Is Life Insurance REALLY a Scam?

Added: 2026-05-03

[00:00:00]If you think life insurance is a scam, you're probably right because the average person can lose anywhere from $25,000 to $100,000 just from the wrong setup. I've spent more than a decade in the industry and I've seen NASCAR drivers lose millions of dollars while NFL players build some serious wealth using similar types of policies. And it usually happens through the same few mistakes one after another.

[00:00:28]So, today I'm going to walk you through these six lies that lead people into bad policies and by the end, you'll know how to flip it so the policy actually works in your favor. Lie number one, life insurance itself is a scam. Last summer, I saw one of the worst situations with a whole life insurance policy. A young guy in his early 20s was making boatloads of money. His tax attorney recommended that he get a whole life insurance policy and the attorney introduced him to an agent.

[00:01:02]He was sold a whole life insurance policy where the plan was to put more than 7 and 1/2 million dollars per year into this policy for 10 years. That's $75 million dollars over 10 years to put that into perspective. The policy was designed to pay the highest commission rate with that product. The problem with that policy is that it was not set up for cash value. The agent made millions of dollars but about a year and a half after he started the policy, the client started to question things and he wasn't sure if he wanted to keep paying this giant premium. His options were as follows. One, he could walk away and lose more than $5 million as the cash value was nowhere near what he paid in. Or two, he could stick it out and keep paying the 7 and 1/2 million dollars every year until he finally got his money back. But that was going to take a long time. The thing was, the policy wasn't with a company where we could make creative changes to try and get a lot of his money back.

[00:02:12]That's always the first thing I look to do. He was stuck. And this happens at all levels but it's much more common among those with smaller life insurance policies. The problem here is that the consumer, the one who lost the money, often blames the insurance industry and the company that they bought that product from. It results in people saying things like whole life insurance is a scam. I got ripped off with that product and by that insurance company.

[00:02:38]The real issue though was the agent that they worked with and if the agent knew how to structure the policy for high cash value and if they were willing to do so. Here's what I mean. Take two people who get the same whole life insurance policy through the same age, they make the same same amount of money and everything is identical about their life situation. We will call them person A and person B.

[00:03:03]So, they both pay $10,000 per year. That's what they pay into the policy.

[00:03:10]Person A, in terms of his cash value, has zero.

[00:03:16]And person B has $9,000. This is immediately in the first year.

[00:03:23]Person A feels like he got ripped off.

[00:03:25]He's like, "Where's my money? How come I don't have as much money as this guy?

[00:03:29]Same insurance company, same product, same out of pocket. What's going on?"

[00:03:34]Most people I've seen express that whole life insurance is a scam are those who've been sold a policy like this where they haven't had any value up front and the policy is set up to be optimized for the agent, not for the client. So, here's what I would do.

[00:03:49]Instead of asking, "Which life insurance company is best?" ask, "How is the policy designed?" Ask for a breakdown of where your money is going. Specifically, how much is going toward what's called the base premium and how much is going toward what is called the PUA. That stands for paid up additions rider.

[00:04:07]Because base premium dollars prioritize insurance first and maximize commissions whereas PUA dollars prioritize cash value first and minimize commissions. I bet you could guess what's prioritized here.

[00:04:22]Person B prioritized PUAs and the commissions were minimized. If you don't see a lot of cash value up front, it's likely that that product was designed in the agent's favor instead of yours. Lie number two, agents always act in your best interest. But here's the truth. If we go back to person A and person B, let's talk about the commissions here.

[00:04:46]Same company, same product, here's what the agent would make. And this varies a lot depending on the company. I'll just use an average here with a traditional whole life insurance product. In the first year, person A, the agent made $10,000 whereas with person B, it was closer to $1,000.

[00:05:09]And that's the first year not counting renewal commissions. You see, the insurance industry will reward agents for selling high commission products.

[00:05:19]And the reason why is because products that pay the most commission, guess what? Also generate the most profit for the life insurance company. So, it makes sense from their perspective when they're operating a business. I remember when I used to go to conferences and I would see these agents recognized for all of their accomplishments, they were always being praised for how much commission they generated. And what everybody would brag about is how much premium they wrote because the premium is what the insurance companies liked and the premium is what pays the commission. See what's going on here?

[00:05:52]Here's the thing though, most agents that I've met over the years, they're not greedy. Most I've spoken with have had good intentions but the industry doesn't train agents on how to sell products that are designed for maximum consumer value. The industry trains on how to sell products that maximize commissions and overall compensation.

[00:06:14]So, the challenge about entering the life insurance industry or speaking with a life insurance agent is that agents are literally incentivized to sell what benefits them more so than the client and that's just how it works when you look at how commissions work with life insurance products. So, here's how you can avoid this trap. Ask direct and very specific questions about commissions and the cash value. The first question I would ask would be this, "With this product, if the cash value is zero up front, what do you, the agent, make in commission in the first year?" Then ask, "What do you make in commission if I see 50% of my payment show up in cash value in the first year?" Then ask, "What if my cash value is 80 or 90% of my payment? Then what do you make in commission?" You want to know what they know. It's your money. It's okay to ask.

[00:07:13]What I would be cautious of is an agent who refuses to show you a side-by-side illustration of something like this with person A and person B. Remember that transparency signals alignment between you and the agent whereas secrecy or not disclosing information, that's a big signal of risk. Let's move on to lie number three. It takes 10 to 15 years to get your money back. Here's the truth.

[00:07:39]So, if we go back to person A and person B. Person A paid 10,000, they had zero in cash value and the agent made $10,000 up front.

[00:07:50]In terms of getting your money back, this is referred to as the break even.

[00:07:55]Person A is going to take 10 to 15 years to get their money back.

[00:08:02]Meaning, at 10K per year, over 15 years, they would have paid $150,000.

[00:08:08]They might see $150,000 in cash value 15 years in. It's a long time to run a loss. Whereas person B with the exact same product and the same company just designed differently, well, it only takes him three to five years to get his money back. Person B has liquidity right now and they also see faster compounding.

[00:08:35]When you look at life insurance policies, a big upfront loss and slow growth is an immediate red flag that signals the agent is earning a very excessive commission and that the policy is designed and in an inefficient manner. So, if you're looking to use a policy, a lack of liquidity, it's going to feel restrictive. Whereas having a lot of cash value feels empowering because you have money to take advantage of opportunities when they are available. You see, the hard part about whole life insurance is that once you start a policy, it's difficult to make changes especially to your premium. Like once this is done, you're locked in in many ways or it's difficult to make the adjustments that I would want to make.

[00:09:22]The one choice that you make upfront will really determine if your policy can be used as a wealth building tool or if it will feel like a financial burden and you'll feel trapped. So, here's what I would do. One, ask, "How much of my payment is going toward my cash value in the first year?" I would target somewhere between 80 and 90%. Then I would ask, "How much of my cash value can I borrow in the first year?" It should be 90 to 95% of whatever your cash value is. And then, if it takes a decade just to break even, that is an immediate signal that that policy is not set up for high cash value. Lie number four, you're always better off buying term and investing the rest.

[00:10:09]But that's only the truth if a policy is poorly designed. I'll give you an example of an old school policy and then a good one. An old school whole life insurance policy will have high costs.

[00:10:20]It'll grow very slowly. You'll have minimal liquidity especially up front and you'll be locked into a very, very big premium. You're going to get a big bill every single year. Whereas a good one, a modern high cash value life insurance policy, will have minimum costs. You'll see cash value up front and faster compounding right out of the gates. And then the premium commitment, the amount that you're billed for, can be just a fraction of the total dollar amount you're paying every year. And in many cases, what I've seen with real policies for clients that I've had for more than 10 years, is that the annual growth rate is between 5 and 5 and 1/2%.

[00:11:00]If you'd like to see an example of this, I did include a video that goes over a case study down below in the description. The big problem though, that I see happen all the time, is that a lot of people will judge life insurance only based on the bad examples instead of the optimized ones. Most people I speak to don't hate life insurance, they hate being oversold and under informed. You see, a properly designed life insurance policy doesn't replace what you're doing with your money.

[00:11:32]No.

[00:11:33]It complements it. So here's what I would do. First, ask for what's called proof of performance, meaning you want to see the real numbers of a real policy instead of just relying on internet opinions, especially if those opinions generate big commissions or sell a product other than life insurance. Next, when you evaluate life insurance, evaluate it as a tool for stability, liquidity, and tax efficiency. Because when a policy is designed well, it can be a solid part of your overall financial foundation. Lie number five, whole life means you have to pay premiums for your whole life. So something that's popular with a lot of business owners and real estate investors that I've worked with over the years, is that they love whole life insurance, the cash value benefits being safe, liquid, and tax-free, but they don't love the idea of having to make premium payments forever. So in some cases, we'll set a policy up where they fund it for 4 years. Maybe it's 3 years.

[00:12:33]Maybe it's 2 years. And in some cases, even 1 year. But what this means is that they take a lump sum of money, they move it into a life insurance policy over a very short period of time, and then it just compounds when they never pay another penny into it. And you'll see it continue to grow even based on the guarantees, which show the worst case scenario in terms of growth. You see, people often avoid cash value life insurance because they think that they're going to have to make payments for a long time. But when they learn that they can fund a policy just for a few years, and they can easily adjust the dollar amount that they pay in every year, the reaction is usually Oh, I didn't know you could do that. Yeah, show me a couple different examples. You see, if a policy is designed right, it takes that feeling of having a traditional policy. I've got to pay a premium every month, every year. It's boring. It's boring. I don't see any cash value build up. No, throw that out the window and instead, I've turned it into a flexible savings asset. Now it's fun. See what's going on? So here's what I would do.

[00:13:43]When you're shown a policy, ask if you can see an example where you fund it with a one-time lump sum payment. And then also ask about limited pay options.

[00:13:54]Because a one-time lump sum doesn't always make the most sense. A lot of times we'll see people break that lump sum payment up over two, three, or four years because it makes the policy more efficient. But the thing is, you'll get to see the options and you'll see faster growth over time. And if you don't like the idea of committing to decades of premium payments, I don't either. I would just ask for a structure that allows you to easily eliminate the premium payments or get a product like a 10-pay product. The premium is only due for 10 years with that option. The thing is, taking this approach usually makes people aware of this other approach, but it allows you to keep control of your funding while still benefiting from the long-term compounding. Okay, lie number six, you're paying interest on your own money. With life insurance, you earn interest while you borrow against that policy, just like a mortgage on an appreciating asset. So when you take a loan from a life insurance policy, you are charged interest that is paid to the life insurance company, but your cash value keeps on compounding. This includes the money that you loaned. It's the same thing as owning a home where the fair market value of that home is growing faster than the interest you're paying to the bank on that mortgage. See what's going on? So when you look at your policy, what I would do is compare the cash value growth and the loan interest you're paying every year if you have a loan outstanding. I wouldn't pay attention to opinions or emotional reactions that you hear from others. No.

[00:15:31]What I like to do is just focus on the numbers and see if this works in my best interest. Here's a quick example. Let's pretend you've got cash value of $100,000.

[00:15:44]And we'll assume that the net growth rate is 5%. So you decide to take a loan against your policy.

[00:15:52]And to make this very, very simple, let's pretend it's $50,000.

[00:15:59]And the interest rate is 5%. So what do these figures come out to? Well, 5% of a $50,000 loan is $2,500.

[00:16:09]Okay? And remember with life insurance, you still earn interest on the full amount.

[00:16:15]So that means even when you take that 50K, you're still getting $5,000.

[00:16:21]So what that means is you've got a net spread of how much? $5,000 of growth minus $2,500 of loan interest, you're positive $2,500. If the loan was larger, the spread would be a little bit less. If you don't have any loan or it's a small loan, the spread would be more more in your favor. But it's just a case of looking at the numbers. So it's very common to see business owners, real estate investors, and even wealthy families leverage the loan feature of their policies, but all of them, at least that I've worked with over the years, want to see the numbers or know what the numbers are, meaning I do it for them and then show them what it looks like before they take a loan.

[00:17:04]They're not going to borrow against their policy just because they heard it was a good idea. No, the numbers have to make sense. So those are the six lies about whole life insurance. I do hope that this video was helpful. If you want to see how a policy can be set up for high cash value, then you might enjoy this video.