Life insurance is a bad investment product

July 5, 2007 at 9:21 am 16 comments

I’ve always looked as life insurance as a replacement for income lost if I die. But, some folks also see it as a means of investing for retirement. Most insurance agents will push any type of life insurance that will benefit their pocket book while convincing customers that it’s a ‘good’ product. I couldn’t disagree more. I like to keep my insurance and investments clean and separate. Looks like Money Magazine senior editor Walter Updegrave feels the same way.

The article starts off with a simple question from a Money Magazine reader:

I’m 25, make about $50,000 a year and invest $150 a month in an insurance policy for retirement. I do plan on contributing to my workplace retirement savings plan soon and also hope to open a Roth IRA, but in the meantime my adviser has suggested I increase my investment in the insurance policy to $300 a month. What do you think I should do? – Rob

Updegrave’s answer? “I don’t think these policies are worth the trouble,” and here’s why:

  1. A term life policy should be a core element in your financial plan.
  2. Cash value policies (whole, variable and universal) sound great in theory, but the “slew of marketing, sales and investment fees significantly drag down your returns.”
  3. The tax-free benefit only comes by way of borrowing from your investment money, but this can get complicated. If there is a lapse in your policy after you’ve been borrowing, you’ll get hit with a large tax bill.

Updegrave’s advice:

“..it makes no sense to give up the lucrative up-front tax breaks that a 401(k) and traditional IRA offer (or the more straightforward tax-free withdrawals of a Roth IRA) in favor of an insurance strategy that’s a lot more expensive and fraught with potential complications.

But that’s exactly what you’re doing by foregoing your workplace plan and a Roth while plowing money into this policy.

Stop investing in the insurance policy, sign up for your workplace plan and open that Roth IRA. Once you’ve done that, you can turn your attention to figuring out what to do with your policy and any cash value you have in it (if, indeed, you have any).”

And, here’s my favorite part of the article:

If the adviser who put you in this policy comes to you with any other brilliant ideas, I suggest you turn around and walk away, fast.

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Entry filed under: Insurance, Retirement, Saving and Investing.

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16 Comments Add your own

  • 1. Andy O.  |  July 10, 2007 at 1:15 pm

    Nobody ever mentions that 95% of the time a Cash Value policy will Not pay your cash value upon death. It’s usually the greater of face value (plus a small piece of the cash value) or cash value. It will say right in the policy…option 1 or A under death benefits. Read it for yourself if you don’t believe this is a product built to make the agent and the company a ton of money and leave you and your family out in the cold when you need it most!

    Reply
  • […] leading financial magazine’s, and I’ve said the exact same thing about how poor the earnings are in mutual funds included within an insurance product. Let’s dig […]

    Reply
  • 3. shaferfinancial  |  August 1, 2008 at 4:28 pm

    Where are the facts? What is the historical evidence for the rate of returns for permanent life insurance? The problem is that people [like you] don’t bother with the facts, instead rely on prejudices. Now I am not making the case for or against life insurance as an investment, but would like a little honesty in the discussion. For example, folks like the author of the article you quote never tell us what the actual rate of return for folks in mutual funds is. They tell us in theory we could get…. but the data is out there. So how about comparing what people actually get from mutual funds compared to what people actually get from life insurance. Then you compare the two products, pro and con, what the advantages of each are. But, instead they demonize one product, presumedly to pump up their favorite. This is rank propaganda and ill serves the consumer.

    Reply
  • 4. Financial Professional  |  August 21, 2010 at 9:23 pm

    Life insurance offers many, many advantages. The returns should be considered a relatively conservative part of your overall plan, but if your inclined to leverage capital you may consider your whole life plan low risk, high yield. Quite simply if you take advantage of the liquidity life insurance offers you may, when you wish, take advantage of whatever opportunity. Try and tell a successful person how to run their busines. You will find that he/she is the master of thier own economy, the expert in thier particualar field, deservidly so. If you find investing in yourself to be low risk / high yeild then life insurance is the way to go. With recent market uncertainty, life insurance may very well be the most predictable tool to reach your financial goal. It is what it is. Do your home work and make your own decision. Anyone who has an opinion that one is bad and the other is good has an agenda. This is not good. They are both good. Just do one.

    Reply
  • 5. Amir  |  October 20, 2011 at 11:56 pm

    My father got me an Insurance policy when I was 5 and now that Im 32 I have a policy that has about $320K CAD Cash value + dividents + increasing death benefit + the cost of insurance is paid about 5 yrs ago and no one needs to pay for this policy any more..
    So I don’t think I need to buy more life insurance atleast for the next 20 yrs.
    I also used the Cash value as a collatral with my bank to get Business loan to start up my own business.
    So I think over all my father did a great investment not only for him self but for his son..

    Reply
    • 6. Deanna  |  August 2, 2012 at 1:11 pm

      I do agree that your father’s head and heart are in the right place. I would like to share something I learned though: When your policy is “paid-up” as is the case here, where do you think the money is coming from to pay the premium? It’s coming from your cash value (or actually really from living benefit amount– you will never see all of the cash value if you forfeit the policy). So what is happening here is that your company has used a large portion of the premiums paid to make investments for themselves, then promise you some small amount (maybe 1-3.5/4% out of the 12-ish % they are making) as the cash value. That small amount is what is being used to pay your policy for you; they will not dip into their own earnings to pay your policy. What happens when the cash value is depleted? Your policy explodes. So now you have no savings AND no insurance. Then they will say, “Mr. Client, let’s start a new policy! Now you are quite older and the premium will be astronomical. These companies have the right idea: a financial plan needs to have 2 components (life insurance and savings/investment). Where they mess up is by intertwining the two. Life insurance and savings NEED TO BE SEPARATE. Please check option 1A of your current policy. It will tell you right there. I learned this the hard way. Look into term policies with a separate investment.

      Reply
  • 7. Tony  |  December 6, 2012 at 5:43 pm

    I’ve been reading up on this for a while. I can’t seem to figure out the best thing to do here. I came across a site that shows you can actually get strong growth that is safe if you put it into a policy that is “high in cash value” – http://www.becomingyourownbank.com/cash-value-life-insurance/

    Any thoughts before I get too crazy and jump in?!

    Reply
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