A client at work recently asked:
There are lots of social media videos where “experts” say life insurance is a superior investment to 401(k) and IRA accounts. Sounds weird to me, but you guys are the experts – what are your thoughts?
He’s right. Social media – especially TikTok – is littered with pro-insurance videos. Not coincidentally, those videos are created by insurance agents who make fat commissions when they sell policies.
Show me the incentives, I’ll show you the outcome.Charlie Munger
I don’t use TikTok, so I Google’d, “tiktok insurance vs. 401k videos.” This is the first one I found. It doesn’t disappoint.
Math doesn’t lie. So her argument seems…convincing! Right?
But people do lie. And if a person decides to use dishonest numbers at the beginning of an analysis, they’ll get a dishonest result. Garbage in, garbage out.
I think it’s more likely this lady is regurgitating sales pitches she learned at insurance school. Not outright lying, per se, but repeating the lies her company told her.
If you’re curious about the lies, a few of them are:
- She assumes no 401(k) match, despite 98% of 401(k) plans offering a match.
- She assumes the 401(k) investment stops growing completely at retirement. Using her previous assumption of 7% annual growth, she’s neglecting ~$380,000 of post-retirement growth. Seems important, no?
- How is the IUL (that’s indexed universal life) policy growing at 7% per year, despite the steep investment fees of ~3% per year?
- And finally, how can a policy worth $523,000 afford to disburse $67,000 per year (or 12.8% of its original value) forever? Especially when it’s only growing, supposedly, at 7% per year? Because of loans and infinite banking, Jesse! Yeahhhh. We’ll get into that later.
And the lies keep coming. When you dig into a life insurance policy (which we frequently do for our clients), the lies compound. The most frequent are:
- Cherry-picking the timeframe of comparison. If you compare life insurance against the S&P 500 from 2000 to 2010, I’m sure life insurance will win. If you expand that timeframe beyond the worst decade in stock market history, the result will change.
- Ignoring their own fees. The fees on the investment portion of life insurance products often surpass 2% per year. This is astoundingly high.
- It’s insurance though, right? Why are insurance products being sold as investments? Why co-mingle? Seriously. Why? (answer: to make it more enticing and sell more policies). And at the end of the day, how good is the actual insurance portion of the product? (answer: not that good). Rather than buy two pieces of junk co-mingled into one product, just separate them!
- Misrepresenting traditional investment returns. Example: not including dividend reinvestment when comparing against the S&P 500. Elementary stuff that any investment professional should know better about.
When you correct the lies and add them up, the result is disgusting.
Over a 30-year timeline of $500 monthly payments (just like in the video above), an IUL policy indexed to the S&P 500 would have a cash value of ~$350,000.
If that $500 was invested in a simple, taxable investing account instead, the account would be worth $1.10 million. If in a 401(k) with a match, you’d have well over $2 million.
But Jesse – Borrow Against the Policy!
In that terrible TikTok video above, there was a “secret sauce” about borrowing against the insurance policy. Some people call this “infinite banking” or “creating your own bank” or “being your bank,” etc.
In other words: don’t touch the policy itself. Borrow money, and use the policy as collateral.
This idea isn’t new. Financial leverage is an age-old idea. But let’s recall the account values from above. Would you rather:
- Borrow against a $350,000 life insurance policy (P.S. – you get charged interest for doing so), or…
- Withdraw funds from a $1.1 million account?
Call me crazy, but I’d rather just have the $1.1 million, or 3x more money than the life insurance policy. I don’t have to borrow against it. I can just…spend it.
But the Tax Benefits?!
A common insurance sales tactic relates to the tax benefits of life insurance. Guess what? This is (mostly) a lie.
When does life insurance provide a large tax benefit? The following must be true:
- Your 401(k) and IRA accounts are already maxed out yearly.
- Your estate will surpass the Federal estate tax threshold: $12.06 million for individuals and $22.12 million for couples.
If this sounds like you, a life insurance policy may provide you a tax benefit.
If you haven’t maxed out your 401(k) or IRA, then you don’t need an insurance policy masquerading as an investment to provide you tax benefits. The tax advantages of 401(k) and IRA accounts are ALWAYS equivalent or superior to those of insurance/investment policies.
If you have more than $12.06 million or $22.12 million as a couple, then you can/should consider if a life insurance policy would provide you a tax benefit. Since you’ve got a fair chunk of change, I’d consult an independent professional to help you with that analysis. Not TikTok. Nor a blog like this one. Just sayin’…
If you need life insurance – you know, the real product behind insurance policies – buy a term policy.
Why Then? Why?!
Why, then, do so many TikTok videos espouse the investment benefits of life insurance?
Show me the incentives, I’ll show you the outcome.Charlie Munger
Because insurance agents typically receive a commission equivalent to 80%-100% of the first year’s insurance premiums. Insurance agents have families to feed. They’ve got to sell policies. They have to convince you to buy.
The pitches that we debunked above sound great. They convince people to buy life insurance. It does not equate to a wise purchase. It’s that simple. I don’t begrudge any insurance agent, with mouths to feed, for pitching a bad product. I do begrudge their management who ought to know better, but that’s for another blog post.
The real math shows how terrible an “investment” whole life, indexed life, or other co-mingled life insurance policies really are.
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*Term Life Insurance ought to be an essential component of a young families’ finances. It’s not an investment; it’s insurance. Stuff happens.
Completely agree, D’o!
“If you need life insurance – you know, the real product behind insurance policies – buy a term policy.”
It sucks that she portrays herself as a “financial advisor” when she’s really a salesperson selling insurance. All I could find on her background is that she’s “active” on Utah’s Insurance Company and Agent Search platform. She doesn’t appear to hold a Series 65. I feel like any person dishing out advice like this should make their motivations and conflicts explicit.
I completely agree. Buyer beware!
Well said, it’s complicated enough that it’s not obvious to most people. In defense of the people selling whole life, they really think it’s a great product, which you alluded to. My dad sold insurance, including whole life. He was a good, honest man with poor math skills. He believed in the stuff because his company told him it was awesome and paid him well to sell it. I think that’s true of most salespersons in that industry. But it’s a terrible product for the vast majority.
Hey Steve, thanks for sharing. That’s a terrific anecdote. Most of them – including this lady in the article, I bet – are trying their best and think they’re doing good.
But someone in their hierarchy is leading them (and their clients, of course) astray.