How to Beat Your Insurance Agent’s Returns
Last time I discussed how to beat your stock broker’s returns, so now I thought it was high time to do the same for the insurance agent’s returns. How can you double your insurance agent’s returns?
While I railed on why it is so difficult to get the general population to understand basic investing principles last time, I’d like to do the same about basic insurance principles now. At the crossroads of insurance and investing, should you be “term and invest the rest” or “all of the above?”
Doubling your insurance agent’s returns is easy, but almost no one does it.
And no, this is not clickbait. We just need to understand the cost of insurance, the reason for insurance, and the goal of the money!
So, how can you double your insurance agent’s returns?
What is an Insurance Agent?
First off, what is an Insurance Agent?
An insurance agent has an office in one of those big buildings downtown, in a bank, or maybe someone more local to you.
They get paid on commission. When they sell you a policy, they get a percent off the top and perhaps a trail (an ongoing percent every year for a while to “service” your policy). Some policies (like IULs and are you being sold a RILA?) pay well, and some (the good annuities like SPIAs) pay much less.
But wait, first off; there is life insurance and annuities. Life insurance protects you against premature death, and annuities protect you against living too long. Or at least that was the original use.
With Permanent Life Insurance, you can have indications to use the death benefit or the cash value (or sometimes for long-term care needs). Obviously, permanent life insurance is a breathtakingly complicated topic. But it can be used to leverage tax-free cash for investing (especially in cash-flowing assets), retirement (tax-free loans that are paid off by the death benefit), or as a way to pass on cash to the next generation(s) (which can be estate-tax free if done in an ILIT).
On the other hand, while remaining similarly shockingly complex, Annuities also lack a basic classification scheme. That is, there is no good way of describing annuities!
I like good annuities vs. everything else. It’s not to say that there is no value in non-good annuities; it just takes much more education to understand them. But with a SPIA or a QLAC (both good annuities), you know what you are getting.
Otherwise, there are accumulation annuities (which you likely never plan to annuitize) and income annuities. Or there are immediate and deferred annuities. Or there are indexed and variable. Oh, but don’t forget about the ones that are like structured products, which are called RILAs.
Anyway, insurance agents can be registered to sell securities (and then they might try to sell you a variable life or annuities product, or a RILA) or not (in which case they will try to sell you an indexed product or something else that is not an “investment.”). If any of that confuses you, don’t buy an annuity.
But perhaps that is too much. An insurance agent is someone that middle Americans can go to with financial questions.
In many cases, it might be better than going to a stock broker!
They might help you with your employer plan and ensure you have your basic insurance needs covered (which, let’s face it, most people don’t). But the person I’m talking about is someone you give your after-tax money to invest. You have paid the bills and have extra. So you want to “invest” in insurance. How can you double the returns you get personally vs. giving the money to your local insurance agent?
For example, let’s look at the old whales of traditional whole life insurance and variable annuities as these products were sold in the 90s.
If you have a whole life policy from the 90s, I bet you are pretty happy with that decision. Sure, you paid a hefty commission years ago, and your old insurance agent probably did ok for himself. Not spectacular, but upper-middle class. If you annualize the expenses over the policy’s life, I bet it is about 1% a year.
That’s about the same as AUM charged by financial advisors.
So, for sure, there is survivorship bias, but folks with current whole life policies are happy with them because think of this – what is the alternative? What could they have done with that money over the last 30 years, vs. what would they have likely done?
For example, we can say, what if they just used VTI for the last 30 years? Well, great thought experiment because VTI has not been around that long! Sure, you could have done small-cap value, but there was no inexpensive way to access this factor.
So, what would you have done with the money over the last 30 years? Unless you bought something and continued to buy it year after year (as you do with whole life), I doubt you did as well.
The math here is that 1% fees over the last 30 years is pretty damn good, no matter what the asset has returned. Remember, compound growth takes decades. If you have held something for decades, especially if it is a cash-flowing asset, you are likely rich.
Here is a super important point I’m trying to make: sometimes it is better to stick with something no matter what you pay. The implication: sometimes, the old-fashioned commission model is better for you than the alternatives.
Right, so what about annuities?
The Returns of Annuities
If you are in de-accumulation, consider good annuities.
But what if you are in accumulation? Is there ANY role for annuities?
I’m going to keep this part simple. You would only buy an annuity during early accumulation because you don’t know any better. Once you have enough market exposure (or real estate exposure if that is your vice), if you want to think about annuities for principle protection and perhaps to generate income in the future, you might not be crazy. If that is, you use annuities as a bond-replacement.
And that is the key in de-accumulation or accumulation. Annuities are bond-replacements.
The long and the short of buying complicated annuities is that the devil is in the details (the contract with the provider). There are schemes and complex indexes to navigate, let alone shifting caps and spreads.
Why not just invest directly in options yourself? Or better yet, consider buffered ETFs.
As in most things in life, it is buyer beware.
Conclusion—How to Beat Your Insurance Agent’s Returns
So, in conclusion, you can beat your insurance agent’s returns if you just buy the total US economy when you have money and then don’t sell it.
This is the least expensive way to get better returns than your insurance agents can.
But who actually did that for the last 30 years? No one, cause you couldn’t. Now you can.
Now, as always, think about the purpose of the money. If you are going to buy whole life, or an annuity, what is the purpose of that money?
Sure, your kids might be better off if you have an indication for whole life insurance before you buy it. And you can use whole life or an IUL for cash accumulation, too. I’d have a good chunk of investments in something else before I did this (usually business or real estate). But for non-W-2 rich folk, there are indications for cash accumulation policies, too.
And yes, I like annuities as bond replacements. Mathematically it makes sense to floor your life-long expenses with an income annuity bought in the proceeds of bond sales (if you have an income need).
Annuities during accumulation are much more of a stretch, but hey, different strokes for different folks. Just be smart about the products, as if you are buying a rental investment or a business. Because you are.
In summary, 30 years ago, it was hard to be an investor. Now it is cheap and easy. If you are lucky enough to have good income, the game is accumulating enough assets to cover the living expenses for the rest of your life. You can do this by buying VTI and forgetting about it. That is easy. Or you can do real estate or business, or just keep working for the man. I like life insurance and annuities once you already have enough of the other good stuff.