The Knowledge Gap
Complexity is the route of evil. The more complex a product or financial strategy is the more it probably favors the the issuer, not the buyer. The knowledge gap handicaps doctors when they go to make financial decisions. Simple financial cliches that most investors know “Don’t Mix Insurance and Investing” and “Buy Term and Invest the Difference” can be profound knowledge to a doctor who is solely focused on medicine. These products are purposely made to be very complex.
Mistaking an insurance salesman for a qualified investment adviser
Everyone markets themselves as a financial advisor or a financial planner these days, no matter what their qualifications. Insurance salesmen, stock brokers, and mutual fund salesmen like to take advantage of the fact that they know just a little more than you. Unfortunately, most of their training is in sales, ultimately they will push whatever is the most bang for their pockets.
The False Belief that insurance products provide asset protection
Insurance Salesmen are quick to point out that the cash value of a life insurance policy or the value of an annuity is protected from malpractice claims. What they usually fail to point out is, so are your 401Ks, IRAs, and sometimes a great deal of your home equity.
The False Belief that insurance products provide tax benefits
It seems the insurance industry focuses on taxes and asset protection to sale most of their products. In actuality, most tax benefits can be reproduced in much simpler types of accounts and for much much much lower cost.
The Lack of Value of a Guarantee in Insurance Products
Most Insurance products come with some guarantee. However, have you ever wondered, what is the actually percentage of usage of that benefit and how does it compared to the cost of that extra rider etc…I know Insurance companies very rarely make mistakes that will cost them profits. The only known example of this is with the Long-Term care policies and they are quick to raise premiums on current policy holders. How nice of them.
The True Value of Liquidity
The lack of liquidity these policies give you is astonishing. Some annuity products make you wait 7-15 years before you can access all your money. I don’t know about you, but I am lucky to know what life is going to throw at me in the next 5 years let alone in 15 years. This lack of liquidity can cause headaches when you change your plan down the road. Liquidity has a value, and the insurance company does not compensate you for this additional risk.