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What's up, guys? I'm George Camel, and today we're talking about something I keep seeing all over TikTok and Instagram. No, not people slapping their friends in the face with tortillas. I'm talking about people telling you to use life insurance to get rich, specifically an extra slimy and expensive kind called indexed universal life. People like this. You're supposed to use life insurance while you're alive.
You can take out money to invest. You can use the money throughout your retirement while all together at the same time, not taking it out, using liens and loans, and it's a little complex. No, you're supposed to use life insurance while you're alive. Ew, no, David.
You've seen the videos where they go "Be your own bank and use the secret wealth hack of the rich" and then they attempt to explain in like 15 seconds how to use a life insurance policy for something they call "infinite banking" where they use some video of Waka Flocka explaining how to borrow money from yourself tax-free. Which sounds really smart and cool, like the financial equivalent of bottomless appetizers. I mean, who wouldn't want infinite soup, salad, and breadsticks and money? But it's
But it's also really complicated. And when you break down what they're actually saying, it sounds like a bunch of financial mumbo jumbo if you ask me. Amortize the arbitration. Amortize the arbitration. Sure. Yeah, that makes sense. So if you don't have hours to try to figure out what the heck these people are talking about and if it actually works, you're in luck because I've done the nerdy research for you. So the question today, is indexed universal life insurance really a little known financial secret of the super rich that can help you build generational wealth? Short answer, no.
No. Long answer, keep watching. But seriously, please keep watching. We worked really hard on this one. But before we pull out the pocket protectors and crunch some numbers, let's do something that burns a whole lot less brain calories, and that's hitting subscribe, like, and share buttons. Not all at once, one at a time, single file. Beautiful. Thank you.
You're very welcome. So let's talk about indexed universal life insurance, and let's start with what a mouthful that is. Gosh, I should have been in the marketing meeting for this. We could have come up with a snappier name, guys. And I'm not going to say that over and over, so let's just call it IUL for short. So IUL is a type of permanent life insurance with a death benefit and a cash value portion.
Basically, it's like a weird gross hybrid between a bad life insurance policy and a terrible savings account. Have we not learned anything from hybrid products like Smucker's Goober Grape PB&J Stripes? Or the Ketchup Ranch Combo known as Crunch Saucy Sauce? But why would we expect anything more from the same company that brought us Easy Squirt Funky Purple Kid Condiment? And you gotta wonder, if it's a kid's condiment, does that mean it's made with 100% real kids?
IUL gets pitched as this really sophisticated, nuanced, "It's so complicated, you don't understand, just trust me bro, I'm your insurance guy, I'm gonna make you lots of money" kind of thing. Which is super gross to begin with.
There's a reason you're seeing this all over social media. The salespeople that are selling this stuff get massive upfront commissions. These IUL policies are often sold to naive people as some kind of investment by insurance salespeople. Here's a pro tip. Don't invest with your life insurance agent instead of an actual, you know, investment advisor. That's like getting a colonoscopy from an astronomer instead of your gastroenterologist. Although, to be fair, they can both tell you a whole lot about your anus.
And much like Uranus, these IUL salespeople are full of crap. They pitch some incredible benefits like risk-free growth, except they lose value due to fees for years before they even break even. Tax-free inheritance. The first $11 million you pass on is already tax-free. Infinite banking. That's another one, which is just borrowing your own money, but with interest and fees. So here's how IUL actually works.
You pay them a hefty monthly premium, some of which goes towards the cost of life insurance, more of which disappears in fees. The leftovers are added to a cash value portion of the policy. Now, each year, the cash value will grow based on a stock market index. Now, even if you're an investing rookie, you've probably heard of the S&P 500, Dow Jones, NASDAQ, you know, those little fun green and red arrows on your TV screen. But
Well, those are stock market indexes, which basically track the performance of a certain group of stocks. So with IUL, a chunk of your monthly premium gets tied to the performance of an index, say the S&P 500. Then if the S&P 500 goes down, say negative 18%, like it did in 2022, your cash value is insulated by a 0% floor. If the S&P 500 goes up, however, the cash value increases by that percent up to a cap, like 12%. So if the S&P 500 goes up,
say 28% like it did in 2021, your growth doesn't get 28%. It gets 12%. Now you may be thinking, well, George, 0% floor, that's not bad. You can't really lose money. 12% potential, that's not terrible. Well, it is. Here's why. You see, those IULs ignore the existence of
which is kind of like bonus profit sharing from the companies that you're invested with. The IULs only look at the net change in share price of the S&P 500. If you had just simply invested yourself into an S&P 500 index fund, you would get the change in share price plus the dividends,
which then can be reinvested, giving you much higher long-term returns. On top of that, this whole 0%, 12% game is a parlor trick to make it sound like you can't lose. But you would be wrong again, my friend, because in the last 40 years, the S&P 500 was up for 32 of those 40 years. And 23 of those years had a return greater than 12%, and it averaged almost 24%.
That's amazing. So missing out on that growth hurts your nest egg way more than that 0% floor would help. And here's another catch. Your return on investment will always be below the actual performance of the index. Why is that? Well, because it gets eaten up by the agents, commissions, and fees. And guess where those fees get taken out of? It comes out of the cash value portion of your account. And get this, as a general rule, the cost of permanent life insurance goes up the older you get. And it makes sense.
Statistically, you're more likely to die as you get older. I think I'm getting the black lung, Bob. So let's look at an example of how that can affect your IUL policy. Let's say you're paying a set monthly premium of $350. Inside of that, $20 goes toward the cost to insure you, and the remaining $330 gets put away in the cash value portion of your account. So any growth you see on that money that doesn't get eaten up by commissions and fees adds to your cash value.
But as you get older, the cost to insure you can start wiping out your entire premium every single month. And that means nothing is going toward the investment side of your policy. And if you keep this crappy coverage long enough, the cost to insure you can become even higher than the cost of your premium. So to make up the difference, the insurance company starts dipping into your piggy bank. They're not losing money on this deal. So now you've got a real money-eating monster on your hands. Okie doke. And
And just like the other kinds of permanent life insurance, two good intentions, life insurance and investing, can end up canceling each other out. Imagine paying a ton of your hard-earned money to an insurance company every year for the rest of your life. And if you want to actually use any of the cash value in your investment account, you have to borrow your own money and pay it back with interest.
Or here's the other option, you can close out your universal policy, but not before you get dinged with cancellation fees. And just for kicks, let's just say your investment actually ends up doing well and it doesn't eat its own weight in money. At least your family can live on all that extra investment money after you're gone, right?
Wrong again. Wrong. No. Here's the real stinger. Your family only gets the original amount the policy was worth. In other words, if you bought a $250,000 insurance policy, but you ended up with an additional $180,000 in cash value, with most policies, your family still only gets the original $250,000 if you die. That sucks. And guess whose pockets just got a whole lot fatter? Not your family's, that's for sure. It's the insurance company. So with that, I ask you this question.
What's the real point of combining insurance and investing? If you said helping insurance companies make more money, give yourself a gold star and a self high five.
Okay, let's recap. At best, permanent life insurance is a really stupid way to invest. At worst, it's an over leveraged, high risk, high cost and high commission account that locks you in for 15 years of premiums before you can even change your mind without insane surrender fees. It's a ticking time bomb that could implode at any time thanks to the high fees and increasing annual premiums. And if you stop contributing, they'll pull the money from the cash value you've accumulated
to pay for the insurance. And when the balance goes to zero, the entire investment is gone. And so is the life insurance. Oh, and most of the time, if you die, that cash value doesn't go to your family. It goes to the insurance company. Call it a parting gift or a scam. So what should you do instead? I wanna give you some good news 'cause there's been a lot of bad. When it comes to life insurance, there's really only one good apple out there and it's term life insurance.
So with term life insurance, the price is locked in throughout the life of the policy. So your monthly premium never goes up. Now, how do they do this? What is the sorcery, you ask?
Well, term life companies know the cost of insuring you goes up over time. They're not dummies. So if you're 30 years old and you take out a 20 year term life policy, the insurance company looks at what it would cost to insure you from age 30 to age 50. And it offers you the average rate for that entire term. And the best part, it's a fraction of the cost of any form of permanent life insurance. So you might be wondering, well, George, what about the cash value and all that growth I'm missing out on? Well,
with all that money you're saving on premiums, you can invest the difference yourself and get higher returns and build wealth on your terms instead of the insurance companies. Remember, above all, life insurance has one job, to replace your income if you die. Say, in a tragic bunk bed accident. You like guacamole? Oh!
But that's all it's there for. If something happens to you, you want to know your family's taken care of financially and not sitting there worrying about the next paycheck while grieving your loss. So it's that simple. Never buy permanent life insurance. Buy term and invest the difference. And always watch out for sneaky insurance disguised as investing. Say it with me. Insurance is not an investment. They're two completely different things that get super dangerous when mixed together. Kind of like Diet Coke and Mentos. Yeah.
So my permanent opinion on permanent life insurance, it's hucksters selling to suckers. Don't fall for it. You're smarter than that. Now, if you're interested in getting term life insurance, I'll put a link in the description below to the only company that I trust and that I personally use. And if you're looking for more information about investing without scummy insurance, check out our investing hub at ramseysolutions.com. It's got articles, resources, tools that will help you build wealth the right way without insurance. I'll drop a link to that below as well.
Hope you guys found this video helpful. As always, be sure to like, subscribe, and share this with your old buddy from college who's still trying to sell you on life insurance. Tell him George sent ya. And if he tells you to get a permanent life insurance policy, you know, you tell him where to stick it. That's it for today. Thank you guys for watching. I'll see you next time.