Tuesday, January 17, 2012

Don’t Mix Life Insurance and Investments

The top bid in the Bloggers for Charity initiative was Glenn Cooke at InsureCan Inc. He donated $100 to the Wilmot Family Resource Centre that provides affordable social, educational, and recreational services and programs.

What would you think if your car insurance broker suggested that you pay higher premiums for your car insurance in order to build up your RRSPs? You’d probably think that something was funny, and go looking for a real expert for your RRSPs.

Conversely is your investment advisor the first person you call for advice on the best car insurance rates?

Both of those situations smell a bit funny. Yet swap out the words ‘car insurance’ for ‘life insurance’ and all of a sudden many consumers find the idea more palatable. Why is that?

The answer lies with a bit of history and a bit of insurance product design. Car insurance premiums are priced on a year by year basis – risk is passed along in the form of premiums each year. For most life insurance products, though, premiums are levelled out across a number of years, sometimes even out to the entire lifetime of the insured. This levelling process means insurance companies build up a reserve of premiums inside the policy over time. That reserve is intended to cover some of the higher risk on life insurance as the insured gets older. The insurance industry, however, has taken that reserve and marketed it through the years as a saving plan or investment. And that has given us an environment where life insurance specialists are dabbling in different investments.

Hypothesis #1: You can find better investment options outside of the life insurance industry.

The standard sales technique goes like this: If I show you that you could invest in a product where the growth was tax deferred, wouldn’t this increase your investments substantially? Of course it would – when compared to an investment that isn’t tax sheltered. What got missed was that most Canadians have a variety of other tax sheltered investment options available to them. RRSPs are always a better option than investing in a life insurance policy, and how many Canadians have maximized their RRSPs? Few have.

Now some in the insurance industry will tell us that insurance investments become worthy after you’ve maximized your RRSPs. At that point, the tax sheltering seems to become comparable to other types of non-insurance investments. Unfortunately (for the life insurance industry) while the tax sheltering may be comparable, the investment options are not. Life insurance investments typically have hidden surprises like heavy back-end loads and high MERs. These two things mean your money is likely to be locked in place and provide you with a lower return than similar options available outside the life insurance industry.

It’s worth noting that there is a big push from inside both the insurance and investment industries (and the banks) to capture all of your business. There are a lot of benefits to the industry for you to deal with one place for both your insurance and investments – benefits that are not necessarily in your favour.

Corollary #1: Don’t use your insurance advisor for investments.

Insurance agents and brokers are licensed to sell insurance – we are not licensed to sell investments. The big world of investments, the billions (well, seems like that) of mutual funds available, are simply not available through your insurance advisor. So you are going to get an insurance product first and foremost, not a product that is primarily intended to be an investment.

Secondly, you’ve now purchased an insurance product that’s been repurposed for investments. What does that do to your insurance? Do you now have the proper insurance product? Or did you have to bend on the insurance in order to get the ‘right’ investment?

Corollary #2: Don’t use your investment advisor for insurance.

Some advisors are dual licensed – they are able to offer both investments and insurance. It seems like we have the best of both worlds. But do we?

I’d like to suggest that both the investment and insurance environments are so vast and complex that it’s virtually impossible for one person to be expert at both of them. In the field of insurance we have our own compliance regime, product changes, risk management, riders, ratings, product idiosyncrasies, and a slew of other minute details that can consume an advisor’s entire career just keeping abreast of them all. What’s the best company for someone who quit smoking six months ago? What’s the best company for someone with diabetes? Or for a pilot? Or for someone with 4 children? If an investment advisor is staying on top of the investment environment, how can they possibly also have the time to stay on top of the complex insurance environment as well?

If you do want to stay with one firm for loyalty reasons, some larger firms have both investment and insurance reps that will refer business between each other. This allows you to get the best of both worlds while sticking with one company.

In summary, if you’re using an advisor for investments, find yourself an expert on investments and stick to investments. If you’re looking for life insurance, find yourself an expert life insurance advisor and center the conversation around insurance. Use two different people for these services.

Too late? Have you already intermingled these two products? While the life insurance industry has traditionally trained its reps to never replace a life insurance policy, I’ve provided some strategies over at Financial Highway on How To Replace a Life Insurance Policy.

Glenn Cooke is a life insurance broker and president of InsureCan Inc. He is happy to provide a second opinion on your life insurance options and does not offer investment advice to his clients. He can be reached at (866) 662-5433.

2 comments:

  1. The Blunt Bean CounterJanuary 17, 2012 at 7:20 AM

    Michael, thx for participating in Bloggers for Charity and to Glenn for making a donation.

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  2. Good post thanks - I will tweet it and eventually repost when my new site is up and running

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