Surprising Investment Strategy The Media Just Doesn't Get

Tailored suits. Power ties. Cuff links! Talking heads on Television know how to look like they possess authority that you and I don’t.

Yet few in the media have genuine depth or insight to share with us. 

You and I are supposed to believe our investing options are  limited to those provided by Wall Street and banks: stocks, bonds, cd’s, and REIT’s if we are feeling adventurous.

But it’s not just the media pushing us to stop thinking for ourselves. Take, for example, the idea of life insurance as part of an investment strategy. A quick Google search returns two main camps:

  • The opponents: “life insurance as an investment is a scam and you should stay away from those slippery insurance agents like you would a used car salesman. Try my (investing newsletter/mutual fund/financial planning service) instead!”
  • The supporters: “life insurance is the best investment ever and it will take care of all your needs for you and your heirs forever. Give us a call and we’ll give you a quote!”

Could it be that the truth is somewhat more nuanced than “insurance is the best” or “insurance is the worst?”

Could it be that just like some 401(k) plans are good and others are bad, some life insurance policies are good and others are bad?

I dare say “yes.” I dare say that if we take a reasoned and balanced look at the facts, instead of the hype, we’ll find that the truth is somewhere in the middle of the hype.

Life insurance as an investment is neither a scam nor a guaranteed path to riches. What a properly structured policy can do is:

  • Provide you a steady stream of cash flow
  • Break even after a couple of years
  • Increase the return you generate on your other investments
  • Provide greater safety for your overall portfolio

Full disclosure: as a financial professional, I do have services to sell. You can even say that I have an agenda. The difference is in the detail, accuracy, and verifiability of the information I am providing you.

With that said, let’s jump in. In this article, I’ll discuss:

  • What makes an insurance policy good or bad
  • Life insurance is an expensive investment… or is it?
  • How to pair a life insurance policy with a 9% guaranteed annual return asset to make an average of 12% per year
  • Using insurance to limit or eliminate your exposure to market risk

By the end of this article, you will have gained a greater understanding of strategic options that may help you achieve your financial goals. Please be advised that all investments carry risk and that past returns do not guarantee the future.

What Makes An Insurance Policy Good Or Bad

Not all cars are created equal. Not all mutual funds are created equal. And not all insurance policies are created equal, either! It all depends on the details of the policy.

Every life insurance policy comes with a “death benefit,” the amount of money paid out to your heirs if the policy holder dies.

One specific form of life insurance, called “Indexed Universal Life” (IUL), uses a combination of premiums and a capital account to pay for the death benefit.

The capital account portion of an IUL policy can be accessed by the policy owner while he or she is alive. This feature is what makes it possible to use IUL as an investment.

Most of the expense of an IUL policy is paid up front, in the first year. The cost varies wildly from carrier to carrier. Some companies break down the cost for you, while others hide the cost in the small print.

Here are the questions you need to ask to determine if an insurance policy is a good investment or a bad one:

  1. Does the carrier clearly disclose the cost?
  2. How long will it take for me to break even on my investment?
  3. How can I expect the policy to perform in the next 5, 10, and 15 years?
  4. What is the cash value of my policy after 5, 10, and 15 years?

If you don’t have clear and compelling answers to these questions, don’t buy the policy.

Also note that life insurance policies are a zero-sum game between the insurance agent and the customer. Higher premiums mean higher commissions for the agent, and lower returns for the customer. Lower premiums mean lower commissions for the agent, and higher returns for the customer.

At Wealth Apex, we use lower premiums because we know that our investors will end up doing repeat business with us and referring friends.

Life Insurance Is An Expensive Investment. Does That Mean It’s A Bad Investment?

One objection that people raise to using insurance as an investment is that it is far more expensive than purchasing stocks, mutual funds, or index funds through an online broker. $7.95 per trade is cheap!

The cost of an investment is an important factor to consider. But so is the return!

IUL policies are linked to the performance of a stock market index, such as the S&P 500.

However, the capital account is structured so that it can never lose money due to stock market performance. Nor can it gain more than 12% in a given year:

Even after taking into consideration the cost of an IUL performance, a policy structured like the one above will beat the stock market during certain long stretches of time. On the other hand, the stock market will beat the insurance policy during other stretches of time.

That’s why we typically recommend pairing an IUL policy with another investment. Many of our clients prefer to choose a 9% guaranteed return alternative asset. By leveraging an IUL the correct way, they are able to average 12% per year with no exposure to stock market downturns. Historically, a 12% annual return is significantly higher than S&P 500 performance.

IUL can be compared with any other asset. The proof is in the pudding. If the policy illustration is attractive in comparison to your other investment options, then you should consider investing in it. If the numbers are unattractive, then stay clear!

Using Insurance To Limit Or Eliminate Your Exposure To Market Risk

Imagine the unthinkable: another 9/11, a systemic financial system collapse, or a major war. Unexpected events like these have caused the stock market to lose 40% or more in a single year.

Because IUL has a 0% floor, you can’t lose money because of a stock market downturn. IUL provides peace of mind to investors who refuse to settle for 2% returns on bonds, but who also don’t want to take the risk of being fully exposed to the stock market.

How To Pair A Life Insurance Policy With A 9% Guaranteed Annual Return Asset To Make An Average Of 12% Per Year

Certain IUL policies can be used to virtually generate two returns with one dollar. It’s not magic, hype, or chicanery. It’s leverage.

Here’s how it works: your insurance carrier allows you to use the cash value of your policy to borrow money at a low interest rate of 3.5%.

You can then take the borrowed money and invest it in a second asset. You can invest anything you like with your cash value but a lot of our more conservative clients prefer using a guaranteed alternative asset to still create a safe wealth-building strategy or a guaranteed cash flow. 

Life insurance policies are complicated, but for easy illustration, we will use round numbers and a simplistic view of how the policy works.  More detail can be discussed with an actual illustration provided by the insurance carrier.

Here’s how it works, in simplified form:

  • $100,000 invested in the IUL
  • 5% average return generated by IUL insurance policy = $6,500 average annual return
  • 5% loan cost = $3,500 annual borrowing cost
  • 9% guaranteed return generated by alternative asset = $9,000 annual return

$9,000 + $6,500 – $3,500 = $12,000, or 12% of your $100,000 invested.

All of that is done with zero exposure to stock market downturns. And, a decent portion of the investment is tax-free.

One important thing to note is that some policies only allow you to borrow 85% of the cash value of the policy, which would affect how much capital is available to invest in a 9% guaranteed return alternative asset.

Where People Go Wrong with IUL

IUL is only effective as a high-return alternative to traditional banking when the policy is structured correctly. Unscrupulous insurance agents may try to sell you on policies that involve much higher fees, and significantly less access to your funds.

At Wealth Apex, we minimize your fees and maximize access to your funds as much as possible, even though we in turn receive less compensation. Why do we do it? Because we want to look back with each and every client 5 years down the road and be delighted with the policy’s performance. Some of the highest praise we get is “everything happened exactly the way you said it would.”

We benefit from offering lower fees and maximum liquidity to our clients because the attractiveness of our policies incentivizes our clients to scale up their IUL accounts. For some clients, that can mean placing millions of dollars in the IUL, and then using liquidity to reinvest 80% to 90% of that money twice for greater returns.

Next Steps

If you would like to start earning two returns on one dollar, reach out to us for a free consultation. We’ll discuss your goals and possible means of getting there.