Non-term Life Insurance Products Are Not Good Investments
Non-term life insurance products, such as annuities, and whole life and universal life products, generate very high commissions for insurance agents and high profit margins for the insurance company. These commissions and profits are coming out of your wallet.
Additionally, you need to question the investment guarantees of these insurance products and read the fine print. Usually, the guarantees are not on an annual basis, but for 7-10 years.
For example, insurance companies or agents may say, “We will give you a guarantee of 5%.” What that really means is you will get at least a $5 return for every $100 after 7 – 10 years, and not $5 every year.
I believe life insurance should be used for insurance purposes only. Your only purpose should be to transfer the risk of loss to the insurance company.
Term life, health, auto, home, and long term care are good types of insurance.
I do not recommend using life insurance products for investing or generating income. Your investment returns are significantly reduced by the insurance company’s fees and the insurance agent’s commission.
You’re better off buying term insurance and then investing the difference in index funds. In fact, you can even buy the exact same funds that the insurance product offers, and pay less fees.
Finally, these life insurance products can minimize transferring wealth to your beneficiaries if your net worth is above $12 million. Even then, you must make sure the higher insurance fees outweigh the tax benefits.
Please note that a blog post can not address each and every possible option that an insurance product pitches to you, but if you contact a competent and trustworthy financial advisor, they can give you an alternative that achieves the same objective with less fees and one where there are no caps to your returns.
Please let me know if you have any questions or comments.
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Earl Yaokasin, CFA, is an investment manager who runs WealthArch Investment Services in Pasadena, CA. He is a fiduciary with over twenty years of experience, and whose entire personal portfolio is managed by the firm in the same investments as the company’s clients. His firm focuses on value investing, similar to Warren Buffet’s successful approach, and disciplined strategies designed to create growth with downside protection, enabling clients to move steadily towards their life goals and aspirations with confidence.