“Cash-value life insurance is the payday lender of the middle class.” ~Dave Ramsey
If you’ve ever met with a Financial Services Representative (they may also be a financial advisor) who works for an insurance company, they likely recommended that you get some kind of permanent life insurance. It comes in various forms, including:
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Indexed Life Insurance
It’s all permanent life insurance, otherwise known as “cash-value” life insurance.
Many companies impose policy sales quotas on their representatives for how much they must sell to keep their job. And they pay commissions 30-100% of the annual premium to the agent who sold it. These two incentives make it a very popular recommendation for insurance based “advisors.”
But here’s the problem:
Almost no one should own permanent life insurance.
In real financial planning, there are a dozen other places one should be putting their money rather than permanent life insurance premium.
However, life insurance agents can be very persuasive in their sales presentations. Many people have heard financial gurus like Dave Ramsey and Suze Orman say that they should not buy permanent life insurance. But when the person across from you is “debunking” Ramsey’s reasons or explaining why you are the exception, it can be convincing.
There are many sales strategies to sell the product, but I’ve identified 10 Myths that are often used to convince people that it is their best option. Note that while the episode is called “Life Insurance Lies,” most of them are not lies, but rather myths and naive understandings. “Lies” simply aliterates.
It took me four episodes to cover the Life Insurance Lies. Links to Part 1 of the four part series are available above for your favorite podcast host. From there you can navigate to the others (episodes 14-17). All four will also be posted at the end if you’d prefer to listen to them on this webpage.
I will give you the myths contained in each episodes, and a short response. For the full responses, you’ll need to listen to the episodes. If you have heard any of the myths below, I invite you to find that myth in the episode and listen to the full response.
Life Insurance Lies
Before jumping into the myths, I outline in this episode who I started my Financial Advice career with a Life Insurance company (not knowing any better at the time). I’m not opposed to permanent life insurance because I don’t understand it. I’m opposed because I do.
I also discuss how Term Life Insurance is good, and many people need it. But 99% of people don’t need permanent. From there, we jump into the myths.
Myth: You should own, not rent, your life insurance.
Agents will liken it to renting vs buying a home. You can rent for cheaper than you can buy, but everyone knows it’s better to buy a home than rent. Likewise, permanent may be more expensive, but in the end you own it.
Truth: With proper financial planning, your need for life insurance is limited, and the expense should also be limited. You always need a place to live, which is why buying is better. You don’t always need life insurance coverage. Using other strategies you can have more in investments than you would in permanent death benefit.
Myth: Permanent life insurance is a great alternative asset class/non-correlated asset.
It is a “non-correlated asset,” meaning it doesn’t go up and down with the stock market. Therefore it is great to have in your overall portfolio.
Truth: Total return is what matters, not correlation. You can’t rebalance your whole life cash value with your equities when they’re up or down, so there is no point in having this non-correlated asset. And there are better fixed income alternatives to cash value. Hear the full response if this is not satisfactory.
Myth: Permanent life insurance is a great addition to a portfolio due to its guaranteed returns.
Truth: The “guaranteed” part of the returns are stupid low. They are actually terrible. They are, in fact, negative returns. Even with the “good” policies, the guaranteed cash value returns alone will never catch up to the premiums.
Even adding in the non-guaranteed returns, the “good” policies will start out with negative cash value returns for the first 10-20 years and then eventually over the long-term end out around 3-4%.
Use a better strategy. Other investments will give you positive returns in the short term (imagine that), and if you’re looking at long-term returns, use equities for those and be up in the 7-10% range.
Myth: Permanent life insurance is a great way to mitigate taxes.
Truth: The “tax benefits” of permanent is not unique to the product. Most people should explore all other options first.
Permanent becomes a “tax-free” way to get income because you can borrow against the cash value tax free, or partially surrender the policy which can be tax free up to the amount of your premiums.
Guess what. You can borrow against anything tax free. You can borrow against your investments, your house, or a rental property and get that loan tax free. Also, you can withdraw money from a non-retirement account up to the amount you’ve put in tax free as well. You don’t need all the downsides of permanent life insurance (expense, hassle, illiquidity) to get these benefits. Not to mention that the vast majority of permanent life insurance owners are not maxing out their Roth 401(k) yet.
Myth: Independent experts confirm that permanent life insurance is better.
Agents might cite this study or that study about how experts not affiliated with any life insurance company determined that using permanent life insurance in a strategy is better than other strategies. They conclude that because these experts have no conflict of interest, they are right and therefore you should buy the product.
Truth: These studies are always comparing permanent to some other poor strategy. Just because permanent life insurance is better that some strategies doesn’t mean it’s the best strategy, or that you should use it. Instead of going for a mediocre study, do real financial planning and get set up with a better one.
Myth: Successful wealthy people own life insurance. So should you.
Truth: Everyone has heard of wealthy athletes who made terrible financial choices. Just because they are successful at their craft doesn’t mean they were savvy enough to see through a sales presentation.
Beyond that, wealthy people have completely different circumstances. Different tax brackets, estate tax issues, and more. They may have already tapped into all other options available to them (which you likely have not). Just because Elon Musk does something with his money doesn’t mean you can or should. (P.S. I doubt he owns permanent life insurance.)
And while there are plenty of smart and successful advisors that work for life insurance companies that own the product themselves, I believe this is more of an “own what you sell” strategy than because they genuinely believe it’s better. In my experience, the vast majority of independent financial advisors don’t own and rarely sell permanent life insurance. The people who truly understand the product, and aren’t paid to sell it, don’t sell it.
Myth: Infinite banking is a great strategy.
Infinite banking is a strategy where you fully fund an indexed universal life policy and borrow against it instead of from a bank when you need money. Bankers are rich, right? So do what bankers do and be your own bank.
Truth: You can borrow against other assets, not just permanent life insurance. Returns on indexed policies are lower than the indexes they follow, and you can create a tax nightmare down the road. Listen to the full explanation if you’ve ever been pitched this idea.
Myth: Most agents are good people and can be trusted.
They are not all sleazy sales people trying to sell you something you don’t need. They are good people who sincerely believe what they are selling will help you.
Truth: Undoubtedly many are good people. But you can sell garbage without being sleazy, and you can believe something is good for people even if it is not. Insurance companies spend a lot of money marketing to their own agents to help them “drink the Kool-Aid.” And many don’t have comprehensive training and experience with the superior alternatives to life insurance.
Myth: You should buy permanent life insurance while you’re young because it’s cheap.
Truth: When you’re young is when you have the most time for those premiums to be invested into compounding equities instead. There has been no scenario in history when premiums invested into the S&P 500 didn’t wildly trounce the death benefit of permanent life insurance over thirty years, let alone the cash value. Get a real financial and investing plan, and you’ll never need nor want permanent life insurance.
Myth: You should buy permanent life insurance to protect your insurability.
Truth: If you’re an adult, you can protect your insurability with term life insurance. Permanent life insurance with guaranteed options to get more insurance only guarantee your ability to get more permanent. Which, as we’ve discussed, you don’t want. It’s like taking out a credit card only to guarantee your ability to get a credit card in the future. And there are other options for getting life insurance in the very low likelihood that you will become un-insurable.
Full Audio Episodes
Listen to the full episodes below, or find links to podcast platforms at the top. You can also search “RetireMentorship” in your favorite player and find episodes 14-17.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.