Is an Insurance Product an Investment?

Hell no! Here’s why

I have lots of insurance. I thank the companies for protecting my home, autos, providing long-term care, earthquake and umbrella protection, and have no problem paying the premiums and the commissions to get great service from my agents.

But my retirement nest egg is kept 100% separate from insurance policies and their agents.

Investments serve a wholly different purpose than insurance and insurance agents. Insurance is a contract with an insurance company–it is not an investment. Likewise, insurance agents are not investment advisers–agents sell you policies and are knowledgeable about your individual insurance needs.

Insurance and investments have nothing to do with each other, but that doesn’t stop agents from convincing you with scare tactics that they do. Investments must take on some equity stock market risk to keep up with inflation. When insurance is mixed with investments the fees, the costly commissions, and guarantees that the insurance company offers so that your retirement plan never suffers a loss significantly damages long-term growth. Most people only think about never losing money, but the price is massive over long periods of time. Guarantees are not part of an investment strategy. But uncertainty is.

The only advantage for a retirement plan that insurance can offer is AFTER you accumulated your nest egg and retired, use the proceeds to purchase a lifetime guarantee income stream, an immediate annuity would be appropriate. It’s essentially a private pension plan. I did not purchase an annuity when I retired because I already have CalSTRS, my fine teacher’s pension.

What the insurance agents never tell you is that stock and bond market risk and uncertainty are good things! Yes, risk carries huge advantages for long-term growth. You should embrace risk with a low-cost, broadly diversified portfolio of stock and bonds. Heck, I do almost exactly what my pension plan does–invest in stocks and bonds. Pension plans, endowments, and foundations never invest in annuities. So why should we plan for retirement differently from these fine financial institutions?

Never listen to insurance agents and the financial media. Market risk and downturns are managed with the stock/bond split throughout the accumulation stage during your working years and the distribution stage in retirement. The older you are, the more you divide your portfolio into a diversified allocation of bonds. That crucial split saved our portfolio in the 2008 crash.

This split is the primary feature of Target Retirement Funds. That’s why they are so popular. Exposing your money to managed risk offers the investor an opportunity that you would not get in an insurance product. Guarantees cost big bucks, will rarely earn market returns, your money is forever frozen with the insurance company (depends on the contract) and the biggest disadvantage of all, your money will not keep pace with inflation.

Use insurance for what is meant for—protecting your precious personal possessions, supporting your growing family against loss, and nothing else. Genuine stock and bond investments grow in the open markets over the long term.

I am not the only one who practices investing in stock and bonds, all our professional public pensions, endowments, and foundations invest the same way. So why do my colleagues, public PreK-12 get sold annuities?