Next we have Manny’s question. He says, “My friend has been pushing me to buy index life insurance and to join her business. It looks like an MLM. Is this a good idea? Do they really make how much they say they make?”
Let me start at the end of the question. Do insurance salesmen make as much as they say they do? If they’re slinging a lot of insurance, they do because insurance is one of the single most profitable financial products that you can sell because you can get really big commissions.
Insurance salesmen are not bad people. I’m not suggesting that you’d hate yourself if you said that. I said I used to do it, right? That’s how I have some insight. I used to sell insurance at the beginning of my career.
When they sell a premium, it’s not uncommon for the insurance company to pay them 50%, 80%, even sometimes as high as 100% of your first-year premium. Well, you can imagine that. Like if you sell somebody a premium that’s a thousand bucks and at the low end, they get 50% of that, that’s 500 bucks. Boom! What if you sell somebody that has a premium that’s ten thousand dollars and they get 50% of that? Well, you can see how the numbers start to add up really quickly.
But you can also see where the conflict of interest exists. If I sell these expensive products, it’s more profitable for the company and more profitable for me, and I’ve kind of justified why it might make sense for the person buying it. And you kind of go through this place. So, can you make a lot of money? Yeah, but it’s hard. I mean, ask anyone who’s been in the insurance business for a long time. It’s hard to sell because you gotta always be looking for the next sale and going to find the next person. And especially if you don’t feel very convicted about the thing that you’re doing. Hey, this is why this is the best solution for you. It’s going to be hard to find a lot of fulfillment in that.
Should you be buying index life insurance? That’s just some backdrop on how the insurance industry works and why the salesman on the other side might be trying to appeal for you to join their team.
Let’s talk about equity index annuities. These things are popular whenever the markets are in a volatile period. But here’s the catch on these things. There’s, first, they can control your behavior. You’ll have surrender periods, typically seven, ten years, maybe even beyond that.
If you can’t get access to your money, I know they’ll tell you you can take a small percentage. But if you had a big need, like a medical expense or you just wanted to invest this money because you had a chance of a lifetime to do something, they’re going to restrict how much you can take. Their surrender periods are huge. So, that’s how they know they can take your money and go fully invested, and it will be okay because you can’t get back to your money until, once you’re into seven, ten years in the future. That’s a long term. No matter what volatility is going on, they’re probably going to be fine from a performance standpoint.
The other thing is participation rate. A lot of people don’t realize when you look at these equity index annuities, what we get excited about investing is, you think about years like 2021, where returns on indexes exceed 20 percent. You think about… I mean, by the way, think about the ’90s. There was a period because I remember I graduated college in the mid-’90s, and I was like, “Man, I just wish I had money. I’m broke as a joke.”
Even though the markets were making, you know, 28, 30 percent, I’m making a few hundred bucks because I just don’t have a lot of money in the market, but I’m trying, you know? And then I think about equity index annuities where they capped that performance. Go look at the fine print, and it depends on how the policy is written. It might be 7 percent; it might be 9 percent.
Who do you think’s keeping all that money above and beyond? It’s those outsized years that really blow up your performance. Plus, think about the dividends being reinvested; all that stuff gets stripped away. Be careful of those because they’re tied to the market performance with a big old asterisk, a bunch of buts, you know, you can’t do this; you can’t do that, and you know, we’re gonna restrict this; we’re gonna restrict that. That’s not the same as investing. So, be careful of that.
They will not only want you to buy the product, they want you to go into business with them, join their team. Well, here’s a cautionary tale. Ask yourself, has this person who’s selling this product to me been doing this for five years or at least ten thousand hours’ worth of services? If the answer is no, then you are probably on their list of a hundred to three hundred people that they had to write down that are friends and family that they’re now pitching within their network circle.
I would ask you, before you take any job in the wonderful world of personal finance, to put a fence and a barrier around your friends and family until you have ten thousand hours. I want you to be an expert, a master of all the knowledge needed to be a success.
So do not, Manny, if you do this, don’t call a friend or family for the first five years. And then, by the way, you want to ask them that in the interview. You’ve got to say, ‘Hey, do I need to write down a hundred people I’ve got to call? Do you expect me to start calling my friends and family in the first few months?’ If the answer is yes, I don’t know, especially if you come from humble beginnings, how are you gonna do this?
That’s the thing I always think about. I mean, that’s when I was twenty-something-year-old Brian sitting in his finance class, and I was looking around, going, ‘What do these people do after they graduate?’ And all of them go work for broker-dealers or insurance companies, and they’re selling insurance.
I moved over to public accounting, and now I’m all excited because every parent is usually a CPA that has a kid in this evening. I’m like, ‘Oh, I’ve hit some pay dirt here because now I can go learn how to be really good at something, turn that into a skill set that then I get to go market at a later point.’ That’s the better way to do it. That’s where wisdom, that’s where knowledge, that’s where expertise comes from, not just because somebody loves you, and now you’re gonna go turn them into a client. For more information, check out our free resources.
