Insurance and Investments are Best Kept Separate

Mar 20, 2018

Life insurance. We need it. We hate it. We don’t really understand it. But we know we don’t want to be sold it.

If I had a message for life insurance companies, it would be this:

When you forget who you are, it’s easy to lose your focus.

The two decades spanning the 1980s and 1990s represent one of the most lucrative periods in history for investors. It was a time of declining interest rates, expanded borrowing, baby boomer buying and a growth in productivity made possible by the dawn of the personal computer.

It’s hard to remember that in 1979, the stock market was coming off a dismal decade, topped off by the cover of a prominent business magazine declaring “The Death of Equities.” To borrow from Mark Twain, the reports of the death of the stock market were greatly exaggerated.

One of the reasons the stock market did so poorly in the 1970s and began a turnaround in the 1980s was the rise (and then decline) of interest rates. Those of us old enough to remember can testify to mortgage interest rates of 21% and CDs paying 15%. But that’s because inflation was like a roaring fire out of control. It wasn’t a good situation.

Life insurance companies were caught in the crossfire. For decades, life insurance companies had been seen by the public as one of the safe places to keep your money. You had some money in the bank, some money in the equity (or cash value) of your life insurance policy and some money in the stock market (not too much though…depression era memories still ran strong).

The run-up in interest rates to the 20% range was a relatively brief phenomenon, but rates rose sharply. The rapid rate rise caught life insurance companies off-guard, as policyholders began borrowing money from their policies (which paid 5% interest) to put the funds in bank CDs (paying 10% interest or more).

To combat the money drain, the industry came up with a product that would allow interest rates to rise as quickly as bank funds, and gave it the nifty name of “universal life.” I can remember an insurance company representative showing 30-year illustrations of what would happen if interest rates stayed at the 14% level his company

was paying at that time. If those rates held true, one could be a millionaire on $100 a month.

I’m not sure if those rates lasted six more months.

But once insurance agents had tasted the crack cocaine of hyper-inflated illustration-selling, it was a small step to claiming their insurance policy would beat somebody else’s mutual fund.

It was an exercise in fortunetelling that would prove ruinous to insurance companies, policy holders and agents who forgot (if they ever knew) what the insurance was really supposed to be for anyway.

I think we can safely conclude that the record shows that life insurance is often not a very good investment accumulation vehicle.

But next week, we’ll look at the corresponding truth that investments are usually very poor insurance.

[click here for part 2]