client max fund(non MEC) the policy. Without over funding a policy like that the thing is sure to blow up. Those are the two biggest problems amongst insurance agents, but also is a problem in the securities industry as well(even with all the regulation they have).

Occasionally, I arbitrate disputes in the securities industry involving, in many cases, broker/account executive and customer issues. Suitability is generally the major area of dispute. However, I think the securities industry has more tightly woven controls over its retail operators, with licensing and oversight, than the insurance industry. I was extremely busy arbitrating cases during the aftermath of the tech bubble and some of the cases involved annuity products, which securities retail operators can also sell. The problem might be more acute in the insurance industry, but better controls, training and registration requirements would be helpful.

This is also a problem with residential mortgage lending too, as witnessed by the housing bubble and mortgage products that wound up in the wrong hands. One of the fixes for the poor underwriting of mortgage products is to register and license residential mortgage lenders state-by-state: Safe Mortgage Licensing Act - HUD This would be similar to the securities industries, Central Registration Depository. I suspect something similar to this will take place, or has taken place, in the insurance industry. Aren't there special products or special clients in the insurance industy that require better training or licensing for the agents in certain States? I'm thinking that products tailored to the elderly, like long-term health insurance, might require special training or licensing.

 

[dshibb]

randyman you are obviously not reading what I'm saying. How much more clear do I need to be? I agree with everybody else on this board that this guy got screwed. And clearly either did it for the commission or because he was incompetent or both(what I have said numerous times already).

Products being regulated and agents being regulated are two separate things. Products are heavily regulated by the states. In terms of regulation of agents, all I have seen is that every time we pass a new law regulating agents, more good ones leave and more incompetent ones stick around. You figure out a simple way to regulate the agents without this happening, I'm all ears. For most agents, the life insurance business isn't as profitable is it used to be. Actually in most cases if you just catered to middle class individuals, you would barely make a living in it. Every time a new law passes making the work more time consuming and more of a hassle, more knowledgeable agents leave for securities, property casualty, etc.

 

[dshibb]

Yes each agent has to be registered and licensed in each state they do business, as well as the carriers, too.

Yeah, variable products and I its think jan 2010 indexed products will require a securities license, too. I'm pretty sure that Long-Term Care does require extra licensing, or at least certified completion of a class or something.

The securities industry's compliance is getting pretty rediculous these days. You're not supposed to send out an email without it being looked at by compliance first.

I'm sorry, but regardless of what you do a handful of agents, brokers, etc. are going to screw their customers. And the only way that starts to come down, is if the population became a little more eduated on matters of finance. I seriously don't get why every high school student is expected to take chemistry, physics, advanced literature classes, gym classes, etc., but no where not even in college are people expected to take a single class on finance. I'm starting to wonder if governments across the country like to keep their population financially illiterate.

 

[FUEGO]

Products being regulated and agents being regulated are two separate things. Products are heavily regulated by the states. In terms of regulation of agents, all I have seen is that every time we pass a new law regulating agents, more good ones leave and more incompetent ones stick around. You figure out a simple way to regulate the agents without this happening, I'm all ears. For most agents, the life insurance business isn't as profitable is it used to be. Actually in most cases if you just catered to middle class individuals, you would barely make a living in it. Every time a new law passes making the work more time consuming and more of a hassle, more knowledgeable agents leave for securities, property casualty, etc.

Maybe life insurance sales lacks high levels of profitability for the same reason that turd sandwich sales also lacks high profitability. The products stink. Sure, there may be a once-in-a-blue-moon situation where whole life is the best possible investment option for someone.

But in the run of the mill case, the average joe walking in off the street needs a decent term life policy to provide insurance against his premature demise to protect the financial well-being of his family. Not some convoluted high fee "investment". When the whole life products are 20-50x the cost of a term policy of similar death benefit amount, something stinks. And it ain't the turd sandwich shop next door.

 

[dshibb]

Besides the comparison to a turd sandwich, I'm not going to disagree much with you. I personally get into a lot of trouble with other agents for berating the insurance industry and the average idiot agent. I personally hate whole life, and wont sell it(in 99% of all cases). I agree that the vast majority of clients should just get term.

The work that I'm in is exclusively high net worth individuals and corporations. And that niche is highly profitable because there is no better asset for a corporation to own than life insurance, and there is nothing better to deal with estate tax issues than life insurance. And trust me(even though it is never whole life), for us permanent policies aren't once in a blue moon. So, if a bunch of cases where permanent policies were written to the wrong people, got the states to stop approving them, me and a lot of other people would be very angry.

 

[ChrisC]

I'm sorry, but regardless of what you do a handful of agents, brokers, etc. are going to screw their customers. And the only way that starts to come down, is if the population became a little more eduated on matters of finance. I seriously don't get why every high school student is expected to take chemistry, physics, advanced literature classes, gym classes, etc., but no where not even in college are people expected to take a single class on finance. I'm starting to wonder if governments across the country like to keep their population financially illiterate.

Ah, that might solve part of the problem. Putting aside the crook agent or broker, the problem even with "consumers" who possess the basic rudimentary level of financial literacy is still nonetheless "suitability." The broker, agent or lender, like the doctor or lawyer, has to know what product, treatment or legal structure is "suitable" for a client, taking into account the base of knowledge and understanding possessed by the client.

I recall a case a while ago involving a broker who would have been the type of broker I would have hired as my own: extremely knowledgeable about products, very candid, good judgment, and an excellent track record. His professional training, background or ethics weren't the problem; his client's knowledge base was the problem in that his client clearly did not possess the requisite acumen and degree of knowledge necessary to evaluate any financial risk beyond Government guaranteed debt -- this is someone you basically stick in T-bills or high-grade fixed income securities or products -- especially after he tells his broker he doesn't want to risk any of his principal. Any other product, despite what he might say on his securities risk disclosure profile, was not suitable for him.

We all know clients like this; you really have to "know your customer" before you launch them into products they just don't understand or will cause them problems later if everything does not go according to Plan A.

 

[dshibb]

Actually, if you want to see what would be healthy for these industries. If financial planners could charge a flat fee and then discount the fee based on commissions paid for the sale of products, etc.(which would get construed as rebating in today's environment) and then for client to understand that it is the best thing for them because now there isn't any financial incentive to sell higher commission items.

Example of how it would work. Client pays flat annual/semi/quarter/monthly fee to financial planner. That financial planner than discounts next years/quarter's/etc. flat fee by the exact commission that they have earned from that client, and if excess exists it gets carried over. The financial planner gets the benefit of essentially prepaid commissions, and the client gets the benefit of getting advice that isn't influenced by their financial planner's lust for higher commissions. Also the client can call on that financial planner any time that they need good information.

The problem is that today's customers would get scared off by the upfront fee thinking that they would be getting soaked.