The rate of return argument against permanent life insurance focuses mostly on an irresponsible comparison of dissimilar asset classes.
Chances are good that most of you reading this understand that there is a relationship between the risk of an asset and it’s return; the two are positively correlated. This means the riskier an asset is (i.e. the more volatile it’s returns and the higher the chance you lose money if you buy it) the higher it’s long term rate of return is hoped to be.
People tend to be pretty comfortable with understanding thatbonds are less risky than stocks and therefore tend to return less to investors. There is still plenty of reason to buy bonds instead of stocks and the lower anticipated rate of return hasn’t prevented anyone who wants the diversification.
To follow the logic of bad life insurance returns in it’s normal presentation—essentially that a cherry picked historical data set assuming returns posted by the S&P 500 would have performed better—would be universally applicable to any other financial tool with a lower anticipated return.
All assets with a lower rate of return apparently are terrible and you shouldn’t even consider.
The star student of stock slingers in the media is passive index funds due to their low costs.
There’s no argument from us that this can be a great place to invest some of your money. You won’t get identical returns posted by the respective indices, but you’ll be close enough. There’s also plenty of opportunity to benefit from market rallying years.
But index funds do nothing for a saver when things turn bad and pretending that things won’t turn bad is a great way to ensure a second career after age 65.
Life insurance is not a replacement for stocks in your portfolio it’s a complement and a really good one at that.
Compared to bonds or cash equivalents, we know of no other financial tool that offers the liquidity, high risk adjusted rate of return, reliability, and tax efficiency that life insurance affords its owners. It also lacks certain correlated movements that many of these assets have tended to show to the stock market in recent years (despite the fact they aren’t supposed to).
Always tightly woven in to any argument claiming life insurance returns are terrible is a comment or two about the awful guarantees.
While I’m certainly not one to get too excited about the guaranteed column of the life insurance ledger, the guarantee is infinitely higher than that of stocks.
Additionally, the fact that the guarantee increases every year you realize returns better than the guarantee should not go overlooked. With stocks, you are always one bad day away from having all of your gains wiped out.
The claim that life insurance returns are terrible is nonsense and a form of weak thinking mostly intended to confuse and mislead. We’ve proven a few times that historical returns have been quite favorable.
We’ve also shown that despite not being an asset that one should compare to stocks, historically a well designed product has compared extremely favorably to stock market returns.
But life insurance isn’t just about the gross rate of return. There’s a multitude of benefits life insurance affords its policyholders and when factored in the net net return is substantial when compared to other savings/investment choices.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
IPB 107: When Interest Rates Go Up, Bonds Go Down. What Does It Mean for my Life Insurance?
IPB 105: Is Indexed Universal Life Insurance Worth it even if the Interest Rate Assumptions are Wrong?
Life Insurance a Potential Hedge Against Sequence of Returns Risk
2016 Whole Life Insurance Dividend Analysis