TikTok influencers are starting a new trend: promoting life insurance as the top retirement investment, beating out 401(k)s? Is this reasonable?

If you’re on TikTok or Reddit, you’ve likely come across the rumor that buying life insurance is a better option than investing in your 401(k) retirement plan. So, is it true?

Life Insurance vs. 401(k)

Life insurance is not an investment, whereas a 401(k) is an investment account offered through an employer. Permanent life insurance (which provides lifetime coverage) is not an investment, and its high costs eat into the premiums you pay and the benefits you might earn in the first 10 years.

“What’s really weird to me is there are so many life insurance salespeople on TikTok, basically promoting life insurance like it’s the next big thing and the most amazing investment on the planet,” said Vivian Tu, the Miami Beach, Florida-based founder of Your Rich Bff, a TikTok channel focused on financial education.

Can life insurance grow like an investment account?

In some cases, yes. Some types of life insurance, like whole life or universal life insurance, do have the ability to build up cash value. But how do these policies earn money like investment returns? By tracking a market index.

One feature touted by TikTok influencers is that returns on insurance policies are unaffected by the overall stock market, but that’s not entirely true. Insurance companies may invest a portion of their portfolio in the stock market, which is technically part of the policyholder’s premium. While some policies offer fixed returns, others depend on current interest rates and investments. Some policies let you choose a stock or bond index that your policy tracks, like the S&P 500, and the insurance company pays interest based on the performance of those indices.

Life Insurance vs. 401(k): Costs

If life insurance can earn stock market interest like a 401(k), what’s the problem?

The problem is that, depending on the policy, the shocking fees charged by the insurance policy will often offset the amount you receive from those premiums and any investment returns.