NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Wed, 13 Nov 2024
Explore life insurance as an investment tool, understand variable and infinite banking, and consider complex insurance choices. What’s the right life insurance policy for you? What is “infinite banking” and how hard is it to set up? Hosts Sean Pyles and Sara Rathner discuss the intricacies of life insurance as both a protective measure and a financial instrument to help you understand its potential for investment and financial growth. NerdWallet insurance pro Lisa Green joins Sean and Sara to explain term life insurance and more complex life insurance options, such as variable life insurance, and the concept of “infinite banking.” They discuss the nuances of investing extra money into the cash value of a permanent life insurance policy, highlighting guaranteed interest rates versus market risks, and who might benefit from these types of policies. Additionally, they delve into the infinite banking concept, explaining how it works, the financial discipline it requires, and potential pitfalls. This episode is designed to help listeners navigate their life insurance choices and create a balanced financial plan. In their conversation, the Nerds discuss: term life insurance, permanent life insurance, life insurance investment, life insurance premiums, variable life insurance, infinite banking, cash value life insurance, life insurance strategies, life insurance options, term vs permanent life insurance, life insurance costs, life insurance benefits, financial planning, life insurance risks, borrowing against life insurance, financial growth, investing in life insurance, high-yield investments, insurance market risks, life insurance for smokers, funeral expense insurance, and financial security. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What is the main question about life insurance?
Hey listeners, this is Sean. Please enjoy this episode from our archives. And as you listen, think about what your main money question is right now, this week, today, this hour, this minute. What's the thing that you need help with most immediately? We nerds are here to help you. So send your money questions our way. You can call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD.
Or email us at podcast at nerdwallet.com. All right, here's the episode. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles.
And I'm Sarah Rathner. If you have a money question for the nerds, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com.
Follow us wherever you get your podcasts. And if you like what you hear, leave us a review and tell your friends. We're back and answering your real world money questions to help you make smarter financial decisions. This episode's question comes from James, who sent us an email. Here it is. Hello, nerds.
I got contacted about setting up life insurance as a way of borrowing against myself for investments to grow my money. Besides giving them $10,000 to $20,000 to fund the insurance, what's the scam? I would be borrowing against my own money and paying myself back interest. Is there a downside besides the cash being locked up and the insurance company collecting interest and fees? James.
To help us answer James's question on this episode of the podcast, we are joined by nerd wallet insurance pro Lisa Green. Welcome back to Smart Money, Lisa. Thank you, Sarah and John, for having me.
Insurance can be a complicated and kind of intimidating topic to those who are newer to it. So, Lisa, let's start by setting some foundations. Our listener, James, is interested in life insurance. And broadly, there are two categories of life insurance. term life insurance and permanent life insurance.
Can you please start by explaining what each of these is and how they fit into life insurance broadly?
Sure. First of all, all life insurance policies have one thing in common. They are designed to pay out a sum of money to survivors when the insured person dies. Term is the simplest form. It lasts for a specific number of years. If you don't die during those years, the coverage ends and no one gets a payout. You can think of this as similar to having an auto insurance policy for a year.
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Chapter 2: What are the different types of life insurance?
So what if I had put the money into a mutual fund instead? Let's say an S&P 500 index fund. I ran those numbers and I saw that I really would have come out ahead, mostly because of not paying the cost of insurance. The expense ratios on an index fund are typically a lot lower than the cost of life insurance.
But I also would have risked losing money if the market declined, which it did for part of that time.
We'll be back in just a moment. Stay with us. So Lisa, some consumers can get a little bit excited when they hear about these new and sort of novel types of life insurance policies because they can seem like a secret way to stash cash or invest through a life insurance policy. But these products are not simple and they are not great for everyone. I would maybe even say most people.
So who do you think might be a good candidate for something like this?
Variable life insurance is one way that some people use. To achieve their investment goals, it is permanent insurance that combines an investment and an insurance policy. You can allocate its cash value to different investments through sub-accounts that are similar to mutual funds. You can choose sub-accounts from the options that are presented to you by your insurer.
Depending on how those investments perform, your cash value can gain value or it can lose value. So this type of policy can be very risky. In fact, the federal government requires people who sell variable life insurance policies to be registered to sell securities such as stocks, as well as life insurance. That's a signal that variable insurance is more complex than a standard policy.
So it seems like James might be alluding to this concept, something called infinite banking. Could you explain what that is? Because it sounds completely made up.
Absolutely. The infinite banking idea has been around since the 1980s. And recently, it has just really gone viral on TikTok. It involves treating the cash value of a permanent life insurance policy as if it were your own personal bank. Here's how it typically works. You buy a whole life insurance policy and you put as much money as you can into its cash value.
You keep doing this for several years. It typically takes... 10 years or more to build up enough cash value to borrow against. Then you can borrow money against the cash value and repay it so that the cash value continues to grow. You may have heard this described as borrowing from yourself and paying yourself interest. That isn't exactly what's happening.
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