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The Hottest-Selling Insurance: The Greatest Weapon of Financial Self-Destruction

Insurance product

Back in the days when I didn’t have a clue about the topic of personal finance and investing, and I just trusted my financial advisers, I bought one of the best financial products available on the market. Later on, I found out that it was the best one for the adviser and not for me.

Unfortunately, this product is owned by millions of people all around the world, and is one of the top selling financial products. Even though the insurance companies have a different, very sexy name for it, I call it “The Greatest Weapon of Financial Self-Destruction.”

The product I talk about has many different names and can be presented differently in different countries. The common names are: whole life insurance, universal life insurance, variable life insurance, equity-indexed annuity and so on.

Beware of the cash value!

When you are buying life insurance and you want to spot this type of insurance, look out for this feature: your policy has both an insurance and an investment component (usually called a “cash value.”) This means that the seller of these types of policies will tell you that you will have life insurance, plus a part of the premiums you pay will be invested somewhere (usually in mutual funds, bonds or something similar).

When you spot these features in a financial product, there is a very straightforward strategy that you need to follow: run away as fast as possible.

Let me show you how they work and you will be amazed by the cunningness of the financial industry.

Like I said, in the past I owned two policies like that. They were both highly recommended by my financial adviser.

The first one was a whole life policy that I still own, because the penalties for terminating it are just too high, and the second one is my favorite example that shows you the damage that these policies can do.

How to lose money?

When I bought it, the advisor told me that because I already have a whole life insurance policy from another company, I should get another one that is even more “investment oriented.” That is why the vast majority of the premiums that I pay would go into a global mutual fund, and only a small percentage of the premiums would go towards the life insurance.

In his words, that product was an alternative to investing directly in this global mutual fund, but with some tax advantages. That is why I should get a good and safe return on my investments because my money is being invested in the world economy.

“Sounds nice,” I thought, and I started to put around $165 per month into this product, and I was also very lucky – the timing was great.

In the next years, the market went down sharply, to 50% of its value, and my monthly investments bought more and more units of this global mutual fund. This is a good thing – I was buying low!

After three years, the market started to turn around, and after 5 years it reached the highest level ever. I looked at the chart of the mutual fund where my money was invested, and I thought, “Great! I have been investing in this fund when the prices were very low and now they are very high. I made a lot of money!”

Now, you won’t believe what happened next. I went to the insurance company to terminate the policy because, at that time, I started to realize what a fraud this can all be. I realized that they probably took a lot of my gains through fees and commissions but nothing prepared me for what happened next…

During the 5 years, I paid exactly $12,005 in premiums and more than 95% of that money was supposed to go towards the investment part of the policy. So, I did a quick calculation that showed that I should get at least 45% return on my investment. That is, the cash value of my policy should be around $16,530. Buying low and selling high is always a good thing, isn’t it?

So, I’m sitting in the office with the insurance company’s employee, who was in charge of policy termination. The office is a typical financial institution office. She is a very nice, official-looking lady with glasses. After a couple of minutes of typing, she printed out the final policy statement and gave it to me.

When I saw the number, I just stared in disbelief.

The cash value of my policy was $9,277. And then there was another fee that the financial advisor didn’t tell me about – $2,261 in insurance costs. I was shocked.

What I got out of this “safe” investment was a cash value of $7,016. $4,989 less than I paid in premiums.

Despite the fact that I made all my investments when the price of the mutual fund was low and the fund was at the highest point in history when I sold, my return was a staggering minus 42%!

I don’t want to even think about people who buy similar policies and hope to finance their pensions with them, or who buy them in times when the market conditions are less favorable than in my example.

These things shouldn’t happen to people who are working hard to earn their money, only to lose it because of the greed of the financial industry. In my opinion, it’s simply not ethical to sell these kinds of products, but the financial industry does it all the time.

“Knowing the right detail gets you a great return. Ignore them and you just crash & burn.”

What was my real cost of this policy? To understand how much I really lost, you also need to take into account the opportunity costs. That means that we need to ask ourselves how much more I would have made if I invested in an alternative investment that had less commissions and fees. If I took 95% of my premiums and I invested them in one of the low-cost financial products I talk about in the next chapter, I would get at least a 45% return in the same period, and that is a conservative estimate.

So, the amount of money I would have made if I just chose a better financial vehicle would be at least $16,530. That means I lost $9,514, and that is a conservative estimate.

How is this possible? Because all the combined insurance/investment products have very high commissions and fees. It was the fees and commissions that cost me $9,514.

That is why you should never combine investments and insurance!

What about the life insurance products or other annuity products that promise 100% of the market returns on up years and no loss on down years?

These products are a dime a dozen and they look fantastic. Who wouldn’t want to have only the upside with no downside?

One of my clients showed me the brochure for one of these products. It was given to him by his financial planner just days before he attended my seminar.

When I went through the brochure, I said to myself, “That’s too good to be true! If this product is really that good, I want it now!”

So, I did a little research, and what I found out is that these products are really too good to be true. The harsh reality is that the brochures are promising a lot, but if you dig deeper into the small print, and you do an in-depth analysis, you find out that the best outcome over the long run is that you end up with less than one-third of market returns – a far cry from the promised 100% on the up years and no downside.

“When something seems too good to be true, it usually is.”

People are being misled all the time because you need to be almost a mathematical genius to understand how these products work in reality. It’s simply appalling that these kinds of products are even legal, and worse yet, financial advisers and insurance agents are offering them to their clients very aggressively. Why? Because they earn a lot of money by doing so, and most of the time they don’t even understand the products themselves.

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