by Franklin J. Parker, CFA
The Summary
- Earnings season has (mostly) come to a close, and companies have made about 4% less profit than this time a year ago. This is better than expected, but not good in general, as this is the 3rd quarter in a row of earnings contractions. With markets trending higher, we are seeing valuations get stretched in several sectors (looking at you technology!). On the upside, earnings are expected to turn slightly positive in Q3.
- This week we see data on retail sales (expected to grow 0.4% month-over-month), business inventories, housing starts, and industrial production. As a preview to retail sales: Target is expected to post its first quarterly revenue drop in six years. As I have mentioned (repeatedly), the economic data is fairly tepid, and markets appear to be range-bound for the time being. A firm catalyst is needed to push markets higher or lower. That may come in the form of a credit event, as there are strains beginning to show, both domestically and globally.
The Details
Let’s talk about the “off label” uses of life insurance I see circulating on social media.
On social media I often see some really bad financial advice (TikTok and Instagram seem to be the the main culprits — is anyone surprised?). Often, the facts presented are just plain wrong and would result in big trouble with three-letter agencies, like the IRS and the SEC, if it were followed (please don’t take advice from those videos). More often, however, I see people marketing “off label” uses of life insurance — under headings like “infinite banking” and it’s “rich man’s Roth IRA.”
While there are some legitimate use cases for life insurance as something other than life insurance, there are some things you should know.
- Incentives. Life insurance often pays a commission to the agent of around 80% to 100% of the first year’s annual premium. The agent, therefore, has a very strong incentive to sell high-premium life insurance (whether it is a good fit for you or not). If you are planning on funding a policy for $10,000/year, just remember the agent is about to make $8,000 to $10,000 on that sale. This drastically changes the quality of the advice you get from these folks. (Interestingly, most annuities are subject to the same perverse incentives).
- Costs. Life insurance is expensive when compared to other investment vehicles. Typically, insurers charge both variable fees and fixed fees. You’ll have a set annual fee (typically in the $100s), a “mortality charge” which is the actual cost of the life insurance (typically in the $1000s/year, and it gets more expensive as you age), a “load” which is the commission the agent receives on every premium payment, and then there is usually a monthly assessment for the first 10-years. When you look at the actual amount of cash that gets invested after fees, it is probably much less than if you just invested the money normally and paid the taxes.
- Marketing Claims. Let me also dispel some marketing claims these social-media types like to bandy about.
- “It’s a secret the wealthy use to get (or stay) wealthy.” No. Just no. I work (and have worked) with extremely wealthy people. Off-label life insurance is not a strategy they use for wealth creation or preservation. I have never seen it done because the numbers just don’t make sense.
- “Infinite banking.” Also no. Paying big fees to loan yourself your own money almost never makes sense. There are more efficient ways of accomplishing something similar, like investing your cash and then using a security-secured line of credit with a bank, for example.
- “It’s a rich-man’s Roth IRA”. This one is actually kind of true, but you still run into the cost issue. The idea here is that your investment gains are tax-deferred and when you go to make withdrawals, you actually take loans against your policy’s cash value instead — which are tax free “withdrawals.” Is it worth paying 3x to 5x the fees? Almost always not, but running the numbers might make sense.
- “It’s a secret the wealthy use to get (or stay) wealthy.” No. Just no. I work (and have worked) with extremely wealthy people. Off-label life insurance is not a strategy they use for wealth creation or preservation. I have never seen it done because the numbers just don’t make sense.
In the end, I advise extreme caution when using life insurance for anything other than, well, life insurance. The misaligned incentives are enough to make me skeptical, but are also to fuel a massive marketing machine. While there are cases when “off-label” life insurance might make sense, those cases are much rarer than the social media “experts” make it sound.
Chart of the Week
When the Federal Reserve specifically mentions your concerts as an influence on the economy, and the Congress of the United States of America holds hearings on getting tickets to your concert, you know you’ve made it big. This week’s chart is a look at the resale value of Taylor Swift tickets versus other artists. As it turns out, tickets to a Swift concert were one of the best investments to make last year (that is, if you could get them!). Her current (and continually-extended) Eras tour is on its way to being the first $1 billion tour in history, and Swift is herself a breath away from joining the billionaire’s club — one of just a few musicians.
Whether you love her music or hate it, there is no denying that Taylor Swift has become an economic force.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.