There are many occasions in which life and disability insurance are necessary. My wife and I have term life insurance policies and long-term disability insurance. As a matter of fact, I believe long-term disability insurance is one of the most important protection products available that is underutilized.
We have written in past posts about how to select the appropriate life and disability insurance for you and your spouse.
A simple rule of thumb is to buy insurance products for insurance and investing products for investing. Some insurance salespeople do not make it that simple. Unfortunately, some sell shady investment products through insurance products even though they are not licensed to sell investment products. Here is a brief history of how it is legal.
The History
Insurance salespeople can sell indexed products without a securities license because they are state-regulated. The SEC, however, has fought since the 1990s for federal securities oversight of indexed products after receiving numerous consumer complaints and regulatory actions from state attorneys general regarding the products' reliance on equity indices and comparisons to directly owning stocks.
The SEC approved Rule 151A in January 2009, which would have converted indexed insurance products into securities (a classification for investments) starting in January 2011. Several leading providers of indexed annuities and indexed life products sued the SEC. They simultaneously lobbied Senator Harkin to amend the "Restoring American Financial Stability Act" to reverse Rule 151A to keep the regulatory responsibilities of indexed products out of the hands of the SEC.
The insurance lobbyists were successful, which is why the problems persist today.
Investing Products Sold in Insurance Products
Jeremy Schneider, owner of the Personal Finance Club, said it best in his well-researched post, Is IUL a Scam? Yes.
Click here to watch the TikTok clip. You can find clips like these all over social media because these “products” generate a fortune for the providers.
An IUL is a common investing product sold through insurance products. Social media scammers have attempted to rebrand it as a 501k. There is no such thing. Yet, as you can see from the comments to his post, people are falling for it.
Did you see the comments on his TikTok post? Sadly, you can see people falling for the scam. I spent less than two minutes watching and documenting the following lies in that short time.
He claimed that the "average return of the 401k over the last 20 years is 4.25%, and the average return of the 501k is 9.9%." This is a lie.
A 401k is not an investment. As specified by the IRS, "A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts." Employees purchase investments within a 401k. The returns on those investments depend on the investment choices.
Let's simplify and assume a 401k was invested in the S&P 500 over the past 20 years. The return would have been roughly 10%, minus 401k fees.
According to the Department of Labor, the Aggregate rate of return of all 401(k) plans over the past 20 years was clearly higher than 4.25%.
I found a comprehensive strategy to sell IULs (Indexed Universal Life). You can see the script they recommend to use to sell it. Also included is an overview of the commission received from selling IULs:
“Don’t fool yourself into thinking you deserve iul commissions over street when you have no idea how to sell an IUL…. However, if you’re a kick ass producer, you should get paid like it.”
You can read for yourself the thousands they make in commission by selling one “policy,” and how salespeople are incentivized by higher commissions to sell the worst products for consumers.
I could do this all day, but you get the point.
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