I’d been out of college about nine months when a fellow alum and acquaintance contacted me to catch up and “buy me lunch.” Following my lifelong philosophy to never turn down a free lunch, I agreed. He wasn’t a close friend, but he was a fun guy, and we’d had some memorably fun nights out. I met him at a faux-Irish pub, and walking in there I was thrown off by his tailored, professional look. You have to understand, this is a guy we’d nicknamed “dirty guy” before we knew him because we saw him at the dining hall after a rough night and it looked like he’d emerged from a kind of primordial party fissure deep within the earth.
Lunch started off well, but fifteen minutes in he got very serious and said something like “you’re starting to make some money, have you thought about securing your financial future?”
I quickly realized that I wasn’t having lunch with a friend. I was getting an insurance pitch! This is so common. No less than four friends and one wife (mine) have relayed similar stories to me, so there’s a good chance this has happened to you. We all followed the promise of free soup in a bread bowl only to be served cold canned financial information.
If you’re still in college, this will likely happen to you after graduation (the probability nears 1 if your college has a business school). The best I can do is to prepare you for some of the products this person might try to sell you.
• Term Life Insurance. This is the simplest product in your acquaintance’s distressed leather satchel. You will pay a small amount of money to the insurance company monthly, and if you die, the insurance company will pay a lump sum to your beneficiary. The term implies the length of the agreement; a twenty-year term locks in your monthly payments for twenty years, meaning that they can’t increase your monthly payments if you become ill. After twenty years, you walk away without anything to show for it (except, you know, still being alive). Term insurance is a completely legitimate product, and it’s usually cheap. As a healthy young adult, I pay roughly $20 per month for a quarter million dollar plan. But if no one relies on you for income, you don’t need insurance. I didn’t get this insurance until I got married.
• Roth IRA. Many insurance companies also offer to manage your Roth IRA, which is a retirement account with large tax benefits. Everyone who can afford a Roth IRA should have one; they are decidedly not a scam. But this company’s Roth IRA might be. In long term investing, fees can seriously eat into your investment’s value, and an insurance company that sends a person to your house is guaranteed to have higher fees than a low-overhead, dedicated investing operation like Vanguard, Fidelity or T. Rowe Price. But overall, having a Roth IRA with an insurance company is better than no Roth at all.
• Whole Life Insurance. This is where the obfuscation begins. I vaguely remember being sold whole life insurance as a kind of life insurance on steroids, and that to choose term insurance would be like choosing roast beef over steak. Charts and graphs were brandished. Income streams were promised. Confusing tax terms were conjured. But in reality, whole life insurance is just life insurance with forced investment tacked on. I’m just giving a rough estimate here, but a whole life plan for the quarter million dollars I listed above would likely be closer to $130-$150 per month than the $20 I pay. A small amount would go toward the actual insurance, and the rest would go into an investment account with guaranteed minimum returns. It sounds okay on paper until you start looking into the nitty-gritty details. Every company is different, but all of these plans have some form of commissions, yearly fees, and early withdrawal penalties, and in general they feel like a piece of machinery that has been made complex on purpose in order to deceive. In almost every case, it would be better to buy term insurance and invest the remainder yourself in low fee funds from a dedicated investment house.
• Variable Annuities. Just no. I cannot think of a single reason you should buy one. They’re obscenely profitable to the seller, and are too complex for me to explain simply in a paragraph. If you avoid all products that fall into those two categories, you will go far in life. Since variable annuities are by far the most profitable product listed here, your acquaintance may try hard to sell these. If so, don’t bow to the pressure, and feel free to order another appetizer on his or her tab.
It’s important to understand that insurance companies hire large numbers of trainees out of college knowing that only a small percentage of them will survive. This army of post-collegiate insurance salesmen is on a Sherman’s March to prove themselves and keep their jobs. We can sympathize with them and wish them the best, but it’s important to recognize when social pressure is leading to bad decisions. Don’t let someone hamstring your future with a toxic product at what is essentially a financial Tupperware party.
I’m not trying to disparage insurance salesmen so much as alert you that when people are paid commission to sell products, healthy skepticism is crucial on your part. My story ends happily. My acquaintance is now a friend. I have my term insurance through him, and I had my Roth with him until I rolled it into a low-fee Vanguard account. I don’t blame him for the early withdrawal fee I paid; I honestly never would have started saving that soon out of college if he hadn’t shown up. I work with him where it makes sense for both of us, and there are serious benefits to having a friendly professional a phone call away in this age of web-only investing. There is one sad thing though, and it’s worth mentioning: he no longer buys me lunch.
E.A. Mann is an engineer and freelance writer living in Warren, R.I. He has a twitter account, but feels like an old person when he tries to use it.