Do Not Buy Insurance

【Do Not Buy Insurance!】Easy Investing Chat, CLEC Investment Channel. Post date: December 02, 2020

One of our students, who was once an insurance broker, told me the following information about insurance. It helped me understand more deeply that insurance is truly a very dangerous product packaged as investment and financial planning.

Below is my summary and the insurance information I learned:

Summary:

1. Once insurance is purchased, no matter what type it is, good or bad, it will not break even within ten years.

2. If a policy loses too much money in the stock market and cannot pay the cost of insurance, it will lapse and become invalid.

3. Index universal life, IUL, is another level of horror story. Everyone needs to understand that IUL and index investment are completely different things.

In reality, the worst-case scenario for this policy is losing everything.

4. IUL now accounts for more than 70% of the entire insurance market's sales, and being advised to do premium financing is even worse. That kind of thing does not only wipe out all principal; it can truly ruin an entire family.

5. The only thing inside insurance that can truly count as investment is Variable Universal Life. But for people who do not need to buy insurance, buying VUL is still very strange.

Detailed explanation:

Again, I completely agree that insurance is insurance and investing is investing. The only thing inside insurance that can truly count as investment is Variable Universal Life.

Universal Life deducts the cost of insurance from the premium, meaning the money based on mortality rate that must be paid to families who really have accidents, and puts the remaining money into mutual funds for investment. Yes, compared with ordinary non-qualified investments, insurance can save taxes.

But a person is using the expense of cost of insurance in exchange for that tax benefit. So for people who do not need to buy insurance, buying VUL is still very strange. Also, you can only choose certain mutual funds inside your insurance platform, so investment choices are very limited. And no matter whether mutual funds are at highs or lows, the cost of insurance is deducted anyway. So when someone gets older and the cost is higher, if the stock market happens to fall sharply, it is actually very damaging to the policy. If the policy loses too much money in the stock market and cannot pay the cost of insurance, it will lapse. For people who need insurance, combining investment and insurance is actually very risky. But IUL is another level of horror story. Speaking sincerely, every insurance product design has some reasoning, whether term insurance, which buys insurance with the least money; GUL, where a person needs a guarantee for estate planning purposes; or Whole Life, where someone is willing to accept a low investment return guaranteed for life.

Having insurance also gives another place to pull safe money, or like VUL, where a person cannot think clearly, or thinks they need insurance anyway, and is willing to pay the cost of insurance to do tax-free investing. In any case, things with lower probability of use are cheaper, and things with higher probability of use are more expensive. Whatever kind of "insurance" a person wants, they pay the corresponding price.

But IUL is truly different from other insurance. In my view, apart from being "easy to sell," I really cannot see what purpose it has. That is, for any purpose, there are other kinds of insurance or investments that can do much better than it.

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The worst part of IUL is that it misleads people into thinking they are investing in stocks, claiming to invest in an index, such as the S&P 500, and then cuts off the head and tail, meaning the index return is subject to an upper cap and lower cap.

For example, the one I was deceived into buying in 2014 had an upper cap of 13.5% and a lower cap of 0.25%, greater than 0. That is where the claim that it will never lose money comes from. In reality, the worst-case scenario for this policy is losing everything, because the part that does not lose money is outside of the cost of insurance. As long as the policy's investment portion does not earn enough money, it does not even need to lose money, or if premiums paid over many years are too low because customers think they will get high stock-market returns and many people underpay premiums, then when the cost of insurance rises with age and may become higher than premiums plus return, it slowly starts eating the accumulated money from before. When the money is eaten up, the policy disappears from the world.

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So the most important thing I want to share with the teacher is that the "statement & acknowledgement" attached clearly says this IUL policy is not an investment in the indexes or the stock market. In reality, most IUL money is still placed in long-term bonds, and only a very small part is placed in index options.

Even the calculation of index return does not include dividends. The most frightening part is that the excess index interest, meaning the upper cap for the return rate, can be changed.

For example, the one I bought back then was 0.25% to 13.5%. The upper cap can be lowered from 13.5% to as low as 0.25%. This is because the underlying investment is not in the stock market. The insurance company always needs built-in knobs. If the stock market keeps doing too well and the bond market keeps doing too poorly, it needs a remedy mechanism @@")

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But my work experience in recent years is that if these things are not explained clearly, it is very hard to dissuade someone. When a teacher says the investment return is low, for many people that is not actually a problem. They will reply: I just want a more conservative investment. A slightly lower return in exchange for not losing money, and tax savings too. I think it is very worthwhile!

These people do not know that the worst case for the policy is losing everything. They do not know the upper cap can be changed at the company's discretion. They do not know that the only part that does not lose money is the part outside of insurance cost.

And once insurance is purchased, no matter what type it is, good or bad, it will not break even within ten years. Except when a person dies early and makes money, exchanging life for it, if you truly buy the wrong insurance, once you go in, you cannot get out without losing a layer of skin.

When I meet customers like this, I also feel sad for them. I do not think it is their fault. Back then they had no concept of investing, and agents only talked about the good parts, not the bad parts. I also thought it would not lose money. Only after changing careers did I realize I had been deceived. Later I accepted the loss and got out, treating it as paying for experience and tuition.

IUL now accounts for more than 70% of the entire insurance market's sales, and being advised to do premium financing is even worse. Borrowing money to buy insurance, using very low initial loan interest plus a very high IUL crediting rate, creates an illusion of arbitrage where the more you buy, the more you earn.

That kind of thing does not only wipe out all principal; it can truly ruin an entire family. Unless the insured person dies early, there is just no way out...