Why Insurance and Investing Must Never Mix

The pitch sounds perfect: get lifelong insurance protection and build wealth in one product. It’s a financial two-for-one!

Stop! A stupid investment trick is buying insurance that has investment features because you are almost certainly getting expensive insurance that delivers subpar investment performance.

The Commission Black Hole

Permanent life insurance—Whole Life, Universal Life, and their variations—is one of the most complex financial products on the market, but the reason it’s a bad investment is brutally simple: The Fees.

Buying an investment product today is almost free. You can buy the Vanguard Total International Stock ETF for just 5 basis points (0.05%). By that yardstick, permanent life insurance is an absolute scam:

• Agent Commissions: The agent’s commission can range from 50% to 100% of the first year’s premium, with renewal commissions of 3% to 5% after that.
• The Math: Your money is not primarily growing; it is paying for the agent’s commission. Under a high-commission regime, even decent growth in the cash value will be severely dragged down, turning paltry historical returns of 1% to 3% into something even worse.

The Three Traps That Lock You In

If the fees don’t convince you, the built-in restrictions should raise every red flag:

1. Lack of Liquidity: Your money is locked up. To get at it, you must surrender the policy (incurring fees and taxes), borrow against it (carrying interest expense), or take limited withdrawals (likely reducing the death benefit). All three options are financially punitive.
2. Limited Investment Choices: Generally, the cash value of your policy is invested by the insurance company. You may have little or no say on the matter, forfeiting the ability to invest in the high-growth, diversified options available in the open market.
3. High Degree of Complexity: If you were presented with any standalone investment that had high commissions, limited liquidity, and limited choices, you would run for the hills. But when these terms are folded into a product that promises a $1 million death benefit for your family, these red flags seem less onerous. They shouldn’t.

The Only Pearl of Wisdom

If you speak with any fiduciary wealth advisor, you will hear a well-worn, simple truth: Buy term insurance and invest the rest.

By adhering to this strategy, you separate your financial worlds—just like the song suggests. You buy insurance for protection, and you buy investments for growth. It’s the essential, time-tested strategy for building true wealth.