The “Professional Deformation” of Life Insurance

The “Professional Deformation” of Life Insurance

April 05, 2017

“Every specialist, owing to a well-known professional bias, believes that he understands the entire human being, while in reality he only grasps a tiny part of him.” - Alexis Carrel

“These are terrible nails!”

You’ve probably heard the phrase, “When all you have is a hammer, everything looks like a nail,” attributed to the psychologist Abraham Maslow. It concisely explains the idea of “professional deformation,” the tendency to view all aspects of life from the point of view of one’s professional expertise.

Thus, a carpenter picks up a hairpin, and says, “You call this a nail?” He takes a paper clip, places it on a board, hits it, then snorts when it fails to penetrate the wood. A copper wire just collapses when he hammers it. “These are terrible nails!” he bellows.

But hairpins, paper clips, and copper wire have proven value in specific applications. You can’t accept a carpenter’s distorted assessment that these items are terrible nails, and thus conclude they are totally worthless.

The Professional Deformation of Higher Returns

Similar professional deformations occur in personal finance. As a field that involves money, many transactions can be quantified with a dollar value, and subsequent calculations made to compare their worth relative to alternatives. But some financial professionals become so focused on quantifiable returns that they ignore other features in financial assets that are both useful and valuable. For example, when there is a professional deformation toward the highest measurable return…

  • It is easy to add up the costs of owning a home – the taxes, interest, insurance, maintenance costs, etc. – and conclude “A home is a bad investment!”
  • It is easy to calculate the projected returns to life expectancy from guaranteed payments by a pension or annuity, and declare “You could do so much better.”

 But an obsession with total returns can’t quantify either the financial or psychological value of controlling one’s residence, and perhaps eventually owning it outright. It can’t measure whether the property might have a legacy value, and how much it might mean to heirs. Similarly, how do you calculate the return on a lifetime of payments, for however long one lives? A full assessment of the financial return from an annuity or pension can only be determined when the recipient dies, but what is the value of knowing a check will arrive each month until that happens?

And Then There’s Life Insurance…

The deformation can really get out of hand when a return-obsessed investment professional looks at permanent life insurance. The deformation is so prevalent that if you begin an Internet search with “life insurance…” one of the first auto-fills will be “…is a terrible investment!” This perspective completely distorts the potential uses and values of life insurance in personal financial plans.

Usually, the deformation in life insurance involves comparing a policy’s cash value accumulation to the historical performance of other choices and concluding the larger balances from these alternatives “prove” their superiority. This simplistic assessment neglects many important elements.

First, it doesn’t fully account for the “possible” value of the life insurance benefit. The deformation focuses on the cash values, but what is the return to beneficiaries on a life insurance benefit? In almost every circumstance, the return on the benefit will be higher than the return on cash value. And no matter when death occurs, a payment is guaranteed. Why should a return comparison be focused solely on cash values?

A return-focused financial professional might argue that the guaranteed protection1 (and potential return) could be accomplished with term life insurance, using smaller premiums. But this is true only if the insured dies before the term expires. Because term premiums in old age become prohibitively expensive, the most likely outcome is the benefit will be surrendered. When this occurs, the “unused” term premiums, and the accompanying opportunity costs, now constitute a significant negative return. At what point is this loss included in a return evaluation? The return from a life insurance policy, term or permanent, can be accurately calculated only at the conclusion of the contract, either with a claim or a surrender.

Second, it doesn’t distinguish between “saving” and “investing.” These words have soft definitions, and often seem to be used interchangeably. But there is a distinction worth making between accumulation products that offer guarantees and liquidity (saving) and those that don’t (investing). Because of the structure of these guarantees, saving products have diminished the potential for high returns; they aren’t designed to “win” a total return comparison. While you can quantify the rates of return, the attraction in savings vehicles comes from stability and liquidity, not highest returns. Cash value, with its guaranteed accumulations1 and consistent dividend payments2, could be considered an excellent long-term savings vehicle, even if an investment professional insists it doesn’t meet his standards for an “investment.”

Third, it doesn’t account for an approach that integrates several types of assets to provide superior overall benefits. Accumulating assets is a critical component of personal finance. But spending is another, and a permanent life insurance benefit in a financial portfolio may enhance the spending utility of other assets. With the flexible, tax-free options for withdrawing cash values, provided the amount withdrawn does not exceed the policy’s cost basis (premium paid), individuals may be able to blend their taxable and non-taxable distributions for optimal tax advantages. More important, the guaranteed insurance protection benefit is a significant “integrative” asset. The certainty of this “last” transaction means other assets may be liquidated or monetized instead of remaining off-limits for spending. For example, an individual can receive a tax-free income from a reverse mortgage, knowing the asset will be fully restored to the estate at his death, by using the insurance benefit to remove the outstanding balance.

Respect Expertise, Recognize Professional Deformation

Because there is some overlap with other aspects of home construction, it’s reasonable to assume that a carpenter may know more about plumbing than the average Joe. Still, if a carpenter contradicts the recommendations of a licensed plumber about how to configure your bathroom, it’s fair to ask: Who really knows bathrooms?

Likewise, many investment professionals who are well-versed in strategies to maximize returns probably have some familiarity with real estate, pensions, life insurance, and other financial issues. While these return-focused professionals may passionately believe all financial challenges can be solved by amassing the largest accumulation, this narrow approach overlooks the benefits from products and strategies that don’t meet their high-return criteria.

Just like a well-built home taps the expertise of a variety of specialized workers, your financial plans may benefit from the counsel of several financial professionals, instead of one who claims his/her approach can do it all.

When you engage a well-rounded mix of financial professionals, it is less likely there will be professional deformation in your financial affairs.  

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims-paying ability of the issuing insurance company.

2 Dividends are not guaranteed. They are declared annually by the company’s board of directors.

Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. PAS is an indirect, wholly-owned subsidiary of Guardian. Lifetime Financial Growth is not an affiliate or subsidiary of PAS or Guardian. 2017-36523 Exp. 3/2019