By Matt Becker

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Has this ever happened to you?

A friend, or maybe a family member, calls you up and asks you out for lunch or coffee so you can catch up. They offer to pay, so of course you say yes!

You get there and wonder why they’re a little dressed up, but you don’t really think much of it. They probably just came from work.

The two of you sit down and start talking. Maybe it’s been a little while since you last saw each other and there’s a lot to catch up on. You order some food with the special joy of knowing that you aren’t the one paying the bill. Life is good!

Then, all of a sudden, the conversation changes. Your friend mentions how great it is to hear about your job and your family and asks if you’ve given any thought to securing your financial future.

Wait, what? Where did that come from?

As it turns out, your friend is now working for Life Insurance Company X and he’s really impressed with how well they take care of their clients. So he’s wondering, are you familiar with life insurance? Do you know how it works and how it can protect you?

You’re caught off guard by this turn of events, and honestly you feel a little embarrassed talking about money. And you probably aren’t intimately familiar with the ins and outs of life insurance, so you reply politely but with some hesitation.

Meanwhile, your friend keeps it casual like this is all no big deal, and asks if you’d be interested in meeting again sometime soon to talk a little more about the benefits of life insurance, just to see if he could help you build some financial security. And again, being caught off guard and not wanting to offend your friend, you agree.

A few days or maybe a couple of weeks later, you’re back with your friend. Only this time it’s a more formal setting and you know you’re there to talk about life insurance. Maybe your spouse or partner is there with you too.

Your friend asks some questions about your financial situation and then launches into a compelling story about the power of life insurance. You find out that life insurance is not only a good way to protect your family today, but that it’s actually one of the best ways to build wealth for the future too. Who knew?

By the end of the meeting this life insurance thing is sounding pretty good. But you’re still not 100% sure about everything, because you’re really just learning it all for the first time.

But this is a friend, someone you trust, and someone you definitely don’t want to let down. So now it’s time for the big decision…

Should you trust your friend and buy the life insurance they’re recommending?

The short answer: No

The situation above is so common that it’s comical. It’s happened to me multiple times and I’ve talked to countless other people who’ve been through the same thing.

And the truth is that your friend is probably coming to you with good intentions. You are friends after all, and he almost definitely feels like he’s genuinely trying to help you out.

But none of that matters. No matter how well-intentioned your friend is, and no matter how much you trust him, it’s almost never a good idea to buy life insurance from him.

And are the few reasons why.

With some exceptions, your friend is almost certainly not a financial expert. It’s much more likely that this is his first job in the world of finance and that he’s only recently been trained by the company that hired him. The training he received was all about how to sell the company’s products. He was not trained in comprehensive financial planning, because that’s not what he’s paid to do. Which brings us to… Both he and the company he works for are paid when he sells that particular company’s insurance products to people like you. That’s how he makes money. The more he sells, the more he makes. He’s paid particularly well when he’s able to sell whole life insurance, which is almost never good for you.

All of which means that this is a person who is fairly new to the world of finance and whose primary incentive is to sell you a lot of insurance from one particular company.

This is not someone who is trained to review your entire financial situation, assess all of the financial opportunities available to you, and make objective recommendations based on what’s in YOUR best interest.

That’s not your friend’s fault. It doesn’t make him a bad person. He’s just not in a good position to give you good, objective financial advice.

Which is why you should say “no thanks” and move on to a different topic of conversation.

What if you already bought life insurance from a friend?

If you’ve already bought life insurance from a friend, don’t worry. I actually did this myself a while back. It’s pretty common, and in most cases it’s pretty easy to fix. It will take a little bit of work on your end, but the savings could be pretty significant.

The steps you need to take depend on whether you bought term life insurance or whole life insurance from your friend, so let’s walk through each one separately.

1. Term life insurance

There are a few questions you should ask yourself to see whether the policy you have now is the best deal available. Below is a quick summary, and you can refer to the following guide if you’d like a comprehensive overview: The New Parent’s Guide to Life Insurance.

First, do you even need life insurance? If you have children, the answer is almost definitely yes. If not, then you may not actually have a need. It all depends on whether there’s someone who would suffer financially if you die.

Second, if you do need life insurance, how long will you need it for? Generally, you’ll want insurance long enough to cover the entire period during which people are financially dependent upon you. For parents, that typically means covering yourself until your youngest child is out of college and therefore able to provide for him or herself. Past that point, you likely won’t have a need.

Third, how much life insurance do you need? Life insurance agents have an incentive to sell you the biggest policy they can, since that’s how they maximize their commission. But if your actual need is lower, you could save yourself money by switching to a policy with a smaller benefit.

Finally, are you paying the lowest price for the protection you need? If your friend represents a particular insurance company, he probably sold you a policy from that company rather than shopping around. Even if you don’t change anything else about your coverage, you might be able to get a better rate from a different company. My favorite quote engines are from PolicyGenius and term4sale, and you can research more ways to get life insurance here: 5 Ways to Buy Life Insurance.

After going through all of that, if you find that you can save yourself money through some combination of different coverage and a different insurance company, bring that information to your friend and see if they can match the price you found yourself. If so, great! You can save money and help your friend keep some of his commission. Win-win.

But if he can’t or won’t do it, it’s time to cut ties and get the life insurance you need on your own. Just make sure to get your new policy in place before canceling the old one. The last thing you want is to find yourself without coverage when you need it.

2. Whole life insurance

The situation is a little more complicated if you bought whole life insurance from your friend, simply because these policies are much more complex.

In general, I’m not a fan of whole life insurance. It’s much more expensive than term life insurance, often costing 10 times as much for the same amount of coverage, and most people don’t need life insurance for their entire lives. It’s just not necessary.

But whole life insurance is usually sold as an investment opportunity, and this is what really gets me. Whole life insurance is almost never a good investment. There are rare exceptions where it can be useful, but you need to be making a lot of money and to have exhausted all your other investment options before even considering it.

The tricky part is evaluating a whole life insurance policy that’s already in place. Because those first few years are the worst from an investment standpoint, and if you’re already past that point your policy at least has a chance of performing reasonably well in the future.

Here’s how I would approach it:

Request an in-force illustration of your whole life insurance policy. This is a document that projects the future growth of your policy based on where it stands right now and the insurance company’s predictions about the future. Take note of the current cash surrender value. That is the amount of money you would get in your bank account if you canceled your policy today. Pretend that you have that cash surrender value in your hands right now and you can do one of two things with it: 1) Invest it in this whole life insurance policy, or 2) Invest it elsewhere. Make the decision between those two options based on which one you think will give you the best chance of reaching your personal goals going forward. Remember that the money you already put into the policy is irrelevant. That money is already spent. You don’t need to wait for your policy to break even or anything like that. The cash surrender value is yours and all you need to decide is what you want to do with it going forward. If you’d like some help evaluating your options, consider working with a fee-only financial planner who can give you honest, objective advice. Feel free to check out the services I offer here.

Friends don’t let friends sell them life insurance

There are certain things that are great on their own but don’t mix well. I like ice cream and I like cheeseburgers. But cheeseburger-flavored ice cream? No thanks.

Friends are good. Life insurance done right is good. But buying life insurance from a friend is usually not a good idea.