Math beats insurance disguised as investor products
ATikTok and Twitter fight broke out in January pitting two often incompatible ideals — marketing hype and the emotional vibes it generates versus math. In one corner is Curtis Ray, an insurance salesman with 1.5 million followers on TikTok who sells universal life insurance, with a focus on a product known as maximum premium indexing, or MPI. A main feature of MPI is that the insurance companies behind it lend money to those who buy it in increasing amounts over time to cover insurance premiums. I have written about how bad these insurance-masquerading-as-investments policies are.
Ray’s specialties include bashing traditional financial products on TikTok and charging hefty commissions for the ones he sells.
In the other corner is Honest Math, a website and Twitter account run by Khalen Dwyer, a finance professor who recently took on the TikTok-hyped insurance salesman with math.
Fighting marketing hype with math is hard, especially over social media, but it is a fight worth having.
What I like about Honest Math’s approach is that Dwyer publishes reasoned scenariodriven analyses and the assumptions on which they’re based. In his tussles against Ray on Twitter, he requests and adheres to Ray’s starting assumptions as he compares the financial outcomes of different investment strategies over time.
Not surprisingly to me, but perhaps illuminating to anyone who has bought a universal life policy, these complex and costly products almost inevitably underform simpler brokeragebased investments, such as combinations of stock and bond mutual funds.
A big problem with universal life policies is their complexity, which hides costs and risks, while helping compensate the salesperson.
In the scenario Dwyer follows, one worker contributes $400 per month to an MPI policy while another contributes $400 per month to a brokerage-based retirement account for 30 years. The brokerage investor ends up $1.1 million wealthier. On Twitter, as well as in an email to me, Dwyer points out that his mathematical analysis is extraordinarily generous with respect to Ray’s starting assumptions.
“Our analysis reflects MPI’s underperformance relative to a traditional retirement portfolio,” Dwyer told me, “despite granting Curtis (Ray) the benefit of wildly optimistic assumptions.”
The most overreaching assumption is the amount of lending, or leverage, an insurance company will extend to a client — at unrealistically low interest rates.
Given that, $1.1 million likely underestimates the difference in investment outcomes.
Dwyer again: “So, even granting Curtis (Ray) this seemingly unfounded assumption (and many others), we’ve demonstrated that his product materially underperformed. I’m emphasizing the absurdity of the assumptions because I believe one can reasonably expect his product to perform much worse than we’ve demonstrated, in reality.”
A cool thing about Honest Math is that Dwyer shows his calculations online for people to examine.
Honest Math also takes on other important personal finance bugaboos and provides math-based answers to combat hype, vibes and misunderstandings in personal finance.
One such subject is the cost of active management and high-cost mutual funds, and their effect over decades, compared with passive and lowcost mutual funds. Over 40 years of investing $10,000 per year, the difference in one’s nest egg would be about $1 million in favor of the low-cost investor.
Another take involves a comparison of paying off one’s mortgage early — a frequently advocated financial tactic —
A big problem with universal life policies is their complexity, which hides costs and risks, while helping compensate the salesperson.
Michael Taylor
versus paying over 30 years while funding an investment account. The math presented by Honest Math shows that the two approaches yield similar results, as is the case when analyzing the outcomes of having a 30-year mortgage and a 15-year mortgage. It all depends on certain assumptions, which the site is transparent about.
I didn’t expect that Ray would find Dwyer’s math convincing, considering the maxim about human behavior attributed to Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
And neither did Dwyer.
“I’ve seen no evidence that (Ray) possesses a thorough understanding of the math of his product, nor that he’s capable of modeling it himself in sufficient detail,” Dwyer said. “And I doubt he has direct access to actuarial software that would allow him to run these scenarios firsthand. So, I think it’s likely he’s learning certain things about his product for the first time.”
Ray can take a lesson from this case: Never allow math into an insurance products vs. investments fight. The math will win.
But when the math is disregarded, the insurance while the customer will lose.
Besides bashing insurance products purporting to be investment products, the Honest Math website is a uniquely useful and conflict-free source of analysis.
After creating an account on the site, you can run retirement account simulations to your heart’s content — for free. You can try different savings and contribution amounts, different allocations to stocks and bonds, and see Monte Carlo simulations of the coming years and decades, as they affect your retirement.
A Monte Carlo simulation is a statistical technique used to model many unknown future outcomes — such as returns of stocks and bonds, and the order in which they happen — and see the range of possible outcomes. For that reason alone, future retirees should run their personal scenarios through an online Monte Carlo simulator.
You can usually also get this type of simulator from an online brokerage or any investment adviser worth his or her license. But the advantage of sites like Honest Math is that they don’t sell insurance or brokerage products, so they have no incentive to build a model that funnels people toward certain prescribed results.
The site may seek paid consulting engagements from municipal bond issuers or pension managers in the future, but it strives to remain conflict free, so it has avoided advertising, sponsorships and partnerships. Dwyer provides the online personal financial simulator for free. I found the simulator to be easy to use and helpful in visualizing different scenarios.
Another plausible response to the Curtis Ray vs. Honest Math fight might logically be: Why are people using TikTok or Twitter for investment ideas?
But for whatever reasons, people are using TikTok and Twitter for that and will continue to do so. And insurance salespeople will post their viral and misleading content there because that’s where their current and future customers are.