Cash Accumulation life insurance

[Peter York]

I have been working with a financial advisor for about a year now and he is strongly suggesting permanent life insurance. I am skeptical about it because I would rather save the money that I would put into the policy and instead put it towards a real estate investment. Also, I am only 21 so life insurance seems like a waste of money right now. He is pushing it because it is a guaranteed return of 5% and it is also tax free. Is permanent life insurance worth it?

[Joe Splitrock]

@Peter York your financial adviser is actually an insurance salesman. The 5% return is nonsense. Ask him this question. If I pay $10,000 each year for the next 5 years, how much money can I withdraw at the end of year 5? Spoiler alert, it is not $50K pus 5% per year. 

Why is he pushing this insurance? Because 30-70% of your first year premium goes to pay his commission. Top performers may even get as much as 100% of the first years premium. In other words, these policies are extremely lucrative to sell. You pay in for years and have nothing (besides life insurance). 

Ask yourself how does the insurance company make their annual return? The answer is they invest your money in bonds, mortgages and the stock market. Nothing special and there is no magical way for them to get a better return. If you peel away the expenses, you are better investing all the money directly in those things yourself. Or better yet real estate!

You don't need life insurance if you are 21 with no family. Once you have a family, get a term policy that ends once the kids are out of college. Invest your other money in real estate. 

If you are considering life insurance, ask your planner these questions:

1. How are you compensated?
2. Do you accept referral fees?
3. Will you itemize the commissions you will get from the products you offer me?

Fair questions to ask, but good luck getting a straight answer.