This is Jonathan Clements, director of financial education for Creative Planning.
Insurance is a great invention. It is a wonderful way to pool risk with other folks and thereby limit the financial fallout from major disasters that might occur in our life. But, when you take insurance and you combine it with an investment, what you essentially end up with is a mutual fund with extraordinarily high expenses.
Take the classic example: variable annuities. What you get with a variable annuity is a series of mutual funds with an insurance wrapper. That insurance wrapper is a questionable value, but the result of having that insurance with the investments is that you end up paying three percent or more in annual expenses. And the chances of getting good performance every time suddenly becomes extraordinarily slim.
Well, consider another example: cash value life insurance. Cash value life insurance pays huge commissions to the salespeople who sell it. That commission ultimately comes out of the pocket of the buyer of the insurance product. Result? Most people would be better off skipping cash value life insurance and instead combining a low-cost investment portfolio with inexpensive term life insurance.
This is Jonathan Clements for Creative Planning.