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

Back when I had no clue about personal finance or investing, I trusted my financial advisors completely. As a result, I bought what was touted as one of the best financial products available on the market. Later, I found out it was the best product—for the advisor, not for me.

Unfortunately, millions of people worldwide own this product, and it remains one of the top-selling financial products today. Insurance companies may give it an appealing name, but I call it “The Greatest Weapon of Financial Self-Destruction.”

The product goes by different names depending on the country, but common ones include whole life insurance, universal life insurance, variable life insurance, and equity-indexed annuities.

Beware of the Cash Value!

When purchasing life insurance, if your policy includes both an insurance and investment component (often called a “cash value”), you need to be cautious. Sellers of these policies will tell you that you’re getting life insurance plus an investment, typically in mutual funds, bonds, or similar vehicles.

When you spot these features, there’s a simple strategy you need to follow: run away as fast as you can.

Let me explain how these policies work—you’ll be amazed at the financial industry’s cleverness.

As I mentioned, I once owned two such policies. Both were highly recommended by my financial advisor.

The first was a whole life policy I still hold today because the penalties for terminating it are too high. The second policy, however, is my favorite example of just how damaging these products can be.

How to Lose Money

When I purchased the second policy, my advisor suggested it because I already had a whole life policy from another company. This new policy, he explained, was more “investment-oriented,” with most of the premiums going into a global mutual fund and only a small percentage towards life insurance.

According to him, this was a great alternative to investing directly in the mutual fund but with added tax advantages. He assured me I’d earn a good and safe return because my money was being invested in the global economy.

It sounded appealing, so I started contributing around $165 per month. As luck would have it, my timing was great.

Over the next few years, the market took a sharp downturn, dropping 50% in value. As a result, my monthly investments bought more and more units of the global mutual fund—classic “buy low” behavior.

After three years, the market rebounded, and by year five, it reached an all-time high. Looking at the mutual fund’s chart, I thought, Great! I bought low and now prices are high—I must have made a lot of money!

What happened next was shocking. When I went to the insurance company to terminate the policy, already suspecting the fees were high, I was not prepared for what I found out.

Over five years, I had paid exactly $12,005 in premiums, with over 95% going towards the investment portion of the policy. A quick calculation suggested I should have earned at least a 45% return, with the cash value of my policy sitting around $16,530. After all, buying low and selling high is supposed to pay off, right?

Sitting in the insurance company office, the representative—an official-looking woman with glasses—typed away and eventually printed my final policy statement.

When I saw the number, I was stunned.

The cash value of my policy was $9,277. But there was another fee I hadn’t been told about—$2,261 in insurance costs. In the end, I walked away with just $7,016, meaning I had lost $4,989 compared to the premiums I paid.

Despite investing during a market downturn and selling at its peak, my return was a staggering negative 42%!

I can’t even imagine how people who purchase similar policies and plan to finance their retirements with them must feel, especially if they buy during less favorable market conditions.

These types of losses shouldn’t happen to hardworking people who are simply trying to save money, but the financial industry allows it. In my opinion, it’s unethical to sell such products, but they continue to be aggressively marketed.

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

What Was My Real Cost?

To truly understand my loss, we need to consider opportunity costs. In other words, how much more could I have made if I had invested in a lower-cost financial product with fewer fees and commissions?

Had I invested 95% of my premiums in a low-cost product like those I discuss later, I would have earned at least a 45% return over the same period—conservatively speaking.

This means I could have had $16,530, but instead, I ended up with $7,016. My real loss was $9,514, and again, that’s a conservative estimate.

How is this possible? Simple: insurance/investment hybrid products have high fees and commissions. In my case, those fees cost me $9,514.

That’s why you should never combine investments and insurance!

What About “Guaranteed” Products?

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

These products are everywhere, and they sound fantastic. Who wouldn’t want the upside without the downside?

One of my clients recently showed me a brochure for such a product, which his financial planner had given him just days before attending my seminar.

As I looked through the brochure, I thought, “This is too good to be true! If this product is really that great, I want it now!”

So, I did some research. And what I found was that these products really are too good to be true. The brochures promise a lot, but if you dig deeper into the fine print, the best you can hope for over the long run is less than one-third of actual market returns. A far cry from the 100% upside with no downside they advertise.

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

People are misled all the time because these products are designed to be complex, requiring almost a mathematical genius to fully understand them. It’s appalling that such products are even legal. Worse yet, financial advisers and insurance agents push them aggressively, often without fully understanding them themselves.


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