Investing Through Life Insurance: Things to Know

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This is such an important topic to me. The goal of this article is to offer unbiased information for anyone looking into the investment qualities of life insurance. This topic really needs to be discussed because of the amount of information (and misinformation) available through the internet and social media and businesses about the ability of life insurance to provide for long-term capital needs. I spent so much time working in this space, especially in my earlier years in the financial services industry. The great thing about writing about this now is that I have no incentive to write this article other than to benefit my audience and gain readership. If I were getting paid to write this article or if I were getting paid to sell life insurance, you could easily infer a conflict of interest.

I'll divide this article into three different parts: investment performance of life insurance products, the effects of sales commissions in the selling of life insurance, and finally, practical uses for life insurance as an investment vehicle. The purpose of this article will not be to sway anyone from purchasing life insurance but to simply provide information so you can continue to make educated decisions.

Any industry that involves sales and the commissions tied to those sales will involve some semblance of ethics when products are being sold. As a financial service professional working in the business lending industry, I am no exception either. The way in which I solicit products has to be done with the responsibility to ensure that I'm benefiting the client more than myself with any earnings gained in the sales process.

What Life Insurance Is

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Let's start with the definition of investments in regard to life insurance. Life insurance, by itself, is a vehicle to provide a certain sum of money in the event of the death of the policy owner. It could be $10,000 to the beneficiary or beneficiaries or It could be a million dollars. When someone dies and they're insured, the proceeds given to their beneficiaries could change their lives forever

When investments become tied to life insurance, things become a bit more complicated. Certain investment products have built-in benefits such as the ability to build cash value when a certain portion of life insurance premiums are used to invest in the market to generate gains. The efficacy of those gains in regard to their part in the life insurance product is exactly where we're going to start.

When our money is invested in the market, the object is to generate as much of a return as possible. Out of $100, the goal is for your entire $100 to grow as much as possible. The thing is, that is impossible. Why? Because if you're going to invest in anything, you will have to pay a certain fee for the ability to invest. You can't get something for nothing. Everything has a cost.

What has been often cited as the most cost-effective investment option are index funds. I've written extensively about this in the past so please reread those articles if you would like more information. The cost of investing through an index is minimal and the investment performance of index funds in the long term are some of the most powerful tools available on the market. Anything that can diminish your investing potential as a cost or fee should be heavily considered proceeding.

Life insurance policies with cash value have to take care of a few considerations in addition to your investments. To further illustrate, we will have to break down how your premiums are used when you pay into a life insurance policy with the cash value.

With your premiums, first of all, life insurance has to work. If it doesn't work then the policy is pointless. Life insurance companies have to make sure that if you die, they will pay the money that they promised to pay. If a life insurance policy is not able to do that with your premiums, it is utterly useless.

Secondly, there are the fees associated with the investments in the policy. As I mentioned before, you have to pay to invest at least a minimal fee. Third, your premiums will have to cover commissions for your life insurance agent and the fees to the insurance company itself. Due to these fees, the cash value within a life insurance policy won't start building until 2 to 5 years.

(https://www.investopedia.com/articles/personal-finance/082114/how-cash-value-builds-life-insurance-policy.asp#:~:text=In%20most%20cases%2C%20cash%20value,value%20grows%20over%20the%20years.)

What is even more shocking is that you'll be hard-pressed to find the breakdown of fees from insurance agencies. Again, I am not advocating against purchasing life insurance but I'm advocating for self-education before you make that decision.

Sales Commissions

Now, let's talk about commissions. Commissions are fair. I believe in commissions. Commissions are fun if you do them right. For anyone who provides a service, compensation is in order. You work or provide service and you should get paid. Providing life insurance is no exception. You have to get people to trust you, You have to educate them AND You have to continue maintaining a relationship in case anything happens. You should get paid for that. The downside of those commissions is when they influence product recommendations from financial professionals to their clients.

Life insurance financial professionals get a much higher commission incentive whenever you choose life insurance with an investment benefit over basic Life Insurance. The sad thing is that may persuade them to highlight that product over the basic product even though it costs more. The same thing happens in the financial advising industry with investment products and this is why fiduciary responsibilities exist. The public needs to be protected against sales tactics and being taken advantage of in any sales process.

There are practical uses for life insurance with investment capabilities. If you're using life insurance for solely investment purposes, please make sure you explore other more growth-efficient options first. When I say growth-efficient, I'm alluding to how much of your dollars are actually used for the purpose of growth rather than any fees or commissions.

There are instances where life insurance with cash value can be beneficial for a client but, unfortunately, I have seen instances where the life insurance cash value policies have been seen as a universal solution for any and all wealth-building conversation when that is not the case. The premiums on insurance policies with cash value are much higher than basic term life insurance. In fact, 'Financial planners don’t recommend cash-value life insurance as an investment unless you’ve maxed out contributions to tax-advantaged retirement accounts, such as IRAs and 401(k)s'

(https://www.nerdwallet.com/article/insurance/cash-value-life-insurance). There are simply better ways to grow your wealth. But if you have maxed out those options and you are confident that your emergency needs in your invest and needs are met, you can use that life insurance as a way to grow and protect your capital.

There's one more thing to be mindful of as you are shopping around for your financial needs. Please beware of jargon. One piece of jargon that was often communicated to clients when I worked in the insurance space was that you can 'take out the cash value' whenever you want. What does that even mean? The way that this is phrased is that you have investments and at any time you can just take out some of the money from the investments seemingly. That is not the case. What is more appropriate is to say that you can take a loan out against your cash value within the policy for a 5 to 8% interest rate. That's not a bad interest rate if you're trying to have access to capital at a decent cost. Keep in mind, there are other ways to access capital. There are other instruments like home equity lines of credit that boast the same capabilities at similar interest rates. At the end of the day, you have options. Just be careful of jargon that sounds too good to be true and always do your research.

Life insurance is a great tool to provide for your financial needs. There are good uses for the investment capabilities of life insurance but you have to make sure that those provisions fit your needs. If it seems complicated to you, do not do it. Do your education, consult with multiple financial professionals if necessary, and think of the long-term implications of your actions.

Conclusion:

I'm not a complete "buy term and invest difference" financial philosopher. What I am is a "know your freaking financial situation before you make any financial decisions" type of financial philosopher. There are instances when investing through life insurance can be suitable for your needs But it's not often that you see investing through life insurance as the first stop on your way to building wealth. The primary ways to build wealth are the ones that we know: creating a profitable business, Building wealth through real estate, investing through the stock market, and the like. Once you have obtained the wealth, there are other tax-efficient vehicles like retirement accounts And even life insurance to help you protect your assets. Read this article to learn more (https://www.investopedia.com/articles/pf/07/permanent_life_insurance_taxes.asp)

As always, do your research, spread this information as much as possible, and make sure that we can build wealth responsibly.

Thank you.

NOT FINANCIAL ADVICE

The information contained on this medium is not intended as, and shall not be construed or understood, as financial advice. Any information provided should be not considered a substitute for a professional who is aware of the facts and circumstances of your situation. Please do your own research and make the best decisions for your situation.

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