Myth #19: Life Insurance Should Only Be Bought for Life Insurance Purposes (i.e. death benefits)

I'm going to get quite a few dissenting opinions on this article, particularly on LinkedIn and other places where agents love to debate compliance, ethics, and proper representation of insurance policies.

And that's okay.

This often comes up when someone posts an image or a post comparing cash value life insurance to other kinds of long-term savings or investments, such as 401(k), IRA, Roth IRA, 529 plans, taxable brokerage accounts, or just about anything else.

Critics of these posts claim: "You shouldn't be comparing insurance with investments."

I can.

I have.

I will.

I will say that these posts with these comparisons are typically done with the belief or implied statement that "You will have MORE MONEY in life insurance than you would in these other savings plans."

That... is NOT true, unless the underlying investments did not perform to expectation (which is always a possibility as all securities will have fluctuating values).

Side note: The only reason that fixed indexed insurance contracts (life insurance or annuities) may show that they "outperform" market securities is NOT because they gain more in a given year. (They usually don't.) It's because during down years, these insurance contracts don't lose money (other than costs of insurance or living benefit rider fees) and therefore have all their money ready to grow as the index rebounds.

Company compliance views

Insurance companies that have their own career agents often give compliance advisories in order to protect the company and firm's reputation. They don't want lawsuits to make headlines that "Joe Schmo, an agent for XYZ Mutual misrepresented their products that they can do something they cannot do!" I agree with that.

MassMutual put out a company memorandum for their advisors and brokers regarding promoting "Personal banking strategies to promote whole life insurance."

Let's review some of the concerns from that memo:

"Using strategies that position whole life insurance as a personal banking or similar concept is inconsistent with MassMutual's policy because these strategies often:

• Are misleading to customers, in violation of insurance laws and regulations, by positioning the policy as a checking, savings, or retirement vehicle, and something other than life insurance.

• Violate life insurance illustration regulations by creating financial plans using policy values without providing the supporting basic life insurance illustration with corresponding guaranteed values and required disclosures.

• Promote large deposits and then early or immediate access through policy loans that are typical red flags for money laundering.

• Are used with younger customers who have less disposable income or investment sophisication and often have no dependents and hence, no insurance need.*

• Results in policies having a higher lapse risk if customers do not fully understand the impacts of policy loans, interest accrual, and the likelihood that repayment will be required, especially in rising interest rate environments."

Let's do a quick, common-sense summary:

• Misrepresentation is a problem to represent life insurance as anything else than what it is.

• Withholding mandatory disclosures and illustrations is a violation of insurance regulations.

• Don't want to promote money laundering activities (or attract those who would desire to launder money through insurance institutions).

• Younger customers with no insurance need... we'll cover that in a bit, but I do agree that if there's less disposable income, these policies may not be an appropriate fit at this stage of their lives.

• All of the above results in a higher lapse risk which impacts the company and, more importantly, the policyholder.

Let's go deeper on "younger customers who have less disposable income or investment sophistication and often have no dependents and, hence, no insurance need."

Later in the memo, MassMutual goes into further explanation:

• "No insurance need. Prime "targets" for this type of strategy are often younger clients being pitched this concept as an alternative to a savings or checking account, or sometimes as an alternative to contributing to a retirement plan. Customers are sometimes encouraged to transfer a large portion of their savings into the whole life policy, and then access that cash through borrowing. These customers may not have the investment experience or sophistication to understand the nuances of using whole life as part of their overall investment program. And being younger, they may not have dependents who will suffer a loss in the event of their death, and, thus, life insurance may not be an appropriate product. As a result, these types of sales can result in customer complaints and refunding premiums."

Do you see the company protection perspective?

Lack of dependents is not a valid reason to not issue a life insurance policy. One can list other family members (including parents) or even eligible charities as beneficiaries of the policy. But is that enough of a reason to buy and keep the policy? That's up to each policyowner.

Does that mean that we cannot offer life insurance for the properties of these contracts?

Comparing life insurance to other investments

The biggest issue of doing this... is implying that you'll have more money or better performance in the life insurance policy than in the retirement or investment accounts.

If you believe that, then maybe I have a bridge to sell you.

There are a number of advantages for cash value life insurance over these other accounts (401k, IRA, Roth IRA, 529, and taxable investments)... but the dollar-for-dollar statement values... will be higher in these accounts.

When does life insurance win? When the properties (especially tax advantages) of these contracts are more valuable to the policyowner than the provisions of the other accounts.

I've made two 24-point comparison checklists (no you can't have them) where I detail the pros and cons of life insurance to these accounts as well as life insurance to owning a home. Life insurance does win when max-funded and designed optimally... but it has the negative psychological impact that you won't have as much cash in the policy as you would elsewhere.

I've got a number of blog articles here where I discuss and dissect where these advantages really shine including retirement and educational planning. However, if you're trying to invest for a higher net worth... you won't get it with the most efficient life insurance planning that is designed for college aid maximization and retirement cash flow. Many financial advisors believe that the higher your net worth is, the greater your financial security.

I've found that where your money is, is more important than what it earns.

Years ago, I was in a private briefing with a few agents discussing Private Placement Life Insurance (a whole other kind of policy). Afterwards, I spoke with the presenter who asked me what I did in the industry.

"I help people to use life insurance to retire with cash flow off the radar screen of the IRS for income tax purposes." He asked: "What's the rate of return on those policies?"

My straight-faced, dead-pan answer: "It's negative." And I kept looking at his face to judge HIS response because *I* was perfectly fine with that. 🤣

Two ways to design a policy

There are two primary ways to design a life insurance policy:

• Minimum premium for maximum death benefit for as long as you want that coverage guaranteed.

• Maximum premium for minimum death benefit for efficient cash value accumulation.

Death benefit... is a secondary consideration for max-funded cash value policies.

Each company will have different ways to accomplish those objectives, but that is it.

In my opinion, agents get in trouble for insinuating and implying that someone can have more money or better performance in a life insurance policy on a dollar-for-dollar basis compared to other investments... and that's a slippery slope. I promote that having less money in your life policy can make other areas of your life far more efficient.