Is index life insurance a good investment?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
kingsolomon
Posts: 1
Joined: Tue Jun 26, 2018 4:23 pm

Is index life insurance a good investment?

Post by kingsolomon » Mon Aug 12, 2019 7:54 pm

Hi All, my girlfriend has an index life insurance that she has been doing this investment for the past two years. She is not sure if this investment is worth it, to get out of it there is a penalty involved. We need advice from the good community of bogleheads for if this is good or investing on something else would be better.

User avatar
arcticpineapplecorp.
Posts: 4260
Joined: Tue Mar 06, 2012 9:22 pm

Re: Is index life insurance a good investment?

Post by arcticpineapplecorp. » Mon Aug 12, 2019 7:59 pm

welcome to the forum.

not a good product. they promise you the return of the market with none of the risk. not true. you get a part of the return of the market. most of the return goes to the insurance company. it's true your floor can never lower even if the market falls and you can get an increased ceiling if the market does well, but there's a cap on the increase, the market has to go up really high to get a significant increase and most of the return you should have gotten goes to the insurance company. You would do better just investing in the S&P500 yourself and capture 100% of the return (of course you have to deal with the risk as well, which you're trying to put off on the insurance company. But that will cost you dearly...)

worse off, they're expensive. very high commissions in the 6 or 7% range not uncommon and/or surrender fees if get out before a certain number of years (some policies have very long surrender periods. I've seen 15 years on one such policy).

The pitch is appealing because they make it seem like their product did better than the S&P 500 index, but what they don't tell you and the fine print does is that their pitch intentionally leaves out the reinvestment of dividends. If they'd included that, it would have made the S&P500 returns look much better than what the insurance salesman shows you.

been discussed before, read more here:

https://www.google.com/search?sitesearc ... +insurance
Last edited by arcticpineapplecorp. on Mon Aug 12, 2019 8:00 pm, edited 1 time in total.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

User avatar
Nate79
Posts: 4795
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Is index life insurance a good investment?

Post by Nate79 » Mon Aug 12, 2019 8:31 pm

kingsolomon wrote:
Mon Aug 12, 2019 7:54 pm
Hi All, my girlfriend has an index life insurance that she has been doing this investment for the past two years. She is not sure if this investment is worth it, to get out of it there is a penalty involved. We need advice from the good community of bogleheads for if this is good or investing on something else would be better.
I'm sorry she was scammed. She should get out of this horrible product asap. You can search in the search bar if you want to understand better why these are truly a horrendous product.

User avatar
Stinky
Posts: 1480
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Is index life insurance a good investment?

Post by Stinky » Mon Aug 12, 2019 9:38 pm

arcticpineapplecorp. wrote:
Mon Aug 12, 2019 7:59 pm

Not a good product. they promise you the return of the market with none of the risk. not true. you get a part of the return of the market. most of the return goes to the insurance company. it's true your floor can never lower even if the market falls and you can get an increased ceiling if the market does well, but there's a cap on the increase, the market has to go up really high to get a significant increase and most of the return you should have gotten goes to the insurance company. You would do better just investing in the S&P500 yourself and capture 100% of the return (of course you have to deal with the risk as well, which you're trying to put off on the insurance company. But that will cost you dearly...)

worse off, they're expensive. very high commissions in the 6 or 7% range not uncommon and/or surrender fees if get out before a certain number of years (some policies have very long surrender periods. I've seen 15 years on one such policy).

The pitch is appealing because they make it seem like their product did better than the S&P 500 index, but what they don't tell you and the fine print does is that their pitch intentionally leaves out the reinvestment of dividends. If they'd included that, it would have made the S&P500 returns look much better than what the insurance salesman shows you.
Welcome to the Forum! Glad that you found us, and glad that you asked the question about indexed life insurance.

The comments above are right on point. This is a horrible product. Your girlfriend was basically scammed. She should drop the product now, collect her surrender value, and not buy whole life or universal life insurance ever again.

If she has needs for life insurance, she should buy level term insurance. OP, if you'll post more information about her financial situation and obligations (especially any dependents that she has), the Forum folks can give their advice. If she has no dependents, it's quite possible that she doesn't need life insurance at all.

If she has money to invest, she's far better off maximizing her tax preferred accounts (401(k), IRA, etc.) and her regular taxable accounts than purchasing life insurance as an "investment".

OP, if you have more questions, please post them on the Forum. There are a lot of good people here who want to help out.
It's a GREAT day to be alive - Travis Tritt

noraz123
Posts: 264
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: Is index life insurance a good investment?

Post by noraz123 » Tue Aug 13, 2019 12:08 am

There's a more nuanced answer here.

The question people are answering is this, "Is indexed life insurance a good investment?"

The answer to that question is almost invariably no.

But the question you should be asking is this, "Being 2 years in, is my girlfriend's indexed life insurance policy a good investment to continue with?"

The answer here is, *it depends*. You likely gotten a terrible return to date, but those are sunk costs. What you care about is what kind of return will you get going forward. Being that she is only two years into the policy, you most likely just want to cancel and call it a day.

But, if you can find out a few more details, such as, what's her cost basis (ie, how much has she paid to date?), what's her cash/account balance, what's her surrender value is (ie, if she canceled today, how much money, if any, of her cash balance would she get back), and what firm issued the policy (a policy from a company like tiaa-cref could be worth keeping vs a company like North American, which is most likely not worth keeping), that would be helpful. Getting an in-force illustration from the insurance company would also be helpful, but I would argue not needed if your wife's cash balance is less than $10k.

Also, if your girlfriend lost a significant amount of money to date (I am thinking in the range of $10k or more, and by loss I mean something like she's paid $30k to date in premiums but her surrender value is $10k, resulting in a $20k loss), there may be tax friendlier ways to end the policy than just straight canceling, but that requires a bit of work.

I went through this same process when I got engaged. My now wife had two indexed life insurance policies sold to her by her financial advisor. It took a lot of time and effort on my part to understand all the ins/outs of life insurance, and how to get out of a policy in a slightly friendlier manner. Needless to say, we got rid of the policies and the financial advisor!

If you can post a few more details, gladly give you my thoughts on best path forward. Else, I highly recommend checking out The White Coat Investor's article here - https://www.whitecoatinvestor.com/how-t ... fe-policy/

That website is run Dr Dahle, who's a Boglehead himself and a frequent contributor to Bogleheads.org.

It was my wife's policy that led me to both this website and the White Coat Investor. Two invaluable resources on the internet.

Good luck, and let me know if I or others can help.

bsteiner
Posts: 4197
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Is index life insurance a good investment?

Post by bsteiner » Tue Aug 13, 2019 7:51 am

noraz123 wrote:
Tue Aug 13, 2019 12:08 am
... My now wife had two indexed life insurance policies sold to her by her financial advisor. ...
It may have been an insurance salesperson rather than a financial advisor.

noraz123
Posts: 264
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: Is index life insurance a good investment?

Post by noraz123 » Tue Aug 13, 2019 11:17 am

bsteiner wrote:
Tue Aug 13, 2019 7:51 am
noraz123 wrote:
Tue Aug 13, 2019 12:08 am
... My now wife had two indexed life insurance policies sold to her by her financial advisor. ...
It may have been an insurance salesperson rather than a financial advisor.
Not sure if you're saying this as a joke, but yes, in my mind they were insurance salesmen disguised as financial advisors. :beer

SuperSaver1975
Posts: 43
Joined: Wed Apr 24, 2019 1:33 pm

Re: Is index life insurance a good investment?

Post by SuperSaver1975 » Tue Aug 13, 2019 11:26 am

Welcome to this forum. There's a lot of great advice here. Just about any financial question you have probably has a hundred threads you can search for and find answers. I've learned a lot here. I'll pass this along:

Never mix insurance and investing.

Post Reply