5 Things the Insurance Industry Doesn't Want You to Know

Tyler Gardner (0:00)

Insurance is supposed to protect you from catastrophic financial loss. That's it. It's not an investment. It's not a wealth building tool. It's a cost you pay to transfer risk.

Hello friends, this is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Welcome back, my friends. I'm Tyler Gardner, former financial advisor, portfolio manager, and the guy who's about to spend the next 40 minutes convincing you that most of what the insurance industry sells is somewhere between unnecessary and borderline predatory. Oh yeah, I'm starting with some fire today. Today, we're going to talk about insurance. All of it. The good stuff, the bad stuff, and the stuff that is so egregiously terrible that I'm genuinely baffled it's still legal. I'm not kidding. Now, before we dive in, quick and familiar favor and ask if this show has been helpful to you. If you've learned something, avoided a financial mistake, or just appreciated that someone's willing to call out an entire industry for being slightly sketchy, please consider leaving a review on Apple Podcasts or Spotify. It helps more people find the show. And honestly, given what we're about to discuss, the insurance lobby probably isn't going to be thrilled with me, so your support matters more than you might know, and I appreciate it greatly. Alright, let's get into it. A few weeks ago, you may recall, I did an episode on the real financial order of operations. Basically, where your money should go and in what order. And step four, before even establishing an emergency fund, was to get term insurance and disability insurance if anyone does, in fact, depend on your income. That's it. Term life. Not whole life. Not universal life. Not indexed universal life. Not variable life. Just plain, boring, and relatively cheap term life insurance. And I got a lot of questions about that step. People asking, but Tyler, what about whole life? My financial advisor says it's a great investment. I've been told it's a great wealth building tool. What about building cash value? And what about tax-free growth? Okay, I need to take a breath before getting into this episode, so I do my best to stay polite and diplomatic. Because today we're going to unpack all of it. We're going to talk about what insurance actually is, why you need some of it, and why you should run screaming from most of what the industry tries to sell you. And I'll even include some all-too-real anecdotes so you can see this isn't just my opinion, and this is what goes on behind the scenes. So here's the road map for today's episode. We'll start by talking about what is insurance and why we even need it. Then we'll move on to whole life insurance and why it's a scam dressed up in a suit. Then we'll move on to the hybrid models, the IULs and variable life policies. And if you have to go right now, just know they're equally terrible, full stop. Then we'll move on to annuities. Actually can be useful for some people. I know, surprise. Then we'll move on to long-term care insurance, increasingly rare but worth considering. And finally, we'll move on to talking about health savings accounts, the equivalent of an insurance product that you should absolutely be maxing out if you can and are eligible. So let's start as most good stories do at the beginning.

Number one, what is insurance and why do we need it? Okay, as always, we're going to start with the 1 before moving on to the 2.0. Now, let's define insurance because I've found that many people buy it or at least are intrigued by it without ever really understanding what it is at its core. Insurance is a contract where you pay a company a premium, aka money, and in exchange, they agree to cover you if something bad happens. You're transferring risk to someone else for a price. That's it. That's insurance. You pay someone to take on the downside risk for you. And because those companies can then do what's called pool that risk by insuring lots of people across a space, it can be a great deal for them. And ultimately it could be a great deal for you. Let's think about it this way. You pay 50 bucks a month for car insurance because you don't want to be on the hook for a $30,000 accident. You pay 100 bucks a month for homeowners insurance because you don't want to lose your house to a fire and have to rebuild it with your own money. Not to mention you wouldn't have gotten the mortgage in the first place. And you pay for health insurance because a hospital stay can actually bankrupt you today. Insurance exists to protect you from catastrophic financial loss, not inconveniences, not minor expenses, catastrophic loss. And here's the key that will get out of the way early and I'll repeat it later. Insurance is not investing. It's a cost, a necessary cost sure, but a cost nonetheless. The insurance company is not your friend. They're making a bet that you will pay them more in premiums than they will ever have to pay out to you in claims. That's why they will almost always challenge when it comes time to make claims. The less they pay out, the more they make. And statistically, insurance companies win. No surprise there. That's how they stay in business. So when you buy insurance, you're essentially saying, I am willing to pay a small, predictable amount each month to avoid the risk of a large, unpredictable loss somewhere down the road. And that's smart. That's what insurance is for. But here's where it gets a little tricky. The insurance industry has spent decades convincing people that insurance can also be an investment or a wealth building tool, that you could pay premiums and build wealth at the same time. So let me tear down that wonderful vision of a castle in the sky now before you fall victim to this absurd script. No, you can't. At least not efficiently. So let's start by talking about the types of insurance you actually need. You're going to need term life insurance. If anyone depends on your income, spouse, kids, aging parents, you need term life insurance. Term life is simple, which I love. You pay a premium, and if you die within the term, usually 10, 20, or 30 years, your beneficiaries get a payout. If you don't die, the policy expires, and you get nothing. See how easy that was to explain? That means it's usually a good product. Healthy 35-year-old, a 20-year term policy with a $500,000 death benefit, might cost about $30 to $50 a month. That's it. Pretty cheap, straightforward, and it does exactly what it's supposed to do. Now, just imagine putting that $30 to $50 in an emergency fund instead, and expecting that will cover your family in the event that something truly bad happens. It won't. Not even close. So that's why I put term and disability way ahead on my financial order of operations, than building out a cash account. You're also going to need disability insurance. This one's underrated. Statistically, you're way more likely to become disabled during your working years than you are to die. And if you can't work, odds are you can't earn. And if you can't earn, your financial plan falls apart. Long-term disability insurance replaces 60 to 70% of your income if you become unable to work. And many employers offer it, but if they don't, you might want to consider buying this one for yourself. Go check with your HR team today to see. Next, you need health insurance. Obviously. Don't be silly. Get health insurance. I had one uninsured visit in my life to an ER, and holy moly did that open my eyes to how absurd the prices of health care are these days. Get health insurance. Finally, homeowners and auto insurance. Required by law or by your mortgage lender, and for good reason. Catastrophic losses. You need coverage. And that's it. That's the list of insurance most people actually need. So again, if you need to run and stop listening, just know, there's your value add this week on the positive side. 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