Why I Purchased State Farm 10 Year Whole Life Insurance
What is this whole life insurance all about? Simply, it’s positioned as an tax free investment vehicle, meaning, you pay a premium for the policy that stores your pre-taxed cash.
It acts as your investment while providing insurance liability for someone else. In my case, I bought the insurance for my family.
Here are the top 3 reasons why I made this decision:
Purchasing Decision #1: Supposedly a safe investment
The State Farm agent pitched that the 10 whole life (10 year term whole life insurance) historically outperformed the stock market by placing the money in government-related expenses like roads, sewer repairs, etc.
Hence, there is a consistent yearly growth of 3-4% that is unaffected by the status of the stock market.
Purchasing Decision #2: It’s like the Roth IRA, a tax-free investment vehicle
I was pitched that this product functions like a Roth IRA, since you contribute your pre-tax dollars into this investment vehicle.
At that time, I already maxed out 3 years worth of Roth IRA contributions and based on my research (YouTube, Google searches) and I was fairly certain that for my risk tolerance, investing style.
As a result, I wanted to find similar investment mediums, thus, the 10 whole life insurance fit that category.
Purchasing Decision #3: I Thought I Had Extra Money to Invest
At the time, I hit my 9-month emergency fund mark and I thought it wouldn’t hurt to invest 2-3 months of that into the whole life insurance.
I met up with the State Farm financial advisor and went through the sales qualification process. And I kept saying yes and bought into each qualification segment since what I believed at the time was the right decision.
Purchasing Decision #4: My Pride and Thinking I Was “Cool”
The biggest, looming factor in making this purchasing decision was driven more by emotion than logic and reason: my pride and the please-other-people urge.
My pride: I wanted to validate myself and feel good about myself because I was “making the right financial decision”. And this pride was fully fueled by the next factor.
Please-other-people mentality: I wanted to brag to other people and ultimately, find a way to belittle them by boasting that “I am more financially literate” and better than other financial losers.
Or, I wanted to impress co-workers, friends, or other people in my life and show them I am a “finance guru”.
In the end, I was the fool and the idiot of this internal story that I am sharing with you!
1 Year Later… The Bleak Outcome….
In November, I reached out to my State Farm agent to cancel my policy. Also, November 2018 was also when I needed to renew my policy.
Long story short, the State Farm agent communicated that if I canceled, I can get close to 50% of my initial investment. Hearing that news sucked to hear, but… much worse news was yet to come.
A few days past and I had email communication with my State Farm agent about doing a direct deposit that spanned 2 weeks due to bad instructions on State Farm’s part. That was fine and tolerable.
But this pissed me off the most. The State Farm agent misread the policy term and in reality, THERE WAS NO CASH SURRENDER VALUE.
Meaning, I just lost $5000 by doing absolutely nothing and receiving no immediate value from this stupid policy.
Admittedly, this is all my fault. My friend who also was a State Farm client in the past mentioned, “That’s how insurance works dude, you are buying a financial product that provides the benefit of insuring your recipients in the event that something happened to you. In all, this was just a bad purchase.”
Alternatively, he also gave me this piece of advice: “Don’t beat yourself up on it too much. At that time, based on what you knew, you made the best decision that you can. This is just a learning experience.”
My Mistakes, Your Free Lesson
Mistake #1: Not doing enough self-directed research about the product
All financial bloggers, YouTube channels, etc always bring this up (probably for 15-30 seconds) and most people probably don’t take this seriously. I for sure, did not take this as seriously as I should.
The number of resources (time, expense, etc) needed to research and understand a product or service you are about to make a purchasing decision depends on your goals guided by your experience and knowledge.
But a good rule of thumb is to understand the pros and cons of that decision fully and determine if you are ok with the worse case scenario.
Mistake #2: Not understanding the “bad what if” before making a decision
For the 10-year whole-life State Farm insurance, I accepted all pro side of the sales pitch from the State Farm agent.
Yet, in retrospect, I don’t remember taking any notes on how the invest can go wrong.
Here are the things I should have considered:
- What happens if I ended my policy early?
- What would happen if I cannot afford to pay the premium per month or annually?
- How many people canceled their policy and how much did they lose?
Mistake #3: Lying to myself that it’s ok to commit 10 years of steady payment
To this last point, simply, at this stage in my life where I am early in my career, I shouldn’t have made a 10 year commitment to anything.
Life happens. You might end up moving. Switch jobs. Get married. Other emergencies with family, etc.
Since your career and personal life is not as stable as it could be, making a commitment of that magnitude is plain stupid.
Upon reflection, at this stage in my life, I can only afford to make at max 2-year commitments and realistically, 6-12 month commitments based on only have 3-6 months of emergency fund.
What I Should Have Done Instead
Use Extra Cash for 1 Year Emergency. Period
Stay tuned for another blog episode where I make an argument on why it is imperative to build a 1-year emergency fund.