Robert P. Murphy is an American economist, consultant and author. He has a PhD in Economics from NYU, is a fellow at the Mises Institute at AuburnUniversity, has appeared on cable business channels, and been involved in national debates over government economic policy. When it comes to money and finance, Murphy qualifies as a pretty smart guy. And yet, until recently, he had no clue about whole life insurance.
For several generations, the decision to finance a college education has been relatively easy: getting a degree is so valuable, it’s worth borrowing for. The financial anchor of debt could usually be overcome by the increased earnings expected from a higher level of education. But in the last decade, the decision to borrow has become less certain. Student debt has a tipping point; the costs can be too steep, and the consequences can seep into other aspects of life.
Sometimes when people project their financial futures, they conclude, “Well, when I retire, I don’t think I’ll need life insurance.” But one of the advantages of permanent life insurance, i.e., insurance designed to last one’s entire life, is the flexibility to re-purpose benefits at a later date. What was once intended to provide immediate relief for dependents can be transformed to preserve an asset for future generations.
After almost four decades as the recommended and predominant form of retirement saving, pre-tax qualified plans, such as IRAs and 401(k)s, appear to be losing their favor with both experts and consumers. Instead, Roth accounts featuring after-tax deposits and tax-free withdrawals are increasingly the option of choice, particularly with younger Americans. This shift is so pronounced that Wall Street Journal reporter Anne Tergesen began a June 23, 2014, article with this declaration: “You probably know the conventional wisdom: Tax-free Roth IRAs and 401(k)s –a relatively new and fast-growing breed of retirement account – make the most sense for young investors.” Yep, that’s right. For at least one observer, regarding a particular segment of the population, Roth accounts are now “conventional wisdom.” (But you “probably knew that” didn’t you?) But wait, there’s more…
The term “red herring” is used to refer to something that misleads or distracts from the relevant or important issue. In discussions of whole life insurance by mainstream financial media outlets, a common red herring for consumers is the “excessive” commissions earned by life insurance agents for providing these products. According to these pundits, the prospect of large commissions harms consumers in two ways: it skews agents’ recommendations toward more expensive policies, and diminishes policy performance because the commissions paid to the agent result in lower cash values and higher surrender charges. Theoretically, by themselves, these assertions seem reasonable, and may grab the attention of readers and viewers. But other real-world factors are part of the equation, and a closer look suggests that a focus on commissions distracts consumers from the relevant issues in a life insurance decision.
Retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, annuity contracts, bonds, and mutual funds have beneficiary designations. Assets with beneficiary designations can bypass the probate process, allowing heirs to receive funds in a timely manner. To ensure the speedy distribution of funds, beneficiary designations take precedence over similar stipulations in a will. The challenge for households is that it is impossible to consolidate beneficiary designations. Each insurance policy, retirement account, or annuity has its own beneficiary designation, and if life events (a birth, death, divorce) necessitate a change in beneficiaries, the correction must be made to each account. And the responsibility to update beneficiaries falls squarely on the individual; it is impossible for financial institutions to be aware of all the life events that might require beneficiary changes. Even if you can’t consolidate your beneficiaries onto one statement, you can consolidate the process, and minimize the possibility of a beneficiary error. Here are several options: