Tuesday, January 8, 2013

Life Insurance As An Investment

Hello readers, today I am going to address a topic that I had wanted to wait to discuss much later – perhaps when this blog has become more well-known. But I just came from reading something on this topic on LinkedIn, and I can't help but get into it. What I read was contributed by a member of a group that I subscribe to and commented on by other members of that group, so I tried to add my own comments but as is typical of me (as my friends and those who know me well would attest to), I ended up having more to say on the subject than space would allow – for a LinkedIn post-related comment. So I had this brainy idea: rather than limit my contribution to LinkedIn (where only members of that group would see it), why not bring it here so more people can read it – and hopefully add to the discussion with their comments? So, here we are...

Obviously the discussion was started by somebody (I believe it was a gentleman from Canada) who posted a write-up under the above heading, and naturally folks had a lot to say about it, but a couple of comments really caught my attention. One was by a contributor who said this, and I quote: "Life insurance is insurance and not an investment. Can you accumulate cash value, yes. However it doesn't do well as an investment -- the costs are too high." The contributor went on to say, however, that he believed permanent life insurance "makes more sense than term" because it (meaning permanent insurance) doesn't put you in a situation where at the end of the "term", "one has no money and no insurance", and he finished by saying "I sell life insurance for the insurance and not for an investment".

While I share that gentleman's sentiments about permanent insurance (typically with cash value build-up and growth) and its marked superiority over term insurance (let those who disagree with that statement howl all they want; I'll defend it with my life), I do not agree with his take on life insurance as an investment, and that is what got me motivated – if I may put it that way – to contribute to the discussion. So I set out to add my comments – mostly as a "concurring voice" to another contributor who said that "life insurance can be an investment" (his exact words) and went on to extol some of the "virtues" of life insurance – not the least of which is "the real beauty of....its unique tax treatment" (I'm quoting again). Of course, that contributor was able to say his piece – and quite effectively too – within the number of characters that are allowed on LinkedIn, unlike me. But not to belabor that point – how else would we be reading this all-important discussion here (so more people would have access to it) if I had been able to fit my contribution in there?

The point is that the gentleman who said that life insurance can be an investment hit the nail dead smack on the head, and I couldn't have said it any better myself. I think that it's time for people to get off this humdrum script of "life insurance is not an investment" and "life insurance as an investment is too expensive" and take a good, hard look at what a really well-designed, well-structured, well-funded life insurance policy can do versus the so-called "real" investments over the long-term; I bet they would stop singing that old song if they did. But sadly, most people don't; instead they just continue to believe (and repeat) that same line we've all been fed (and continue to be fed) by the "investment gurus" and "experts"– the folks on Wall Street and those crowding the hallways of banking institutions' ivory (or is it gilded marble?) towers – who are the ones who really benefit from the status quo of people continuously pumping gobs – no, oodles – of money into stocks, mutual funds and CDs (yeah, CDs, and for some, even savings accounts too!).

Somebody tell me what is more expensive: putting $1,000/month into a mutual fund for 30, 40 years and paying a fund manager (money manager, whatever you call them) year in and year out to "manage" it for you (someone who gets paid whether your investment grows or not) and then getting half – or possibly even more – of your portfolio (whatever the value is at the time is not really material for the purpose of this discussion, but we can get into that later, if necessary) wiped out on the "eve" of your retirement by a market down-turn (the "money manager" still gets paid, regardless!), or putting the same amount into a life insurance policy (let's say an equity indexed UL, for example) over the same period of time, never ever having to worry about losing a penny of your cash value to the market and being able to pull a very decent amount of money out of it via tax-free "loans" upon retirement (or even way before that, with no tax penalties) on top of the income-tax-free death benefit that your beneficiaries would receive?

Without even getting into a discussion of IRRs (internal rate of return, which I mention here because I saw one of the contributors in the LinkedIn discussion mention that) and all the technical stuff, I'm willing to bet anything that the supposed "real investment" alternative (in mutual fund) is not just more costly in this instance; it would be plain devastating. And yet that is what people are asked (encouraged, told, cajoled – I dare say deceived or maybe even coerced, in so far as they're not even "allowed to know" that there are possibly better alternatives?) to do every day when they are constantly bombarded with ads, sales pitches, news, articles, op-eds radio/TV talk shows and what have you singing the praises of "good" and "real" investments while supposedly "exposing the evils" of permanent, cash value life insurance!

And the sad thing about all this is that it is the very people who could (would, actually) benefit the most from a commitment to life insurance – making a consistent, systematic contribution of funds to a financial product that will be there for you (and the people you care about) to benefit from no matter what happens on the stock market (or when you die) – who are turned away from this great tool for providing financial security for oneself and one’s family by all this senseless “noise” and negative press (most of it coming from largely uninformed people speaking out of relative ignorance).

I’m talking about middle-to-low income families, the people who more often than not are unable to save enough – if anything at all – through the so-called "traditional" investments (mutual funds, stocks and bonds) for their retirement (in spite of all the hoopla about 401(k)s and other tax-qualified plans, and we will talk about that another time) let alone leave something for their heirs, the people whom most of this bad rap about permanent (cash value) life insurance is directed at and who are constantly receiving free “superb advice” from everybody and their granny (from Suze Orman to Dave Ramsey and all the other “financial” experts and gurus in between) to only buy term insurance (if they should even dream of getting life insurance at all!) and put the rest of their money in “good, real investments” (the “buy term and invest the difference" – or BTID – theory arguably perfected by Primerica).

Yes, these are the people who, through no fault of theirs, are getting sucked into believing stuff that is far from reality and therefore getting hurt by what, to me, is nothing short of outrageous advice where their money and what is good for them is concerned. On the other hand, the folks whom most of these "financial experts" claim life insurance is "made for" (because they are "wealthy" and can afford to pay for it) are usually financially savvy people who seemingly don’t pay attention to what the supposed “conventional wisdom” out there about life insurance is anyway, or maybe they also buy into that conventional wisdom, because either way, they dump tons of money into permanent life insurance. And for good reason too! Remember the "virtues" of life insurance – not the least of which is "the real beauty of....its unique tax treatment" – that I said the contributor on LinkedIn talked about? Well, if there's one thing that motivates wealthy folks (and should motivate everybody too – no matter the size of your pocket book), it is the need to continually find ways to pay less tax and keep more of their money for themselves and their families/loved ones.

Another reason that makes it even more sad – the way I see it – for people to be caught in this farce of "life insurance is not an investment; it is too expensive and only for the rich" is that, in my opinion, "rich" folks are the ones who do not necessarily even need life insurance at all! Why do I say that? Because to me, such people are financially "okay" (in most people's estimation, judging by whatever the measure of being "financially okay" is supposed to be) and therefore do not need the cash value from a life insurance policy to survive on (as a supplement to whatever other retirement income they have) or the death benefit from the policy to leave an inheritance to their loved ones. And yet we're all made to believe that these are the folks who should be buying permanent life insurance, not the rest of us. Good logic it is, right? Rich folks can afford life insurance so let them buy it and leave even more money – than they already have – to their heirs (or favorite charity), and as for the rest of us, well, we can't afford life insurance (heck, we don't even need it!) so let's forget about it and condemn our heirs (and descendants of multiple generations) to an eternity of financial struggles, huh?

Think about this: who would be better able to handle financial difficulties during their working life, survive a near wipe-out of their retirement savings just before or right into retirement (or simply afford to have a sizable chunk of their “real” investment portfolio evaporate over-night with a major market loss and still come out of it okay), and still leave an inheritance to their loved ones (let’s not even worry about charities here for now)? Well-heeled folks, or the everyday working-class people (and I’m not implying here that “rich” folks don’t work, so let nobody jump on me for that) struggling to put something away for that far-in-the distant future dream of retirement (which, more often than not becomes somewhat of a mirage)? And so which of these two groups of people would have the greatest need for permanent life insurance and should therefore be encouraged the most to get it at all cost?

It seems quite obvious to me that it is the latter group – the folks who struggle to get by, who can hardly save and therefore can ill-afford to lose any part of their life-savings (what they manage to put away) at any point in their life. And that means that regardless of how fantastic a return such folks can hope to get on their investments in the stock market (and that is all it is, a hope for higher returns, whether in a given year or over a number of years), they would most likely be better served by putting their investment dollars (or whatever currency they use, since this is not just about Americans) in something – a financial product – that would not necessarily take them to the giddy highs of the financial markets but definitely give them a decent sampling of that whenever possible (through the very unique means by which insurance companies "grow" policy-holders’ cash value) while completely shielding them from the markets’ often heart-breaking and potentially disastrous lows, at the same time making sure that come hell or high water, they – or somebody they care about – will collect from what they sweated to put away.

And if that “something” is not permanent, cash value life insurance (well-designed, well-structured and more importantly well-funded – the same way they would fund their so-called “real” investments), then I don’t know what it is.

So there, that is my two cents’ worth, and I stand by it. Happy New Year, everybody!


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