A Washington woman named Sarah recently called into The Ramsey Show because she worries her mother’s financial advisors could be swindling her (1).
Her mother holds a $60 million estate, and her advisors recommended she add a $300,000 annual life insurance policy to a stack of policies that already costs her $300,000 a year.
“It just feels like overkill,” Sarah told the show’s cohosts, adding. “It feels like they’re operating on her fear that she’s not going to take good care of her heirs.”
Sarah told Jade Warshaw and George Kamel that her mother already has a $1.5 million whole life policy (costing $100,000 a year) alongside two $10 million policies (costing $200,000 combined).
Now, the same advisor team wants her to ink a fourth deal, paying another $300,000 a year, doubling her annual premiums to $600,000.
The $1.5 million whole life policy stands out here. When Sarah suggested to her mom to cancel it, she says the advisor told her mom to wait seven more years until the plan “pays for itself.”
“Yikes,” Kamel reacted. “That plan can implode pretty quickly with how high these premiums are, and how awful the returns are.”
In plain English, when advisors claim a policy “pays for itself,” they mean self-funding. The hope is that the policy grows enough on its own that the dividends eventually cover the bill. Ideally, Sarah’s mom would stop paying out of pocket and the policy would just take it from there.
It sounds appealing, but the plan depends entirely on the policy generating returns strong enough to hit that goal.
Sarah believes these agents may be pitching the policy to her mother just to pad their own pockets. Whole life insurance agents typically make 100% or more commission (2) on the first-year premium.
On a $300,000 annual policy, that initial commission alone could exceed $300,000 and they could get renewal commissions in smaller amounts for years to come.
Kamel, however, noted the distinction between a bad recommendation and predatory behavior. “I don’t want to just go in going, ‘this is a ripoff, they’re trying to screw her over.’ That may not be the case here,” he cautioned.
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