Alex Hormozi Deletes Whole Life Video
One year ago, YouTube finance influencer Alex Hormozi posted two videos about whole life insurance, life insurance agents, and the industry. Soon after he posted the second video, he deleted it with a short explanation.
Alex’s Main Talking Points
- Get a whole life, high cash value policy
- Insurance agents are incentivized to screw you
- Go with one of the “Big Four” [MassMutual, NorthWestern, New York Life, Guardian]
While the “Big Four” are a good place to start, we believe some other mutual carriers can be added. Whichever one you choose, you need to look at their track record, including whether they’ve been around for over 100 years. Do they have a track record of paying dividends? What are their ratings? While you can look at their COMDEX score and AM Best rating, what moves the needle is whether or not the policy is properly structured to be overfunded. State Farm is mutual with a good COMDEX rating… their whole life policies suck.
Here at BetterWealth, we’d much rather have a properly structured policy with a mutual company that's been around for over a century and has high ratings than a whole life policy from a “Big Four” company that’s not properly structured. Ps. One of the Big Four has not been paying dividends for over 100 years. Do you know which company that is?
Alex Hormozi’s Logic
Video #1
Here is a condensed version of what Alex says in the first video:
“I have a whole life insurance policy with high cash value upfront. You have to be careful about the people that you work with on this because they can screw you, and they are incentivized to screw you. Most insurance agents will not want to hear that, but their commission structure for these policies is insane. It destroys the cash value that you earn from these things.
So, if you decide to set up a whole life, cash value, or insurance policy, go with the big four—Guardian, New York Life, Northwestern Mutual, and MassMutual. Those are the big four. They've all been around for over 100 years. New York Life has been around for 183 years—they predate the tax code I did that because it creates a bank account for you that you can use. You pay costs initially but can loan against the insurance's cash value, which will likely grow at about four percent yearly.
So, if you compare the cash value growth of a traditional bank account where you're losing money, this at least covers inflation. This allows you to at least park the money in a way that's not devaluing itself, and if you do see opportunities, you can take a loan against it and invest in those things. If you ever do one of those, you should be able to break even by year three to five at most if it's designed properly. They'll tell you that no, that will sacrifice the long-term growth.
I think that's when you compare it to present-day cash—like the value of having your money available to co-invest simultaneously is—it's not even an argument. It's also how corporations, banks, and Fortune 500 companies structure it. So look at corporate-owned and bank-owned life insurance; they know what they're doing, and that’s how we structured it.”
So, Alex mentioned creating a bank account that you can use to borrow against, which grows at four percent a year. If you look at the long-term return, that's certainly possible, especially for someone his age. Alex is solely looking at the policy's internal rate of return, which is fine. However, other benefits to life insurance also increase its value. A myopic ROR mindset sells whole life insurance short if you only care about a rate of return.
Alex then claims he's parking his money somewhere with a better rate of return than a savings account and then looking for opportunities to use it.
Soon, he's talking about COLI (Corporation-owned life insurance) and BOLI (Bank-owned life insurance). He means that many corporations/banks use life insurance to shelter capital in a tax-efficient vehicle, incentivize key employees through split-dollar benefits plans, and protect the company from loss should a key employee die while employed. Over 3,000 banks in the United States today have many tier-one assets in bank-owned life insurance, such as JP Morgan, Bank of America, and even some of the larger credit unions.
Video #2
Here is a condensed version of what Alex says in the second video:
“Life insurance is one of the most profitable enterprises that exist. If you think about the oldest businesses, they have to be the most profitable because they can weather depressions, wars, etc. And the oldest companies in America are insurance companies. They predate the tax code, which is why there are advantages to owning insurance, but they structured it so you won't be the one benefiting from it.
The reality is that you probably will get scammed—you'll probably lose all your money. Most of those products, 80 percent or so, get abandoned before they come to fruition, meaning you forfeit all the money you gave them. Most of it, especially the first year, goes to the sales guy who sold it to you. They factor the likelihood of your policy lapsing into their profit margin. If you want to pursue whole life insurance, the likelihood of getting scammed is almost 100 percent.”
This video was strange because he contradicted what he said in the first video. Even though Alex has a whole life policy on himself, he is telling people there is a 100% likelihood of being scammed with a whole life policy.
He seemingly makes a direct accusatory link between the frequent lapsing of policies before they come to fruition (i.e., the people pull what’s left of their money out and walk away) and an intentional “scamming” by the carriers. Rather than assigning blame on poorly structured policies or the inability to fund them as promised, he lays the blame directly at the feet of the agents and the carriers they are appointed with.
Alex Hormozi’s Response to Removing the 2nd Video
His abbreviated response:
"I posted a video about insurance, and important nuances were omitted. It happens when you put out 100+ pieces of content per week, so I deleted it. For those who saw it, it didn't reflect my views on my whole life, and in all the ways it's wonderful.
Many whole-life policies are forfeited before they come to fruition, making those an actual money waste. Did you know that many whole-life policies, 80 percent of your first year, go to the salesman? The incentive of the salesman is against the consumer. There’s this saying: "It's hard to do the right thing when how you get paid is directly opposed to it."
All that to say, whole life insurance is a great savings vehicle. Period. But if you sign papers with someone spewing “MEC limits,” “PUAs,” “premium,” “term,” and “death benefits” at you, you likely got hosed. For my policy, the difference in commission to the agent between a well-structured policy and a standard policy would have been, drum roll please, $800,000. Instead, it was about $100,000. And if you didn't know that they get commissions, you probably got hosed. It's tough. Period. I remember I was pitched to life by people in a group I was in. Something felt off, so I kept looking and found more intelligent advice and learned.
So, the person looking at policies should learn and understand the difference. Be careful who you learn from. Many say their whole life is great and don't have any. I have a policy, and it's structured well. I also like the idea of having a lot of tax-free income at retirement. My account breaks even in year four. It starts making more in year five. It's a great vehicle to park long-term cash. I still see it as a bond equivalent in my portfolio, and if you can't explain your policy to me in a way that I understand, don't buy it.
Don't buy if you don't feel fully confident that the person has your best interests in mind. Learning about this takes time, but if you need it, take it. The cost of not understanding is much higher."
What We Have to Learn
How Commissions Work for Life Insurance Agents
Life insurance agents get paid primarily based on a percentage of the policy's base premium.
Most of the compensation is earned from the first year of premium payment. Less compensation is earned from renewals, which are paid to the agent who services your policy, answering any ongoing questions you may have or updating your beneficiaries. By and large, the industry average on base commissions is around 55% of the base premium year one - many carriers also pay “expense ratios” above that 55%, bringing the total compensation on a typical contract to between 70% and 90% of the base premium, depending on the company. Beyond year one, those numbers drop into the low single digits for the remainder of the policy. Essentially, the more base premium there is, the more an agent will be compensated.
In whole life, paid-up additions (PUAs) do the same thing as base premiums–they both buy death benefits. But PUAs can be optional, and when paid, they can increase your death benefit and have a HUGE increase in your cash value in a way that base premium does not. PUA premiums are compensated at a very low level throughout the life of an insurance contract. On average, compensation on PUAs is around 2-3% of the PUA premium in year 1, often dropping for the following years.
Understanding the Implications
Take a moment to understand the implications of selling a normal whole-life policy with an all-base premium of $20,000 versus a policy with a 40% base premium and 60% PUA. Now, a 10% base premium and 90% PUA. You can see why the industry is set up to incentivize the sale of the most death benefit (highest base premium) because that is where the insurance company makes the majority of its money. It’s not unethical; it’s just how a free market works.
Since agents are financially disincentivized from making your policy a mixture of base and paid-up additions, you will likely have to ask for it. The problem is that most agents have no idea how to build a policy with high cash value, and many of those who do would rather convince you of a policy with a higher base premium because they get paid more. Alex is 100% spot-on on that front. However, you need to ask yourself what you want.
We have sold 100% base premium policies for individuals looking for permanent death benefit for estate tax mitigation—for that person, it was the best option. For others who want maximum cash value growth, we build it with a very low base premium of around 10% of the total. Still, others have purchased 50% base premium policies because they wanted the option to put in more PUAs every year.
Working with an advisor who can customize the strategy for you is important.
The Facts
Alex mentioned that a large percentage of these policies lapse - we will push back on that. According to LIMRA, an industry-funded financial research company, lapse rates among whole life insurance average out to be approx. 2.9% annually. This means only 2.9% of policies are canceled due to nonpayment, surrender, or transfer to a different product. Likely, Alex may be referring to indexed universal life, which has a comparatively high lapse rate due to surrendered policies. Incidentally, you can see why IULs carry a surrender fee that whole life insurance does not. For the first 10 years, most IUL companies will keep most of your money if you cancel your contract.
Over the last 10 years, we have seen a drastic increase in sales in the IUL life insurance space, primarily from uneducated yet confident (*cough cough Dunning–Kruger effect) sales agents. Because of this, this product's lapse/surrender rates have increased drastically.
“Indexed Universal Life: Lapse rates increased significantly across all policy years between the earlier part of the study period (study years 2015-2018) and the latter part of the study period (2019-2020). This is the only product type to exhibit consistently higher lapse rates by policy year during the pandemic relative to [before] the pandemic.”
Improper Policy Setup
Some policies are just not structured well for the person who buys them. Policies often lapse because the value was not clearly explained, and the product is improperly sold to the client, who has false assumptions about what this product will do for them.
Understanding your costs/benefits and how to maximize those benefits by understanding the product will help ensure that your policy stays in force and serves you and your family for years to come.
Find an agent who will design and show you a policy and then explain the cost, benefit, and how the product works. Do this, and your confidence in your purchase will increase.
Whole Life Insurance is Designed for the Long Term
Don’t think, "This better break even in year four or five," or "This isn’t beating the market," or "This isn’t going to make me a ton of money." If you are focused solely on these items, chances are life insurance is not what you are looking for.
However, whole life insurance is “The And Asset.”
You don't have to be just doing life insurance. It can be a foundational asset with many benefits, including giving you control and peace of mind. If you're looking for the highest internal rate of return, it will be hard to justify life insurance. But if you’re stepping back and saying, "Where can I save, what can I control, and where can I put my money and get multiple benefits?"
That's where whole life insurance shines, especially when properly set up.
Contact our team if you're looking for ways to understand and use life insurance properly. We can examine your situation and create a customized solution, helping you achieve your goals.
Watch This YouTube Video
Watch life insurance agents react to two videos made by @AlexHormozi on whole life insurance. Does Alex own a whole life insurance policy or does he think it's a scam? I'll show you exactly what he had to say in these now-deleted clips as well as review the type of policy Alex references in these videos.
