Why Investing And Insurance Shouldn’t Mix (Despite What TikTok Says)
If you spend time following the financial influencers on TikTok, you may start to get some crazy ideas about money. For example, some of the worst financial advice I’ve seen on TikTok has suggested that you should never put down any money when you buy a home and that anyone can be successful at day trading.
I’ve also seen TikTok stars say all kinds of things about cryptocurrency and non-fungible tokens (NFTs), including claims that some really obscure digital assets would be worth millions by the end of last year. Obviously, none of their claims wound up being true.
TikTok also seems to be a haven for financial influencers who want everyone to rush out and buy permanent life insurance with an investment component. A quick search of TikTok videos on the subject will lead you to influencers who say whole life insurance is a “cheat code for the wealthy,” and that young people would be better off buying whole life insurance instead of saving for retirement in a 401(k) plan.
While you’ll occasionally find small nuggets of truth in some claims made on the social media platform, most experts agree that investing and insurance don’t mix well. I reached out to other experts who wanted to explain why investing should take place separately from your insurance needs, and here’s what they said.
Insurance And Investing Serve Two Different Objectives
Financial advisor Darren L. Colananni of Centurion Wealth says that investing and insurance shouldn’t mix, and for more reasons than one. First, you have two completely different objectives you’re trying to achieve, and life insurance with an investment component tries but fails to combine them into one investment product that does the best job at meeting both sets of needs.
While life insurance that offers an investment component might look good on paper, Colananni says that investment products in an insurance wrapper come with high fees, low liquidity, and benefits you might not need or want.
“Overall, you are much better off keeping the two separate,” he says.
In other words, buy the life insurance you need to protect your family, then find ways to invest for your goals separately. You can use the difference in costs to add to your emergency fund, fund a Roth IRA, invest within a brokerage account, and more, says Colananni.
Meager Investment Returns
According to financial planner David A. Fowler of HIgh Mountain Financial Coaching, life insurance products just won’t give the same returns over time as a disciplined well-built investment portfolio will.
For example, the S&P 500 has averaged about 10.5% give or take over the last 50 years, he says, yet insurance products that are designed as protection vehicles don’t offer returns anywhere near that range. Fowler adds that whole life and universal life policies can have you paying premiums for 15 to 20 years just to break even in terms of the value of the policy.
Fowler also says that many insurance products are tied to the returns of financial markets, such as variable universal life insurance. However, these policies still have mortality and expense risk charges, as well as additional layers of fees from the underlying funds.
Financial planner Kurt Heineman of Vision Casting Financial offered the following example of someone who invested in whole life insurance and came to regret it based on long-term returns.
Heineman says his client was sold a whole life policy for their newborn child, and that he was told by the insurance salesperson that it would be a good way for them to save for college since they could use the cash value of the policy to pay college tuition and fees. The client was spending a few thousand dollars per year on the policy, yet it only had a cash value of $18,000 by the time their child turned 18.
“If my clients instead chose to invest $2,000 a year in a 529 account that yielded 8% a year on average, they would have $74,900 set aside for college education,” he says. “This is the problem with insurance products that mix investments and insurance.”
Too Many Conflicts Of Interest
Brian Walsh, who works as a financial planner at SoFi, says there are several conflicts of interest to be wary of when it comes to mixing life insurance with investments, or listening to anyone on TikTok that offers financial advice.
First off, the barriers to entry for the insurance industry are extremely low, and the barriers to sharing information, often misinformation, on social media are even lower. People on TikTok may have their own incentives to espouse the virtues of permanent life insurance, including sponsorships or their own sales of these products.
Also note that insurance salespeople, which often refer to themselves as financial advisors, are financially incentivized to sell permanent life insurance via large commissions they receive upfront when someone buys a policy.
“When you combine low barriers to entry with financial incentives, you get a significant amount of permanent insurance policies sold to individuals who would better benefit from other strategies,” says Walsh.
Lack Of Liquidity
Finally, California financial advisor Ray Prospero says that many agents try their hardest to position life insurance as a retirement savings vehicle in line with traditional IRAs and 401(k)s. While insurance products do provide benefits, he points out that they also come with other issues, such as lack of liquidity and high ongoing costs. Additionally, they are complex and have many moving parts, and this makes it very difficult for the average retail investor to fully understand their investment.
Prospero says he has sat across from many investors that were previously sold an insurance product they did not fully understand. Unfortunately, in many of those instances they were unable to immediately make changes to their insurance investment “due to the high surrender fees associated with those types of products,” he says.
“Rather than pay these fees, they are forced to stay in the insurance product until these surrender charges expire.”
The Bottom Line
At the end of the day, almost everyone I spoke to on this topic had a similar view on mixing investing and insurance. They all seemed to agree most people are better off buying term life insurance that provides a death benefit and then investing the rest.
The premiums for term coverage are significantly less than whole life policies, says Propsero. In fact, a company like Bestow advertises rates as low as $28 per month for a 30-year-old woman who is seeking a 30-year policy for $500,000. For $1 million in coverage, that same policy could cost as little as $50 per month.
The money a person saves on premiums can then be used to invest in a traditional investment vehicle, such as stocks or mutual funds. Best of all, you get to decide how your money is invested when you take on this challenge yourself, and you get to avoid the high fees and hidden charges many life insurance products charge.