The Truth About Insurance: Buying Insurance Is Always a Loss. The More Insurance You Buy, the Poorer You Become! Do Not Buy Insurance: Casual Investment Talk, CLEC Investment Channel, Post Date: December 02, 2020

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1. Once You Buy Insurance, No Matter the Type or Quality, It Usually Will Not Break Even Within Ten Years

The truth about insurance: buying insurance is a permanent loss. The more insurance you buy, the poorer you become. Do not buy insurance. Casual Investment Talk, CLEC Investment Channel, blog date: December 02, 2020.

One of our students, a former insurance broker, told me the following information about insurance. It helped me understand more deeply that insurance is a very dangerous product packaged as investing and financial planning. Below is my summary and what I learned:

Summary:

1. Once insurance is purchased, regardless of type, good or bad, it usually will not break even within ten years.

2. If a policy loses too much in the stock market and cannot cover insurance costs, the policy will lapse.

3. Indexed universal life (IUL) is another level of horror story.

Everyone must understand that IUL and index investing are completely different things.

In the worst case, this policy can lose everything.

4. IUL Now Accounts for More Than 70% of the Insurance Market's Sales, and Premium Financing Makes It Even Worse

5. The only product inside insurance that can truly be considered investment-like is variable universal life (VUL). But for people who do not need insurance, buying VUL is still strange.

Detailed explanation: I completely agree that insurance is insurance and investing is investing. The only insurance product that can truly be considered investment-like is VUL. It subtracts insurance costs from the premium, meaning the amount paid according to mortality risk to families that actually experience an insured event, and invests the remaining money in mutual funds.

Yes, insurance may save tax compared with ordinary taxable investments. But a person pays insurance costs in exchange for that tax benefit. For someone who does not need insurance, buying VUL is still strange.

You can also only choose from certain mutual funds on the insurance platform, so investment choices are limited. Insurance costs are deducted regardless of whether the mutual funds are at a high or a low. As you age, insurance costs rise. If costs are high when you are older and the stock market falls sharply, that can be very damaging to the policy.

The Worst Part of IUL Is That It Misleads People Into Thinking They Are Investing in a Stock Index

If the policy investment loses too much or cannot cover insurance costs, the policy will lapse. For people who need insurance, combining investing and insurance is already very risky.

But IUL is a different level of horror story.

To be fair, every insurance product design has some logic. Term life uses the least money to buy insurance. Guaranteed universal life can serve estate planning purposes. Whole life offers a low guaranteed return for life. VUL lets someone who needs insurance pay insurance costs for tax-free investment. Products that are less likely to be used are cheaper; products more likely to be used are more expensive. Whatever type of insurance someone wants, they pay the corresponding price.

But IUL is truly different. In my view, apart from being easy to sell, it is hard to see what benefit it gives the buyer. For almost any purpose, other insurance products or investments can do much better than IUL.

The worst part is that IUL misleads people into believing they are investing in a stock index, such as the S&P 500, while actually trimming both upside and downside through caps and floors. For example, the policy I was tricked into buying in 2014 had a cap of 13.5% and a floor of 0.25%, so the claim that it never loses money came from there. But the worst case is still losing everything, because the no-loss part applies only after insurance costs. If the policy's investment portion does not earn enough, even without losing money, or if premiums paid over the years are too low because clients expect high stock-market returns, rising insurance costs with age may exceed returns and begin consuming accumulated value. Once the money is eaten up, the policy disappears.

The most important thing I want to share is that the IUL documents include statements and acknowledgments clearly saying that the policy does not invest in the index or stock market. In reality, most IUL money is placed in long-term bonds, with only a small portion used for index options. Even the index return calculation does not include dividends.

Even more frightening, the excess index interest, the cap on return, can be changed. For the policy I bought, it was 0.25% to 13.5%, but the cap can be lowered from 13.5% down to 0.25%. That is because the underlying investment is not in the stock market; the insurer must build in adjustment mechanisms. If the stock market stays strong and the bond market stays weak, the insurer needs a mechanism to protect itself.

In recent work experience, I have found it difficult to dissuade people unless these details are explained clearly. When I say investment returns are low, many people do not see that as a problem. They say they want a conservative investment with slightly lower returns, no losses, and tax savings. They do not know that the worst case is losing everything, that the cap can be changed at the company's discretion, and that the no-loss feature applies only after insurance costs. The insurer deducts insurance costs from the premiums you pay; if anything remains, that portion may be protected. Often, after costs are deducted, nothing is left and the policy lapses.

Once insurance is purchased, regardless of type, good or bad, it usually will not break even within ten years. Except when the insured dies early, which is trading life for money, buying the wrong insurance means you cannot get out without losing a layer of skin. I feel sad for these clients. It is not necessarily their fault. They had no investment knowledge, and insurance brokers only spoke about benefits, not risks. I also once believed it could not lose money. Only after changing careers did I realize I had been misled. I eventually sold at a loss and treated it as tuition.

IUL now accounts for more than 70% of insurance market sales. Premium financing makes it even worse: borrowing money to buy insurance, using low initial loan rates plus high IUL credited rates to create the illusion of arbitrage, as if buying more means earning more. That can not only lose everything, but can seriously harm an entire family. Unless the insured dies early, there may be no way out.

Draft: James