NerdWallet's Smart Money Podcast
Life Insurance as an Investment? We Fact-Check the TikTok Trend
Wed, 06 Nov
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Learn why life insurance isn't a substitute for a 401(k) and how to spot reliable financial advice on social media. Is life insurance a better investment than a 401(k) for retirement? How can I tell if financial advice from TikTok influencers is reliable? Hosts Tess Vigeland and Anna Helhoski dive deep into the latest viral finance advice circulating on TikTok. With influencers claiming that life insurance is a better investment than a 401(k), investing Nerd Alana Benson joins the show to break down the facts. She explains the critical differences between life insurance policies and retirement accounts like 401(k)s, debunks false claims from influencers, and highlights hidden fees and conflicts of interest that you may miss when seeing financial trends in your social media feed. In addition to the TikTok trend, Tess and Anna cover some of the latest money headlines, including the GDP growth report for Q3, the October jobs report, and upcoming decisions from the Federal Reserve on interest rates. Here are NerdWallet's top picks for whole life insurance policies: https://www.nerdwallet.com/article/insurance/find-best-whole-life-insurance Anxious about the election? Find our special series on how presidential policy could impact your finances at https://nerdwallet.com/podcast In this episode, the Nerds discuss: life insurance vs 401k, TikTok finfluencers, life insurance investment, 401k vs life insurance investing, personal finance tips, retirement planning, social media influencers in finance, financial advice on TikTok, life insurance pros and cons, 401k benefits, how to choose life insurance, spotting bad financial advice, avoiding bad financial advice, financial mistakes to avoid, is life insurance a good investment, TikTok finance myths, financial advice for millennials, and whole life insurance. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What is the main focus of today's episode?
Welcome to NerdWallet's Smart Money Podcast. I'm Tess Vigeland in for Sean Piles.
And I'm Anna Helhofsky.
And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. But Anna, before we get started, I want listeners to know that we are not ignoring the elephant and donkey in the room today.
That's right. There was a big election last night and we may or may not have final results, but you won't hear them here because we're taping this on the Tuesday morning of Election Day.
Yes. So we are indeed aware of a big news item in the headlines today. We're not ignoring it. We just didn't have all the information at the time of taping. I would imagine we'll talk about it on next week's episode. In the meantime, in case you missed it, we actually ran a four episode special series last month on how the presidential election could affect your finances.
So we'll put links to those episodes in today's show notes in case you're feeling anxious about the results and you can get an idea for what to expect or visit nerdwallet.com slash podcast and you can find the episodes near the top of the page. With that, today we're talking about influencers and the sometimes not so great advice they give.
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Chapter 2: Why should I be cautious of financial advice from TikTok influencers?
Yeah, this falls under the category of don't believe everything you read, watch, or hear just because someone has a big following.
Speaking of a big following, there are quite a few influencers who are so successful at what they do, they're able to go full time with that gig. A study published last year that was cited in a recent Wall Street Journal piece claims there are 27 million paid content creators in the U.S.
Among those creators, 44% are working full time, and that figures out to about 12 million full time social media influencers. That's just bananas.
Yeah, Tess, that's too many influencers if you ask me. Now, as we all know, an influencer's job is to entertain and inform, even if the information isn't all that accurate. Finance TikTok, more commonly known as Fintalk, has some particularly egregious advice from influencers.
Well, we're going to hone in on one piece of FinTalk advice that's been making the rounds on TikTok for a while now. Some influencers claim it's better to invest in life insurance than a 401k for retirement.
Hmm. Sounds a little fishy to me, Tess, but let's ask someone with a little more expertise in that area. Fortunately, we have Alana Benson, an investing writer here at NerdWallet, to talk us through it. Alana, welcome back to Smart Money. Thanks for having me. So first off, set the record straight for us. Is life insurance considered an investment? And how does it differ from a 401k?
So despite what some TikTok influencers might have you think, life insurance is not an investment, full stop. It's pretty simple. Life insurance is a policy where you pay premium so that if you pass away, the company pays your beneficiaries. There are lots of different kinds of life insurance, but most often the folks on TikTok are talking about permanent life insurance, which includes life
whole life insurance and universal life insurance. A 401k, on the other hand, is an investment account offered by your employer. You add money to it and often your employer will match some of the money you're putting in and it can be invested in the stock market. And then when you are retired, you can use that money to support yourself.
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Chapter 3: Is life insurance truly an investment?
So you have to think of life insurance as a completely different product than an investment account. You know, life insurance is not inherently bad. It just serves a different purpose.
So Alana, what is the actual advice going around on TikTok? And is it coming from influencers who are also financial experts?
The actual advice that people are pitching and people who are most definitely not financial advisors is that you should invest in life insurance instead of a 401k or an IRA. And they make some claims that it is more flexible in terms of investment selection and that will make you more money over time. But those claims are almost entirely false.
Chapter 4: What are the key differences between life insurance and a 401(k)?
And Alana, are there any types of life insurance policies that do grow like an investment account? I'm thinking of the whole life insurance policy that my parents took out for me when I was really young that I've been paying for annually since my early 20s. There is a cash value account in it.
There are some policies like the whole life insurance policy you mentioned that have an investment component, but they often come with high fees that can quickly erode the return. And in some cases, they also erode the money that you pay into them. So these really shouldn't be treated as investments accounts.
With a real retirement investment account like a 401k, you'll typically pay very low fees and you'll get to enjoy stock market returns, which historically average about 10% per year before inflation and over the long term.
With insurance, it's only after around a decade of paying into this policy that you can start accruing premium money and interest in a cash value account that the insurance company holds for you. Also, the interest on that account is likely to be far less than either a high yield savings account or the stock market average.
So part of an influencer's job is persuasion, right? So what's their reasoning for life insurance supposedly being a better investment vehicle than a 401k?
Well, in this case, part of their job is to persuade you to buy insurance because they are going to make money off of it. Ah, I guess. Yeah. So they earn a commission if they sell you a policy. And some of these brokers don't just earn a commission once. You actually keep paying them commission fees for the duration of your policy. So you could end up paying commission fees for like a decade.
These fees are also really sneaky. They're often not listed on your statement, so it can be hard to figure out exactly what you're paying.
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Chapter 5: What misleading claims are influencers making about life insurance?
So if the argument is that life insurance can earn interest from the stock market like a 401k does, then other than fees, why is it bad advice?
So yes, technically it can, but a 401k is straightforward. It's easy to understand. It has low fees compared to most insurance policies, and it often offers a match. That's like free money that you'd be turning down. Plus, contributions come out of your paycheck, so you don't have to worry about prioritizing that money after it lands in your bank account.
And I'll mention here that NerdWallet has an article that lays out the best whole life insurance companies depending on your needs. So if you are in the market for whole term life insurance anyway, not replacing your 401k, and you want to prioritize cash value growth, then you can find the best option for that in our write-up, which we'll link to in today's show notes.
And unlike social media influencers, our insurance nerds have spent more than 2,950 hours reviewing more than 176 products for a little extra context. Wow, that's very specific on the hours there. Anyway, life insurance obviously is not the same as getting a free box of skincare to talk about on a TikTok video.
But it does sound, Alana, like these influencers are incentivized to disperse this kind of advice.
Absolutely. Most of these influencers are not fiduciaries, meaning that they have zero obligation to act in your best interest. And yes, they are likely trying to sell you an insurance product so they can earn a commission.
Do you have any advice for people who are getting investing or other personal finance advice off TikTok? How do you know what's good advice and what's not?
It's kind of tricky. So there are some influencers who have legitimate backgrounds that are using TikTok to offer great advice to just a wider audience. But it's always a good idea to vet someone. So if an influencer says that they're a financial advisor, you can actually look up their certifications.
Also, if they're trying to get you to buy something, it's always a good idea to be skeptical of that.
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Chapter 6: How do fees impact life insurance policies compared to 401(k)s?
Yeah, consumers have really been the heroes of the post-pandemic economic recovery. We keep spending like the Energizer bunny. And in Q3, we spent the most on health care, food and accommodations, non-durable goods, and cars and car parts. I did not help there, though. My car didn't need any parts.
Meanwhile, I had to replace my brakes and my tires. Lucky me.
Oh, no. Mm-hmm. The other big pre-election number is the monthly jobs report. And here the news wasn't so great. The economy added just 12,000 jobs in October, a huge drop from the 223,000 added in September. But remember what happened in October?
Two massive hurricanes, Helene and Milton, plus a significant labor strike at Boeing, all of which took people out of the employment picture. And just to update, those 33,000 striking workers at Boeing approved a new contract this week, so they'll be going back to work. Meanwhile, the unemployment rate stayed steady at 4.1%, with about 7 million people unemployed.
That's up a bit from a year ago when the unemployment rate was 4.8% and 6.4 million people were without jobs.
Yeah, the 12,000 jobs added to the economy was the slowest since December of 2020, just a few months into the pandemic. And finally, test this week, because there's not enough going on already. The Federal Reserve's Open Market Committee is meeting to talk interest rates. Everything we just mentioned around GDP and jobs will be fodder for any decisions around lowering the federal funds rate.
We usually hear from Fed Chairman Jerome Powell on Wednesdays during these meetings. But instead, again, because of the election, he'll be delivering remarks on Thursday.
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Chapter 7: Why might influencers promote life insurance over traditional retirement accounts?
There is speculation among economists and other market watchers that we'll see a quarter point cut following the big half point cut in September. But you never know until you hear it from the chair himself. So we'll have more on that in next week's episode.
And that's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeart Radio to automatically download new episodes.
Today's episode was produced by Tess and myself and edited by Rick Vanderkneife.
And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
And with that said, until next time, turn to the nerds.
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