Life insurance salespeople have this extremely puzzling talking point in their sales pitch. They say “you can’t lose money”. It’s so bizarre because it’s so incredibly false.
They’re talking about the “cash value” contained inside of some permanent life insurance policies. As with all good cons, there’s a hint of truth. The formula the insurance company uses to calculate that cash value only goes up. Nice, right?!
Well, not so fast. First, an individual investor should be concerned about THEIR money, not the calculated “cash value”. When you put money into an insurance policy like this, you lose ALL SORTS OF MONEY before the remainder goes to cash value. For example, I recently bought a permanent life insurance policy and read all 91 pages of it. When I made a $200 premium payment, this is what was taken out:
• $12: Premium expense charge
• $12: Monthly policy fee
• $59: Per unit charge
• $4.50: Cost of insurance (Assuming 30 year old male, non-smoker. This goes up as time goes on)
• Total fees: $87.50
So of my $200 premium payment, only $112.50 went to the cash value. That’s an INSTANT -44% return. All those “stock market crashes” the insurance salesmen are trying to scare you with? A 44% stock market crash is a horrific, once every few decades type of crash. But THAT HAPPENS AUTOMATICALLY ON EVERY SINGLE PAYMENT YOU MAKE TO THE INSURANCE PRODUCT. “You can’t lose money.” Ha.
Ok, but that cash value is safe right? Nope. What if you change your mind, hit a rough patch, forget, or otherwise start to miss the required payments. The insurance policy starts eating away at your cash value. Eventually the policy can lapse causing you to lose everything. I would never “invest” in an insurance policy.
That said, I DO pay for a lot of insurance: Health, auto, homeowners, umbrella. I’m hosting a free “Insurance 101” webinar on TUESDAY where we talk about all this stuff in simple terms. I’m not an insurance agent, and I’m not selling any insurance, it’s just an unbiased look at what I personally do. Check our link in bio!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Jeremy
