“Invest” In Life Insurance? Are You Kidding?

     Sooner or later some life insurance salesman will try to convince you that the best way to invest for retirement is with cash value life insurance, that the premiums you pay are a great “investment.”
     First of all, it is illegal for a life insurance salesman to refer to a premium as an investment; it is a violation of state insurance code and also the compliance rules of ethical life insurance companies. And if you complain to your state insurance commissioner, an agent who tries to convince you that an insurance policy and the premiums you pay are an “investment” could be reprimanded or even lose his or her license. And with good reason. The truth is, life insurance makes a very poor “investment.”

Why Life Insurance Makes a Poor Investment

     First, there are Excessive Fees. Back in the 1980s, I bought a VUL (Variable Universal Life insurance policy) on the promise that it would make me lots of money. Over the next three years the Dow Jones Industrial Average doubled  —  it moved from $3000 to $6000. And I said, “Woopee! I'm making money.” So I called the insurance company and asked what my cash value was. Well, guess what. It had not increased and I had not gotten richer. That's when I knew I'd been had. If I can't make money when the DOW doubles (and how often does the DOW double), when am I ever going to make money? Answer: Never! And why is that? Because the profits from investing don't end up in my cash value, they end up in the pockets of the agent (trail commissions), the investment manager, the insurance company, and the “up-line”; all of whom get rich at my expense. What did I do? I cancelled the policy of course.
     But second, and more importantly, are the Rising Mortality Costs. Suppose you actually do manage to save some money in your cash value. That misses the point. The real question is not will I build cash in my cash value, but will I have cash at the end, when I'm old and gray and actually need that money. Answer: Probably not. Why? Because even though your cash value is compounding, the increasing mortality cost is growing faster than the compounding and will strip it all away.
      Here's what happens. As you get older, each year your cost of insurance increases. That is, each year an increasingly larger part of your premium pays for your actual insurance (mortality cost, not fees and not cash value) and a decreasingly lower part of your premium goes to your cash value.  Then one day (likely in your mid-60s) you learn that all your premium is being sucked away by that annually increasing mortality cost and more! Your life insurance is costing more than the premiums you are paying and are still increasing year by year. And how is that shortage being made up? That shortage is made up by sucking money out of your cash value and at an alarming rate, and the cash value will, in a few years, be zero. Then, when the cash value is all gone, your policy will self-destruct. At that point, you will no longer have any savings (cash value) and you will no longer have life insurance. What you do have is loses  —  all those premiums you've paid over the years.  
       Oh, and you may also have a tax bill. Oh yes. Because if you were foolish enough to have borrowed money from your policy on the mistaken notion that it is “tax free,” that fantasy is about to blow up in your face because when your policy “endows” (ceases to exist), that borrowed money is now taxable as ordinary income, and you're screwed. So you ask your life insurance company what you can do to prevent all this bad stuff from happening and they say “send us more money.” And that's true. You can always keep the insurance policy alive by sending enough money to cover the rising mortality costs, but that's not the purpose of an “investment” is it, to suck away your money. Its purpose was to provide you with money. After all, it was supposed to be an “investment” — that was what the agent said decades ago.

So, What's To Be Done At That Point?

     The one thing you can do is to reduce the face value substantially; for example, from $100,000 to $20,000. This will reduce the hemorrhaging  and extend the life of your policy to when you die, maybe. But now the policy is tiny and is just a burial policy. But still, that's useful and will help your heirs get you into the ground. But that's not at all what you had expected from this “investment,” is it?


     Better was not to have “invested” in cash value life insurance in the first place. Better would have been to follow the advice that one life insurance company used to give which is: “Buy term and invest the difference.” Now that's good advice. Buy life insurance, of course. You do need it.  And invest, of course. Just don't co-mingle the two. When you co-mingle them, you can't keep track of what money goes where, so it's easily pilfered, so you lose on both ends. When things go badly you end up with no investment and no life insurance, just piles of squandered money over the decades.

My Advice

     First: For your life insurance needs (and you do need life insurance), buy 20 (or 30) year term life insurance. Get the cheapest you can find with an A rated company.  Over that 20 years earn enough from your investments so that beyond the 20 years you no long need life insurance because you have real cash, and that's better.
     Second: For your investment needs either buy stocks and manage your own portfolio, or buy an equite indexed Annuity so that you cannot get hurt by market declines. Stocks if you're aggressive, an annuity if your passive.
     Third: However you invest, actively or a passively, consider using a ROTH IRA, so that at the end, if you make a million you'll have a million, not a million minus a third for taxes.
     Fourth and finally: Start investing now. You think you have time, but truth is, time is always shorter than you think.