Why financial advisors don't recommend life insurance products

If you spend time following the financial influencers on TikTok, you might start to get some crazy ideas about money. For example, some of the worst financial advice I've seen on TikTok has suggested that you should never put down any money when buying a home and that anyone can be successful at day trading.

I've also seen TikTok stars say many things about cryptocurrency and non-fungible tokens (NFTs), including claims that some obscure digital assets would be worth millions by the end of last year. Obviously, none of their predictions have been true.

TikTok seems to be a haven for financial influencers who want everyone to buy permanent life insurance with an investment component. A quick search of TikTok videos on the subject will lead you to influencers who say whole life insurance is a "cheat code for the wealthy," and that young people would be better off buying whole life insurance instead of saving for retirement in a 401(k) plan.

Experts agree that investing and insurance don't mix well. While some claims made on the social media platform may contain a grain of truth, most people say that you shouldn't combine your financial needs with your insurance requirements. I contacted other experts who wanted to explain why investing should be kept separate from your insurance needs, and here's what they told me.

Insurance and investing have different goals.

Darren L. Colananni, Centurion Wealth’s financial advisor, says that investing and insurance shouldn't mix, and for more than one reason. First of all, you have two different objectives you're trying to achieve; life insurance with an investment component attempts but fails to combine them into one investment product that does the best job at meeting both sets of needs. 

Colananni says that investment products in an insurance wrapper often come with high fees, low liquidity, and benefits you might not need or want.

"In the long run, you will be better off if you keep them apart," he says.

In the past decade, stocks have not performed well, but over the long term, they

According to financial planner David A. Fowler of HIgh Mountain Financial Coaching, life insurance products do not generate returns that are as good over time as those of a disciplined well-built investment portfolio can be expected to do so,

According to the expert, the S&P 500 has averaged about 10.5% over the last 50 years, but insurance products that are designed as protection vehicles do not offer returns anywhere near that range. He also says that whole life and universal life policies can have you paying premiums for 15 to 20 years before you break even in terms of policy value.

According to Fowler, many insurance products are linked to the performance of financial markets, such as variable universal life insurance. In spite of that, these policies still have mortality and expense risk charges, as well as additional layers of fees from the underlying funds.

Financial planner Kurt Heineman of Vision Casting Financial provided the following illustration of someone who bought whole life insurance and ended up regretting it due to long term performance:

Heineman says that his client was sold a whole life policy for their newborn child, and the insurance salesperson told him that it would be a good way to save for college because they could use the cash value of the policy to pay tuition and fees. The client was spending thousands of dollars on the policy per year, but by the time their child turned 18, it only had a cash value of $18,000.

"If my clients instead invested $2,000 a year in a 529 account that yielded 8% on average, they would have $74,900 saved for college," the spokesperson says. "This is why insurance products that mix investments and insurance are problematic."

Conflicts of interest are a common problem for many scientists.

Brian Walsh, who works as a financial planner at SoFi, says that there are several conflicts of interest to be wary of when it comes to mixing life insurance with investments, or listening to anyone on TikTok that offers financial advice, which is why he advises his clients not to do these things.says there are several conflicts of interest.

The barriers to entry for the insurance industry are low, and the barriers to sharing information on social media are even lower. People on TikTok may have their own reasons to promote permanent life insurance, including sponsorships or their own sales of these products.

When someone buys a policy, salespeople who work in the insurance industry often receive large commissions.

"When you combine low barriers to entry with financial incentives, it results in a large number of people buying permanent insurance policies that aren't suitable for them," says Walsh.

The lack of liquidity in the market is a problem.

Ray Prospero, a California financial advisor, says that many agents try to position life insurance as a retirement savings vehicle similar to traditional IRAs and 401(k)s. While insurance products do have benefits, he points out that they also come with other issues, such as lack of liquidity and high ongoing costs. Additionally, they are complex and have many moving parts; consequently, it is very difficult for the average retail investor to understand their investment.

Prospero says that he has sat across from many investors who have been sold an insurance product that they did not fully understand. In many of those cases, the investors were unable to make changes to their insurance investment "because of the high surrender fees associated with those types of products," he says.

"Because they do not have the money to pay these fees, they have to remain in their insurance policy until the surrender charges expire."

At the end of the day, everyone I talked to about this issue agreed that most people are better off buying term life insurance, which provides a death benefit, and then investing the rest.

Propsero says that the premiums for term coverage are significantly less than those for whole life policies. In fact, a company like Bestow advertises rates as low as $28 per month for a 30-year-old woman who is seeking a 30-year policy for $500,000. For $1 million in coverage, that same policy could cost as little as $50 per month.

When a person saves money on insurance premiums, they can use it to invest in a traditional investment vehicle like stocks or mutual funds. In addition, when you take on this challenge yourself, you get to decide how your money is invested and avoid the high fees and hidden charges that many life insurance products charge.