My Money Mistake & How To Avoid It

Peter's picture

One of the most exciting aspects of planning one's escape is learning new financial skills. Often learning a new financial concepts can get your creative juices flowing as you ponder how you could make use of this new idea in your own personal financial journey. Sometimes, however, learning something new can shine a humbling light on past financial mistakes. Some action in our past that we now realize was a poor financial move starts to weigh heavily on our minds and regret sets in. Today I'm going to share one of my (many?!) past financial mistakes and why I am putting my regrets aside and celebrating instead.

The Mistake

Around the time that I was finishing my undergraduate degree, I decided that I wanted to start planning for my future. I had read some stuff on investing and I saw what an advantage it was to start investing early in life. So I made plans to meet with a financial adviser - I now know he was a financial salesman and not an adviser. Along with the topics of mutual funds and automatic monthly investment plans, he talked to me about life insurance. At the time I was quite young, I had no dependents, and I had about $10,000 in debts. I had also never once considered buying life insurance, so I was not prepared in the least to defend myself against his sales pitch.

This financial salesman recommended a $250,000 universal life insurance policy. A universal life insurance policy is basically an investment account and a life-long life insurance policy combined into one. The interesting part is that any capital gains or income generated by, and retained in, the investment portion of the policy were tax free. So each month you pay a chunk of money into the policy and a portion of that payment covers the insurance premium and the rest gets invested. After a few fancy graphs showing projected growth and some slick talk I agreed to sign up. My payments were $100 each month.

The Education

I now know a bit more about how life insurance and investing is supposed to work. I'm not naive enough to think I know everything, but I do know more than I did.

Life insurance is meant to ensure that no one is left holding your debts and liabilities when you die. It also helps to ensure that your dependents have enough to make the transition to a life without your financial support. Generally, this means that you should have enough insurance to cover your funeral expenses, outstanding mortgage, any other loans or liabilities, as well as your children's education and your family's living expenses for a few years.

Another thing that I learned is that as your assets increase and liabilities decrease (i.e. your net worth increases) your need for life insurance decreases. This is because your own assets can cover costs after you die.

The Re-evaluation

After I began to understand the point of life insurance I began to look a bit closer at the policy that I had. I discovered a few things:

  • Of the $100 I was paying each month, about $70 was going to fees and insurance premiums. I was only saving $30 each month.
  • The cost of universal life insurance is much higher than term life insurance.
  • My actual insurance needs were much lower than $250,000. I needed more like $20,000.
  • The investment funds available within the insurance policy all had very high management expense ratios of around 2.7%.
  • Since I was investing in funds and leaving the money alone, I was not incurring any capital gains so the tax sheltered account was not helping my cause at all.

All in all, it was a pretty poor financial vehicle for me. During the 7 years that I had the plan I had paid $8400 of which only $2520 was invested. So I decided to change things.

The Celebration, Not Regret

Now I've decided to go with a term life insurance policy. It is much cheaper and provides the same death benefit. Now I'm paying around $30 each month for insurance and I'm investing the $70 myself. I also took the balance of the investment part of the policy and bought some less costly investments. I'm celebrating too.

Why am I not regretting the wasted money? Well, the way I see it is that I could have never realized that mistake. I could have paid for that expensive insurance for my whole life and never noticed what a bad deal it was for me. Instead, I did realize. Now I've improved my monthly cash flow and I haven't lost any of the benefit. I'm still insured so my family will be covered if I die. The only difference is that I'm paying much less than before and I'm investing much more than before. That, for me, is cause to celebrate.

Lessons You Can Take From My Mistake

I think the best thing that you can do is educate yourself before making big financial decisions and be wary of financial sales people. By signing up without understanding what I was getting, I ended up with a very poor product for my needs. Make sure you understand your needs when it comes to insurance because over-insurance is a waste of your hard earned money.

The other important thing to remember is that discovering a mistake is good news, not bad. It's only bad if you never notice. So celebrate your mistakes, feel good that you've just learned something new and enjoy the feeling of improving your financial situation. Good luck!

This post is part of a group writing project, My Money Mistake and How to Avoid it, proposed by Canadian Capitalist over on his blog.

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Comments

Thanks for sharing your

Thanks for sharing your story for the group writing project. Cheers!

Peter's picture

No problem. Thanks for

No problem. Thanks for providing the idea and the inspiration!

You make a great point that

You make a great point that you should be happy when you discover a money mistake that you've been making (or any other type of mistake), as it gives you a chance to correct it (instead of continue making it).

Salesmen pretending to be investment advisors is pretty scummy way to make a living. You weren't the first (or the last) to be taken in by these low-lifes...

Peter's picture

Mr Cheap: Thanks for

Mr Cheap: Thanks for visiting!

Yeah, this guy was pretty underhanded. I wouldn't call all of them "low lives" though. There are lots of financial salespeople who are honest with you about how they get paid. Generally, yes, there are better much options when seeking advice though.

I would much prefer to pay someone directly for advice. At least that way they are motivated to do a good job to keep you coming back. When they are being paid by high MERs and commissions they keep getting paid even if the funds are not performing.

Peter

Great attitude! It's all

Great attitude! It's all about improvement (not regret).

Mike

Thanks for the brief lesson

Thanks for the brief lesson in life insurance. I've always heard term is better than universal... however I still have a lot more research to do. Does anybody know a good place to get more educated on life insurance? Who are the best Life Insruance companies?

Peter's picture

First, thanks for

First, thanks for visiting!

Mike: I totally agree. You can't change the past and if we could we'd be millionaires! Hence the focus on improving for the future.

JB: It not always as easy as saying on type of life insurance is better than another. It all depends on your personal situation. If you have a very high income and taxes are a significant concern then universal might be appropriate and worth the extra fees. For most people, however, term is all that is needed.

I've been doing some reading and thinking about life insurance recently so maybe I'll try to put together a more detailed overview.

Hi, Not only is UL worse

Hi,

Not only is UL worse than term (especially if you are disciplined enough to invest the difference in premium as you are), but it looks like you bought a particularly poor UL policy. Insurance costs and admin costs of $70 per month is way out of line even for a UL policy for 250k insurance for a young person.

Thanks,

Bruce

Peter's picture

Hi Bruce: Yes, I had a very

Hi Bruce: Yes, I had a very poor life insurance policy for my needs. Your feedback makes me feel even better that I found my mistake early on (relatively). I can't imagine paying that rate for any longer than I did! Thanks for sharing your insight.

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