Life Insurance as an Investment in 2022

Written by Scott W Johnson

Does Life Insurance Look to be a Great Investment in 2022? Other Options vs Whole Life Insurance as an Investment? Should Life Insurance be considered an Investment?

Life Insurance Investment in 2022?

In years past legions of life insurance agents were hired to sell nothing other than Cash Value Life Insurance policies. Policies that carried an insurance componenet and a “cash account.”  These cash accounts were sometimes referred to as investments. [WholeVsTerm disputes this, but…] As of May 2022 the S&P500 is down about 17%, the Bond Market is down around 9%, and even bitcoin is signficantly down.  Because of this recent market turmoil – you are likely to see more and more agents suggesting or pushing the idea of using various types of Cash Value Life Insurance policies as an alternative investment. Likley they will propose this because Cash Value Life Insurance returns are much more steady and “guaranteed” to not lose money.  [At least that is often the claim.]  Consumers should be exceptionally careful in believing this and seek the counsel of an investment advisor. Whole Vs Term has argued against so called investment of cash value life insurance plans for the vast majority of Americans.  Over and Over. However with the poor current stock market performance, we felt it was time to recast our previous statements and argument, Albeit with some updated twists.

Insurer Investment Challenges in 22:

We would be remiss if we did first not start off with the elephant in the room in regards to Life Insurance.  Sadly, the mortality rate in this country is up signficantly due to COVID and other various factors. All things being equal this equates to more life insurance death benefits being paid out. You may not hear a lot of agents discuss this, but its true and fundamental. The way that mutuals provide income to insureds who are using their policy as a sort of an invesment is to pay out yearly dividends. Dividends are derived by underwriting and long term profit. If the Mutual Insurer makes less money than your dividend rate will be lower as well.  Simple enough. In a certain way of thinking about it, if you wanted to attempt to “invest” in a cash value life insurance policy – you might want to review the insurer and the industry.  To that end, let us consider it

COVID Mortality Challenges for Life Insurers:

Is COVID19 over?  Are the effects of COVID done from a Life Insurer standpoint?  What are the long term health challenges?  How long does Long Covid last?  We do not know.  Life Insurers do not know.  We all might not find out for decades to come. COVID has hit the industry much harder than may has been reported. Are we in the last wave or just the middle wave. The life insurers will likely be feeling the challenges of COVID for decades.  The underwriting rules at some point may have to be updated.

Life Insurer Investments and the Problem with the Float:

Planning on Investing in Whole Life – Look at the Float. Life insurers make money mostly on two fronts:  The primary method is by what is known as the float. According to NPR ” float is the money that an insurance company gets to hold onto between the time customers pay premiums and the time they make claims on their policies.” Life insurers collect annual premiums and hold them until a death benefit claim.  [Yes there are expenses and yes there are dividend payouts.] In the mean time all of the money collected is invested for future use. Those monies are overwhelmingly invested in bonds.  According to the Dallas Federal Reserve: “Life Insurers control largest share of Corporate bonds among domestic institutional investors.” There are some stocks, some real estate – but the vast majority of the industry invests in different types of bonds. Government bonds, Corporate bonds, etc.  The duration of the bonds held is typically longer in duration.  Duration is the length of time until maturity of the bond. Therefore there are two main challenes with Bonds. One – the Value of the bonds have been lowered by market forces. And Two – the quantity of long duration bonds – 20 / 30  years. Those bonds are in many cases paying just 2%, for 20 or 30 years. Should the insurer now sell that bond [at a losss?] OR Should they hold them until maturity paying just 2% when inflation is ripping at 7+% and new bonds are being sold at higher rates such as 4% or 5%.  Its a tough decision that these life insurer’s investment divisions face. If the typical bond is of a duration of 20 years it might take 10 years for many of these insurance companies to naturally update and replace them with higher duration bonds. Ten years. Please note that this post is not about how life insurers invest their money. Our purpose here is to get you to question the theory of investing extra dollars in cash value life insurance products.  Simply assuming that life insurers are going to do well during these unusual times is just that…an assumption. Here is a short terse statement concerning Cash Value Life Insurance as an investment.  For you to make money in a life insurance policy, the insurer must make money. If you do NOT feel that its a good environment for insurers – Why would you put your money in Cash Value?

Personal Investment Decisions:

Interestingly enough, many cash value life insurance agents were touting last year – how well their life insurance indexed products performed.  And while it is true that many Indexed Universal Life insurance policies produced 10+% returns, they failed to live up to the general market performance in 2021 of the S&P500.  In addition there are fees and mortality costs associated as well.  A typical indexed universal life insurance policy has caps, participation rates, and many do not recognize stock dividends. This while many Whole life insurance policies paid dividends in the range of 5.65% to 6.0% in 2021. Of course that is only the money in the CASH ACCOUNT, not the total amount paid to the life insurer. Does a return of 6.0% excite you?  The S&P500 returned more than 26% in 2021. More than 16% in 2020, and almost 29% in 2019.  2018 a down year saw a contraction of more than 6%.  While 2022 has seem a major contraction the benchmark index and is still highly voliatile its frankly difficult to see how meager average 5 or 6% return will match this index over a truly long horizon of 20 years or so. When considering all of these factors know that currently the long term average dividend rate of life insurers is currently below what the current inflation amount is.  Please reread and understand that statement.

Where to Hide the Money in 2022:

This site is not a financial investment website. However we are asked Should I invest in Whole Life Insurance?  The answer seems to be no, currently.  A hard no unless you have a very high net worth or have some other exotic situation. By all means get the life insurance that you and your family need.  Get as a Term Life policy and save the rest of the money.  While its certainly true that  ainvesting theoretical $1MM dumped into a Whole Life Insurance policy all at once might have lost less money than that same money invested in the S&P500 this year, the very concept ignores the fact that you can’t really invest in whole life insurance that way.  They money is collected over decades, year by year.  Dollar by Dollar. So where could you put the money that might still be safe, but that could beat a Cash Value Policy.  Here are a few ideas:

The Venerable I Bond:

Long ago forgotten by financial reporting firms the I series bond is back in vogue. According to Keill Financial Partners, “The May 2022 I bond inflation rate is 9.62% (US Treasury) which is 4.81% earned over 6 months. Your $100 investment becomes $104.81 in just 6 months!” [I Bonds limit investors to around $10,000 in new purchases per individual [and it can be more complicated than this.]  Interesting it is in that $10,000 per year is often the approximate amount consumers are interested in investing in Whole Life Insurance policies as well. $10K into a whole life insurance policy? or $10K into an I Bond with a guaranteed payment?  You do the math.

The Old Fashioned Bank Savings Account:

As of the publication of this blog post, the best consumer rates we are seeing are about .6%.  Less than 1%.  However these rates are sure to rise as interest rates continue to increase.  The return on savings accounts though not really the point, its their liquidity that should be considered.  Find a better option in 2 months, 6 months, or 2 years:  pull your money out with ease in 5 days or less.  Consumer Savings accounts often come with Free FDIC insurance.  Show me another investment with that guarantee?

Municipal Bonds:

Municipal or Muni Bonds have been hammered in 2022, so why invest in them now?  Because they guarantee federally tax free steady income. In many situations they are also State tax free.  You can purchase alone or in ETFs or other Funds. Complicated for certain, but Muni Bonds as Opposed to Whole Life insurance really seems to demonstrate the value of a Muni.  Tax Free, Guaranteed, and you can sell them.  What is the process of selling your investment in a Whole Life Policy?  Please note that Muni Bonds can lose value.

Dividend Stocks:

Stocks have been hammered this year, there is no just no doubt about it so far in 2022.  But with the losses comes opportunity. Large Cap Stocks that pay out large dividends annually.  Many of these funds are paying around 3%.  These yields are not guaranteed and they can lose value. If owned for more than a year the income tax on. many of these dividends is not fully taxed as income tax often.  See your tax advisor.

The Oppossite Investment of Whole Life Insurance:

A path other than Cash Value Life. Have an extra $10,000 and wondering if investing it in a Life Insurance Policy is your best bet?  I bet not.  It would seem to this Insurance Agent that a combination of the following will beat a life insurance policy 9 out of 10 years. Term Life Insurance Policy [For the insurance value] + a Bank Savings Account [for simple liquidity] + an I Bond (for tax deffered guaranteed appreciation] a Muni Bond Fund [for the income tax free income] + a Long Term Dividend Stock Fund [for taxable income with a lower rate with long term upside potential.  You can break it up as you and your financial professional see best fit.  However it could look like this: $900 $1MM Term Life Insurance Policy $2,100 Bank Savings Account $3,000 I Bond $2,000 Muni Bond $2,000 Large Cap Dividend Fund This simple allocation should be changed as times change.  The I Bond might not be a good deal in two or three years.  The savings accounts might be paying a much better rate.  Large Cap Dividend payings stocks might lose more value and hence the dividend rate may significantly scale up and become a better investment option.  These investments will each generate income that can then be reinvested as well. Keep in mind that they do NOT have to reach even 5.65% or 6.0% percent for it to be a better investment.  Keep in mind that those returns from Life Insurance are only from money in the “Cash Account.”  Especially in the first couple of years a very signficant amount of money sent into whole life insurer is used for Marketing and Commission expenses.  Additionally mortality expenses are removed.  And do not forget about possible Premium Taxes, which are state dependent. If pure income gains were your sole goal here – Id direct you to put $9,100 in the Ibond which will generate about 9% and that is guaranteed for six months annualized rate and likely will be very similar the following six months.  This flat out beats any whole life insurance policy right now.

But its Not a Tax Free Investment?

Life Insurance is a tax free investment! Or is it? Some agents will attempt to sell you on the notion of Life Insurance being a tax free investment.  Well…it is and it is not. How do you gain access to the money?  Ask your agent that question. Loans?  Or use the Dividends that are the basis for growth?  No simple answer is there.  This alternative method here will generate tax free income from the Muni Bonds. It will generate fully taxable income from the bank accounts.  The ibonds are tax differed until you pull the money out. The Dividend Stock growth has taxed income [at the potentially lower capital gains rate] from much of the stock dividends and tax differed gains from the overall valuation. If you dont sell the dividend fund in your lifetime there is the potential for a stepped up tax basis.  Additionally any term life insurance payouts are realized tax free to your benificiaries in most situations.

The Difference Over 20 Years:

Would whole life insurance or this invesment outlined Perform Better?  Its difficult to see how Life Insurance wins out in many of the years.  As we have reviewed in previous posts, there is a gap period right after the term policy ends when it is technically possible that the Whole Life option works out in your favor.  But those are just two or three of a forty year event horizon.  The access to the original captial and the ability to redirect the money is for many consumers really just the best bet.  If your college savings plan [AKA your 529 plan] does not produce the necesary money to pay your kids tuition, some of this money can be redoployed to do this.  Can you use “cash” from your life insurance policy to do this?  Yes, sort of, kind of,,,,but its uber complicated solution.

Is Life Insurance an Investment?

WholeVsTerm has argued that life insurance should not be considered an investment.  Its a life insurance policy.  Pure, Simple.  Sure there can be a cash account and yes your cash account can grow. But… there are serious concerns with it being considered an investent. CNN states: “heavy fees involved with cash-value life insurance can really drag down your returns.”  Yah, and that is a real problem. Even if it were an investment, “It is a very costly way to invest.”  On top of all of these signficant issues is the very real challenge of accessing the money itself.  How do you get the money out? Without passing away, how do you access the so called returns? This site believes that its best not to consider it an invesment and consider Life Insurance. Editors Note: this site has used the term Life Insurance Invesment with regards to shooting down numerous of these arguments.  We do not really believe that life insurance is a true investment nor should it be sold that way.  That being said – just because we do not believe it is, does not stop the noise out there from the media and other agents believing it is.

Should you Seek to Invest in a Whole Life Insurance Policy in 2022?

Not being an investment advisor, but being an insurance agent gives me a different perspective.  You have heard investment professionals touting low cost investing.  Well Whole life insurance is not that.  Muni Bond Funds, Dividend ETFs, iBonds, and Savings accounts can all be set up in a low cost method. Not whole life. Yes there is likely a period right after the term policy ends that if you were to die, where it may have made better sense to purchase that Whole Life policy.  However unless you know the time of your demise, its difficult to use that fact as a basis for a decision.  The facts you can use in your decisions are (1) Fees, (2) Average Returns (3)Liquidity, and perhaps (4) logevity tables, among other common considerations.  What is more liquid than a US FDIC Insured Savings Account?  The exact opposite of this is a Whole Life Insurance Policy. Yes 2022 has been a tough financial year and there may likely be far more losses to come. But iBonds and FDIC Savings accounts are not at risk really.  Muni Bonds… yes there is a bit of risk to some of these, but not all that much.  Dividend Funds – they do carry risk. 2022 may be the year to consider a simple 20 or 30 year term life insurance policy.  With its guaranteed pricing for the duration of the term and its low cost – it is the Real solution for millions.

Update 2022, June to Life Insurance as an Investment:

The venerable life insuraer Lincoln National has reported that Group Life death benefits have exploded in the past two calendar years:  in 2019 just over $500MM and in 2020 they rose to almost $550MM- but then in 2021 the death benefits paid out a wopping $1.45 Billion with a B.  That is almost three times the death benefits just two years prior.   Source.  Please note that all of these numbers are rounded.

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Marindependent Insurance Services LLC
Marindependent Insurance Services LLC

We work with people across the country with their Life Insurance Needs.

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