Self-Insure: How Financial Institutions Get You To Do What They Want

Unique Advantage Monthly Client Email – 09/01/2023

by Kyle J Christensen, CFP, Principles-Based Financial Planner

The Four Rules of Financial Insitutions
1- They want our money.
2- They want it every time we get paid.
3- They want to hold onto it for as long as possible.
4- They want to give back as little as possible.

It’s always potentially dangerous to assume, but I’m still going to do it.  I assume that your objective with your money (the money you work hard to earn) is to have it provide you with two types of freedom.  One type of freedom is the freedom to do things.  The other is the freedom from things (i.e. freedom from having to be at work while your kid is playing a game for the school).  

In order to maximize those two freedoms you need access and use of your money.  You also need to have your money earn money (income from assets) which you can use to replace your earned income from your job (trading time for money).  

You won’t be surprised to learn this, but the goals of financial institutions are not the same as yours.  NO ONE, NOT ONE SINGLE FINANCIAL INSTITUTION IN THE WORLD, is sitting in the backroom having conversations about how they can better help you accomplish your objectives.  None of them are asking each other how they can provide you with greater access, use, and control of your money.  None of them are asking each other how they can provide you with more income.  

Do you know what they are asking each other?  How they can get more of your money.  How they can get more control of your money, for longer periods of time.  How they can minimize what they are paying you and how they can maximize the amount of your money they can keep.  The purpose of financial institutions is not to help you.  It’s to help them.  They are in the business of making money (profit), and they understand one thing better than almost anyone.  The entity that has control and use of the money is the one that wins the game.

With that being the inarguable truth, someone might say, “Well, then are you opposed to financial institutions?  Do you think we shouldn’t use them?”  I’m not opposed to financial institutions.  But, as my clients’ Principles-Based Financial Planner, my job is to work for my client, not the financial institution.  Some people use the word fiduciary for what I call myself.  I think that word gets overused and underapplied.  At the end of the day, every financial advisor either is working for their client or they are working (doing what’s best) for the financial institutions.  Unfortunately, most are doing the latter (and probably unknowingly so).  

The bottom line is this, by far the majority of financial products, produced by financial institutions, help the financial institution a lot more than they help the client.  By far the majority of the strategies promoted by financial institutions (nearly 100% of them) are designed to accomplish the Rules of Financial Institutions, not the objectives of the client.  

Here is one “strategy” that is clearly in favor of the financial institutions:  Self-Insuring in Retirement.  Every financial institution that I know of supports the idea that when a person retires they “don’t need” life insurance anymore and should self-insure.  Interestingly, none of those same financial institutions are recommending self-insuring on any other area of protection.  No one is telling people that they should stop paying for homeowners insurance when their house is paid off.  No one is saying you should drop your health insurance when you have $1,000,000 in your retirement accounts.  No one is saying you shouldn’t have auto insurance at any point in time.  Why are they only saying you should drop your life insurance at a certain point?

This is truly an interesting and important question.  When we look at all of the other insurances you can purchase, they all have a chance that they won’t pay out.  In fact, in all of the other types of insurance, there’s a greater than 50% chance you will never collect a significant benefit (i.e. lawsuit, disability, major medical, destruction of property, etc).  What about life insurance?  What are the chances that a person will die at some point?  The chances are 100%.  In fact, it’s not a chance.  It’s a guarantee. 

It doesn’t take a genius to see why life insurance companies want you to buy temporary insurance (term) and cancel it some time before you get serious about dying.  Dropping it at around “retirement age” is perfect for the insurance companies, because most people don’t die until later.  It’s not objectionable which type of life insurance life insurance companies like to sell most.  It’s term, and it’s usually through their employer (group term life – which ends as soon as the employee separates from employment).  Term life insurance checks all of the boxes for the Rules of Financial Institutions.  

Why do other financial institutions (investment companies, banks, etc) encourage people to self-insure at retirement?  This one is a little more complex, but still easy to understand.  The purpose of life insurance is to replace income and assets.  When someone applies for life insurance the application doesn’t ask the applicant what the value of their life is.  It asks them how much money they earn and how much the value of their net worth is.  Life insurance is designed to guarantee the replacement of assets and income.  

What happens when people have something of value that they know they can’t replace (sometimes referred to as something that is “irreplaceable”)?  How do they treat it?  Do they use it all the time?  Or do they rarely use it, or maybe even never use it?  Do they try to protect it?  Do they take chances with it?  

The truth is, most people protect things like that.  They preserve things like that.  They try not to use them very often.  And in many cases, they don’t use them at all.  

When would the financial institutions that are holding your money like you to use your money?  Never.  So, how do they get you to want to never use your money?  They make it irreplaceable.  They encourage you to cancel the one thing, that based on a guaranteed event, will replace your assets and your income.  They encourage you to self-insure on life insurance.  They know you can’t repeat the past 30-40 years that it took to accumulate whatever amount of money you have in your retirement accounts.  So, get rid of the only thing that could replace it all, and now you have something irreplaceable, that you won’t touch, that you will try not to use, and that you will allow them to control and use for the rest of your life.

When a person chooses to go against the objectives of the financial institutions, and instead uses permanent life insurance to insure (to do what it was designed to do), they create for themselves the only way to guarantee the replacement of their assets and their income based on a guaranteed event (death).  And if someone has a way to guarantee the replacement of their assets and income, how much more use of their assets and income do they retain?  Significantly more!  This is your goal!  You want the ability to control and use your money.  You want your money to be able to produce income to you!  You want the ability to use what you create over time, instead of making it irreplaceable and unusable.   

Principle #3, which is that a person should always maintain the ability to fully replace all of their assets on a guaranteed basis, is the opposite of self-insure, and it’s exactly what you would want.  So, don’t forget the real purpose of life insurance, which is to replace your assets and your income, and that that guarantee of replacement has a HUGE impact on your ability to use your money while you are living.  The more permanent life insurance you have in place, the more of your assets you will get to freely use in your lifetime.