No Deals in the Life Insurance Industry

There are no deals in the life insurance industry.

“There are no deals in the life insurance industry…”

This quote, more perhaps than any other, is something we must take to heart when we work with clients. Not because it’s attractive, but because it’s true. The more we try to glamorize the life insurance industry, the greater disservice we do to what life insurance can do—and the more we risk confusing clients.

The truth is that there’s no magic. Life insurance doesn’t grow money out of thin air, nor does it eliminate interest, or allow you to “pay yourself” interest. You can’t use a loan to get rid of a loan or make life insurance do something it has not been designed to do. 

It’s not that life insurance is a bad product. It's a great product, and as life insurance agents (or agents adjacent), we know that it saves families and creates opportunities. Yet when we use language that may have clients thinking it’s something that it’s not, we hurt the whole industry. 

In some ways, unfortunately, the reputation our industry has is deserved. For the last few decades, agents have tried to turn everything into a marketing gimmick to keep up with the hype of the 401k or IUL. 

The truth is so much simpler—and yet so much harder to explain. Yet here’s why we should, anyway.

What Does it Mean That There Are No Deals in the Life Insurance Industry?

At first, you may hear this quote and think, “Well then, why on earth would anyone want life insurance?”

Ironically, the fact that there are “no deals” is exactly why people should want life insurance. Life insurance is, before anything else, an insurance product. Whole life insurance, in particular, is designed to last for your client’s whole life. That means that as long as they pay their premiums, they will receive a death benefit.

Compare this to term insurance, which becomes increasingly expensive to keep the closer you are to needing it (i.e. as you age).

This is where the end of the quote comes into play: “…everything is a trade-off between cost and risk.”

Weighing the Cost vs. Risk of Term Insurance

Term insurance is notoriously cheap because there’s very little risk to insurance companies. Fewer than 1% of term insurance policies actually pay out a death benefit, because people have them during a time when they are least likely to die.

So because the risk to companies is low, they don’t need to charge as much. If, however, someone wants to keep their term insurance past age 65, the price skyrockets. It goes from hundreds of dollars in annual premium to thousands (often even 5 figures). 

This surge in cost allows insurance companies to rebalance their risk once the likelihood of paying a claim spikes. Companies have to recalculate the risk of paying a death claim, against the cost of insurance. Since the risk goes up, the cost goes up.

Weighing the Cost vs. Risk of Whole Life Insurance

Compare this to whole life insurance, which is essentially a lifetime contract. The cost of paying a death claim is built into the policy because the insurance company knows they will pay. It’s not a question of “if” but “when.” (Since death is also a question of “when” for humans, it makes sense in this regard to have a permanent policy).

Whole life insurance is seen as expensive because people don’t fully understand what they’re paying for. Your client is guaranteeing that by paying premiums, their heirs will receive a lump sum tax-free. In the meantime, they can access a tax-advantaged portion of that as cash value, by borrowing against it. The cash value is proportionate to the premiums already paid, similar to home equity.

The life insurance company is assuming more risk when they issue whole life insurance policies, because they are agreeing to pay (rather than hoping you age out). This is what makes whole life insurance invaluable to families and individuals. 

The Reason Gimmicks Cheapen the Product

While the death benefit is the star of the show, the ability to use your cash value account is understandably important. The cash value of a whole life policy is the ideal place to store an emergency/savings fund. Yet we must be careful not to promise too much or use language that may confuse clients. Otherwise, people tend to believe cash value can do things that it can’t. 

For example, the advantage of cash value is that you can borrow against your value and get a loan from the life insurance company. In return, your cash value can continue to compound on the full value of your dollars. However, many clients think they are “loaning themselves the money” and thus “paying themselves interest.” Clients may also believe that they're getting “free money,” and have confusion about what a policy loan is.

Unfortunately, this muddying of the water leaves people disappointed and disillusioned with the life insurance industry.

There are no deals in the life insurance industry. 

What Cash Value Can and Cannot Do

The reality is that to leverage the insurance company’s money, you will have to pay interest to them. This allows you to get the full value of compounding interest, and potentially make cash-flowing investments. This combination can be quite powerful—yet it works exactly as designed. It’s not a magical loophole to exploit. 

When we tell clients they can pay themselves interest, they start to believe that the cash value of a life insurance company can do things that it really can’t. For example, clients may believe that it’s in their best interest to take a loan against their cash value for anything, including their monthly expenses, because they’re “making money on the interest.” 

Unfortunately, this puts them in a position where they might pay their expenses at an additional 6%, when they didn't have to. All because they think the interest somehow gets deposited straight into the cash value. So clients take loans for things that offer no real advantage via a loan. They might not even realize the precarious situation they’re in until it’s too late. And what will they blame? Whole life insurance, and the agents who push it.

The leverage potential of cash value is great—when you understand what the advantage is. The real advantage might be using it to invest in a cash-flowing property, or paying for an emergency you otherwise couldn't pay for out of pocket. There are advantages to having loans that you can control, versus loans with institutions that have strict policies. You may be able to finance purchases with a policy loan that a bank would never agree to, or use the cash value as collateral with an otherwise skeptical lender. Life insurance provides control and flexibility that you can't get elsewhere. 

Reckless use of cash value may render the “emergency/opportunity” part of your client's “emergency/opportunity fund” void.

Tax-Free or Tax-Advantaged?

Similarly, those of us in the life insurance industry must tread lightly when we talk about “tax-free” income. In reality, the only portion of whole life insurance that is truly tax-free is the death benefit. Everything else is simply tax-advantaged.

When a client takes a loan against their cash value, they don’t have to pay taxes…yet. However, if they were to default on their loan, any gains get treated as taxable income. And many clients hear what they want to hear about life insurance, and may not have the diligence or desire to pay back their loans. When their policy implodes, they’re surprised to find out that the money was not, in fact, tax-free.

To many people’s dismay, there’s no magic secret here, either. The trade-off for tax-advantaged use of your money, by putting a lein on it while it compounds, is that you must pay interest on the loan. That means that using your cash value won’t always be the best solution. What it provides you with is options—and that’s priceless.

There Are No Deals in the Life Insurance Industry

Ultimately, nothing about whole life insurance is inherently magical. It’s a carefully designed, highly regulated product that has checks and balances that make sense. Without these trade-offs, life insurance wouldn’t be the product that it has been for almost two centuries. 

The cost and design of whole life insurance have made it viable and reliable. When you introduce too many “magic” solutions to a product like insurance you can get precarious products, like universal life, that have a tendency to implode. 

So when you talk about the life insurance industry, know that it’s okay to tell it like it is. It’s a savings vehicle, it protects your human life value, and it can provide opportunities. It can grow money more efficiently than a bank account, and it gives you the power of leverage. However, it’s not a money printing machine, and it still requires work and discipline to make a strategy like infinite banking work. 

To get clearer on the benefits of whole life insurance, and the truth of how it can work for your clients, we encourage you to attend a 3-day Truth Training event. You’ll learn more about the calculators, and how to interpret the facts. 

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