Are mutual life insurance companies inherently stronger than stock or public insurance companies?
A company is conducting seminars nationwide, for investors, telling them about a new concept for investing in a modified whole-life policy, through Mutual Insurance companies, which they say provides a strong vehicle for building tremendous wealth, with outsized tax benefits. These people make the claim that one is automatically better off, and more secure doing this through a Mutual Insurance company, but they don’t explain WHY a mutual company should be any financially more secure than a stock or public company. I smell a rat and wanted to investigate this on behalf of a friend who’s all excited about this "opportunity".
I should add the fact that my friend is single, has no children or other dependents, and is being led to believe that by borrowing and repaying with interest, he can "be his own bank." and accumulate compound interest, totally tax-deferred, which somehow will make him wealthier than NOT buying a policy he really has no need for, and investing the money himself. I fail to see how this would work, and wonder if anyone else here has heard of this "miracle" investment vehicle?
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1 This isn’t a new strategy by any means. Your friend should not be confused about the timeliness of this strategy.
#2 I never met anyone who got rich from their life policy.
#3 I have seen multiple policies in major trouble, about to cause "phantom taxation" to the owner, because they implemented something like this years back and it didn’t work out as planned. "Phantom tax" is what happens when the planned income includes loans and stops being tax free. It is expensive to either fix or live with.
#4 Because dividends from life insurance companies could go up, down, or completely stop at any time the mutual company determines, people who "invest" in whole life policies run a unique type of risk that a) they cannot get anywhere else and b) is closely tied to a single business.
#5 Historic dividends mean almost nothing. Trusting future dividends is similar in some ways to giving money to a bank that cannot tell you your interest rate ahead of time, but does charge a hefty fee each year.
#6 A permanent life policy would make sense if your friend needs coverage for the rest of his life, however, only a portion of a modified whole life contract is actually guaranteed to be around in the future (the non-modified part). There may be better options.
#7 In my experience, the people who talk the loudest about this strategy seem to have the largest conflict of interest in their advice.
edit: The only thing that changes is that he doesn’t need life insurance right now.
Banks work very differently than life insurance policies. They have control over the rate at which they can borrow money and lend it out, as well as the risk on either side of the equation. They can also borrow multiples of the money they actually have stashed away. And if something in their formula changes, they have the ability to reorganize their loans with relative ease.
The borrowing power in a life insurance policy is much more limited than what banks have. With a whole life policy, the individual has no control over the systemic risk, loan interest rate, or potential dividend rate. Also, if the plan needs to be reorganized later, there may be severe tax consequences or new surrender charges and other costs (it may not even be possible due to a change in the owner’s health).
"Banking" on yourself uses a weak analogy, at best. Of course banks use life insurance. But here’s a hint: Not like this.