You may or may not spend much time on TikTok – but a sizable chunk of today’s 18-30 year old cohort certainly do. And as it turns out, financial pundits are hanging out there as well, forming a community within the short-form video app that’s been informally dubbed “FinTok.”
I can’t say whether this phenomenon is a good or bad thing overall. FinTok’s brand of entertaining and accessible money talk has probably improved financial literacy among many millennials and zoomers. However, it also tends to oversimplify complex topics, and therefore leave novice investors with unrealistic expectations.
Notice I said “novice” investors, however… which doesn’t necessarily just mean young ones.
There is a lot of money to be made – from people of all ages – in the business of money itself. This in turn attracts real innovators and opportunists alike, but a good way to avoid the latter is to remember the commonsense dictum:
If something sounds too good to be true, then it probably is!
An Intro to Maximum Premium Indexing
Today we’ll look at an example of these “too-good-to-be-true” finance pitches – one that holds an appeal for investors of all ages and demographics, but that I found through TikTok. So let’s start there:
This individual is the founder and CEO of MPI® Unlimited – technically a life insurance sales office, although it seems like he has much more in mind than just that. The company’s flagship product is its “Maximum Premium Indexing Secure Compound Interest Account,” or MPI for short (whew).
Based on the pitch, the thing sounds pretty miraculous. But that may lead you to wonder…
Is the MPI a scam?
Actually, no. I don’t think the MPI is a rip-off or that the salesman is some Elizabeth Holmes-style con artist. Nor am I suggesting that products with similarly flashy descriptions (such as “infinite banking”) are, either. As far as I can tell, the claims that this video makes are generally true.
But that doesn’t mean it’s a financial silver bullet, either. Did you notice the layout of the whiteboard that is referred to? On the left is a column for IRAs, listing both pros and cons. On the right is a column for MPI, which lists… only pros. A lot of them.
As you have heard me say many times before, everything has a tradeoff. Safety is inversely correlated to growth, and benefits in one area always entail drawbacks in another. But salesmen seldom mention the drawbacks up front, giving the impression that “Product X” is a must-have.
And that’s why I’m using this guy as my example. I don’t think his product is fraudulent; but it is complex, highly specialized, and unlikely to have long-term benefits for most young savers. Yet that’s clearly the demographic he’s targeting – and that makes me angry.
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How does the MPI work?
The company’s website describes the MPI as “an innovative Indexed Universal Life insurance policy that encompasses the Triple Advantage of Compound Interest: Security guarantees of life insurance, Growth potential of the S&P500, and the compounding acceleration of Leverage.”
Pretty wordy for a one-sentence pitch. Fortunately, those of us who are more visually oriented can refer to the following illustration:
Again – hmmmm. Safety and growth tend to work against each other, so any product that claims to do both is either 1) a genuine game-changer; 2) an outright lie; or 3) doesn’t do both things equally well.
While I haven’t tried it myself, I’m quite sure that the MPI belongs in the latter category. As it turns out, the product runs on a type of life insurance called IUL (indexed universal life) insurance. Although the MPI does introduce some innovations to the IUL model, there are still fundamental issues it can’t overcome.
That’s a whole other post in itself (which, in fact, we’ll also have on the blog shortly). The important thing is that we now have a more concrete idea of what this thing actually is – and that helps us understand what it really can (and cannot) do.
What the marketing leaves out
So, the main thing you don’t hear up front is that the MPI is really a life insurance product with an investment component. Of course, that’s not necessarily a problem – whether it’s life insurance or a tractor or a lunar explorer module, what something can do is more important than what it was designed to do, right?
Right. But the fact is that the MPI can’t actually do the stuff that is being implied: namely, giving you risk-free growth. At any rate, it can’t do so on a level that competes with other retirement savings products.
To see why, let’s do a revised version of that pros and cons list:
|The MPI earns returns based on an underlying stock index (e.g. the S&P 500).
|The cost of insurance increases every year, which means you’ll need correspondingly greater returns every year to keep up. And as you’ll see below, that’s far from guaranteed.
|MPI Unlimited estimates that those returns will average 6.4% per year.
|While that 6.4% RoR is clearly just an estimate, I’d say it’s an excruciatingly unrealistic one. A more likely long-term expectation would be about 4.5%
|You get upside potential of 10% with downside protection of 0%. In other words, while you can theoretically earn returns up to 10%, you’ll never lose anything when the markets decline.
|When the market underperforms and your returns dwindle as a result, you still have to keep up with fees and insurance premiums. That amounts to a loss, even if it doesn’t look that way on paper – and loan interest may compound the problem.
|The account’s RELOC feature (Retirement Equity Line of Credit) allows you to “borrow” from it at an estimated interest rate of 4% and thus earn a spread. That is, your profit equals the difference between that 6.4% return and the 4% cost of borrowing.
|To qualify for the RELOC, you must prove insurability every 2 years. So if your health declines, for example, and you’re moved into a different health category, the cost of insurance will be greater.
“There ain’t no such thing as a free lunch”
At the end of the day, insurance and investment are very different objectives, and they tend to work against each other. It’s just another version of the risk and return problem – something that no financial instrument can eliminate, regardless of how many embellishments and features it has.
At best, the problem can be mitigated; e.g. by giving you some investment exposure, but making that exposure minimally risky and thereby limiting returns. That’s exactly the approach of MPI and other IUL plans. Sure, you won’t lose money to the stock market; but you also won’t earn very much thanks to the account’s limited growth.
When you throw in those high premiums and the cash requirements to maintain them – which, by the way, do not go away with the MPI – this seemingly foolproof method starts to look prohibitively expensive for many people. Even for some who could afford it, it’s just unnecessarily complicated.
No, I don’t think products like this are a scam and I don’t think salesmen like this are swindlers. But I think they are guilty of overhyped salesmanship, the kind that exploits (consciously or not) people’s desire to find miracle cures. With so much information and innovation around us today, it’s more important than ever to pause and think: “what aren’t they telling me?”