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Dear Liz: You recently suggested an insurance salesman be reported to state regulators because he suggested a reader stop funding a 401(k) and instead fund an insurance contract with after-tax dollars. You were way out of line. It’s very likely tax rates will be going up, so it may make sense to trade a tax benefit now for a better one in the future.

Answer: You might have a valid point if the reader were wealthy enough to be funding a life insurance policy or annuity in addition to his 401(k) contributions. Wealthier people are already facing higher tax rates, and they are more likely to be in the same bracket, or perhaps even a higher one, when they retire.

The fact that the insurance salesman suggested the reader redirect his retirement contributions to the insurance contract indicates the reader didn’t have the cash flow to do both. So it’s still quite likely that the reader will drop into a lower tax bracket in retirement, in which case he’s given up a valuable tax break now for a less valuable one in the future.

A red flag should go up anytime an insurance salesperson recommends you stop funding a tax-deductible retirement plan or that you tap home equity to buy whatever he or she is selling. That indicates the product was designed for someone wealthier than you. At the very least, you should run the purchase past a fee-only financial planner — someone who doesn’t earn commissions on product sales — to make sure you’re getting the whole story.

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Categories : Insurance, Q&A, Retirement

6 Comments

1

I love it when people write in to try and prove Weston wrong and then she spanks them with her superior rhetoric! Instead of trying to prove her wrong, just listen. She’s a very smart person who knows what she’s talking about.

2

Anyone getting investment advice from a “salesperson” should run, not walk, to a fee only advisor before making any changes that involve purchasing a new product!

3

Exactly. If the investment’s worthwhile, it can stand up to the scrutiny of a knowledgeable advisor who isn’t getting paid to recommend it.

4

No mention of the roth 401K though.

5

Hi Liz,

I really enjoy reading your articles and I think it would be good to clarify who does and does not need life insurance.

You are right that not everyone needs life insurance however there are many situations where life insurance would still be useful even if you don’t have “dependents”. When my dad passed away, he had no life insurance, they locked up his what little funds were in his bank account and since he died without a will, all we could do was move his stuff out of his rented house and pay for storage until it went through probate. No amount of money would have stopped me from being there when he needed me. However, it would have been helpful to have had some funds available to cover the cost of the storage unit, resolve his final debts or cover the 3 weeks of wages I lost while caring for him in those final five weeks. I was fortunate to have enough in savings to offset the time off work. I know there are many ways be sure there are funds available and accessible but often those without dependent children think they don’t need life insurance and miss out on considering that such a situation could arise.

6

As with all financial products, you have to weigh the benefits against the costs. In this situation, his money might have been better spent on a living trust that would have avoided probate and given you access to his bank accounts. (Simply adding you onto the account would have helped.)