Don’t Fall for this Radio Sales Pitch

By Ryan Craner

Over the past few years several Strategic Planning Group clients have contacted me requesting a SOS (Second Opinion Service) regarding proposals pitched to them or their extended family or friends by various insurance sales organizations in Utah. These pitches are coming via self-proclaimed “gurus” on the radio, at dinner seminars, and more. Once I examined the sales proposals, it didn’t take long to identify them as an old insurance gimmick that has been repackaged and repurposed. Once again, aggressive salespeople are out pounding the pavement looking for fresh clients.

Insurance Company Tricks
On the surface many of these pitches appear to be valuable insider only financial strategies that eliminate all the taxes on your 401(k) and IRA accounts. As you proceed through their sales process you will quickly discover that the actual underlying strategy is to liquidate and pay full taxes and possibly penalties on most or all your retirement investment assets. Then you take what is left after full taxation and use it to make a massive premium payment on usually one large illiquid cash value life insurance policy from only one life insurance company. The final outcome is far different than all the come-ons and one-liners that make it all sound like your “retirement salvation.”

Radio Guru’s
On the radio every weekend you will hear this endless diatribe about magical “tax free,” “risk free,“ and “safe money” investments. They may go on and on about how risky traditional retirement investments are. They tell stories about years,  like 2008, that people were “wiped out” and destroyed their retirements. These same so-called advisors also talk about “social security secrets” that only they know… These secrets can supposedly give you tens of thousands additional in social security income over the course your retirement. This is obviously a ploy to get people to contact them. This may come as a surprise to you, but the Social Security Administration does not have secret strategies that only some people know. There are some choices to make and there is some strategy to use, but there are no secrets that only these salespeople know. Any knowledgeable advisor can help you with social security decisions, and the Social Security Administration itself is available to help with your choices.

These insurance agents love to focus on people’s fear of a market drop. They tend to over emphasize the risk of a market downturn. Let’s be realistic, people can and do damage their retirement by making foolish mistakes in their retirement investments. People who over concentrate in single speculative stocks or make huge bets on other risky investments certainly can get “wiped out”. Nevertheless, when using a diversified and long-term, disciplined approach, there certainly will be down years, however, historically they are survived if the client practices long-term discipline and diversification principles.

You might be asking, “Why in the world would anyone allow themselves to get sucked into this sales pitch?” It really boils down to consumers failing to seek an objective and competent second opinion.

What exactly is the problem with this gimmick? 

A severe lack of investment diversification: It is important to have a significantly diversified portfolio that covers many different types of asset classes of bonds, stocks, and certain specialty positions. Doing so makes it that it is unlikely that any one trend in the economy could expose your portfolio to permanent damage.
In this insurance gimmick all or most of the retirement investment money is typically put into a single life insurance policy, with just one insurance company in charge of what your rate of return will be. This is not a good position to be in. Having all or most of your money in just one insurance company is not proper diversification.

A loss of liquidity: Most of these life insurance policies have expensive and long-term surrender or early withdrawal penalties. In many cases, 15-20 years into the future.

Exorbitant internal fees and expenses:  Remember, these are life insurance policies where the built-in cost for the life insurance coverage is deducted from your principal every month on an increasing scale — the older you get, the bigger the cost.

Claims of higher taxes in the future:  One of the ways insurance sales people talk consumers into these maneuvers is the claim that you will pay higher tax bills down the road in retirement. They overhype the idea that your taxes are always going up and that you would be better off to liquidate and pay taxes now. They commonly propose that you pay tax in one year or a short period of years on large 401k and IRA balances. Then you can allegedly receive “tax-free” income in retirement from a life insurance policy. They often fail to make it clear, that in order to
(even possibly) get tax-free withdrawals you have to borrow your own money from the insurance company every year. Often times these loans are not feasible until 7-10 years after you buy this huge life insurance policy.

Keep in mind that in our experience, as most people enter retirement they pay less tax and are in lower tax brackets than before retirement. This makes it an advantage to take steady withdrawals from your IRAs in retirement. Also, remember that if tax-free income is a priority, this can be accomplished by making strategic Roth IRA conversions before and during retirement. Doing this creates tax-free income from Roth IRAs without all of the expense and illiquidity problems of buying a large, commissionable life insurance policy.

The bottom line is this—For more than 20 years I have been warning my clients about these gimmicks and I am not alone. You can hear the same concerns and advice from consumer advocates like Dave Ramsey and Clark Howard.

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