The "Money Makes Money" Game: Ask Three Questions to Know Exactly What You're Buying
Written by: Huang Shiliang
A relative who lost their job in middle age passed the insurance practitioner certification exam and started selling insurance. They shared extensive insurance knowledge in the family group chat, but I felt what they were sharing consisted mainly of sales pitches learned from company training—lacking a systematic structure. Only by possessing stronger financial knowledge is it possible to truly excel at insurance.
I used AI to draft some financial knowledge focused on insurance for him, and explained some concepts to him myself. I found that interacting with AI and co-writing out this knowledge greatly benefited me as well; previously vague concepts became much more systematic.
I started wondering: could we write a mini-column exploring whether a non-insurance professional can, with the help of AI, compile a textbook titled *How to Become an Excellent Insurance Professional*?
Let's start from the very basics.
Understanding the Most Fundamental Framework of Money Generating Returns
Funds, wealth management products, stocks, insurance, Yu’ebao… Before purchasing any of these return-generating instruments, please first test yourself with the following three questions:
What did your paid money ultimately become? The answer corresponds to the underlying asset.
In what form is it held? The answer corresponds to the investment tool, or the "packaging".
Where do you buy it, and whose account does the money sit in? The answer corresponds to the channel.
Funds are tools, stocks and bonds are their underlying assets, and banks and brokerages are the channels that sell funds.
I will first clarify these three layers one by one, then use them to deconstruct something that is notoriously difficult to explain clearly: insurance.
Layer 1: Underlying Assets, The True Source of Returns
The underlying asset is the thing you ultimately bear the price fluctuations of. Common major categories include:
Stocks: Ownership in a company, returns derive from corporate profits
Bonds: Money lent to others, returns derive from interest
Cash equivalents: Deposits, short-term government bonds
Commodities: Gold, crude oil
Real estate
Crypto assets: Bitcoin, Ethereum
To judge whether something is an underlying asset, look at where the returns ultimately originate. Tools and channels do not create returns themselves; they only deduct a portion (fees) or alter the shape of the returns.
If a return-generating product cannot clearly state what your money ultimately buys, this is an extremely dangerous signal—stay away. Because if you cannot answer this question, you most likely *are* the return yourself, merely someone else's profit.
Layer 2: Investment Tools, Packaging Formats
Actually, most yield-generating underlying assets are difficult to sell directly to ordinary people like us. While we can hold individual stocks directly, buying all 300 stocks in the CSI 300 index would require substantial capital, manual proportion calculations, and periodic rebalancing. Most bonds trade in the interbank market, making direct participation difficult for individuals. Physical gold requires secure storage and authentication, making buying and selling inconvenient. Infrastructure projects like road construction or power plant development certainly do not involve individual funding. Therefore, an intermediate layer of "packaging" is necessary.
The function of an investment tool is to bundle underlying assets into something you can actually purchase.
Funds are the most typical example: many investors pool their money together, fund managers use it to buy stocks or bonds, custodian banks safeguard the assets, and you hold fund shares. The fund company charges an annual management fee from this pool.
Despite both being called "funds," their underlying assets can be completely different:
Equity funds, underlying assets are stocks
Bond funds, underlying assets are bonds
Money market funds, underlying assets are deposits and short-term bonds
Gold ETFs, underlying assets are gold
Spot Bitcoin ETFs, underlying assets are Bitcoin
Other common tools include bank wealth management products, trusts, insurance, futures, and options.
Tools alter several factors: fees, leverage, diversification, liquidity (how quickly you can withdraw), and who makes the investment decisions.
Another scenario is direct ownership. Buying a stock directly in a brokerage account, or storing Bitcoin in your own digital wallet, means the tool layer is empty; the asset and the tool merge into one.
Public vs. Private Funds
Funds are further divided into public and private funds. Public funds are offered openly to everyone, subject to the strictest regulation and information disclosure requirements. Private funds are offered privately only to qualified investors, featuring high thresholds, less disclosure, and more relaxed custody requirements.
Layer 3: Channels, Where to Buy
Channels are the entry points through which you access tools, including:
Banks: Sell deposits and wealth management products, act as distributors for funds and insurance
Brokers: Stocks, ETFs, bonds
Third-party platforms: Alipay, Tiantian Fund
Insurance agents and insurance brokerages
Cryptocurrency exchanges: Binance, Coinbase
Deconstructing Common Products with the Three Questions
The first three rows are straightforward to understand.
The fourth row gets a bit subtle: before withdrawal, the Bitcoin displayed in your account is actually Bitcoin that Binance owes you. What you hold is a promise, not the coin itself.
When you reach the insurance row, the underlying asset cell becomes unfilled. You might say bonds and stocks, but those assets belong to the insurance company, not you. The reason this cell cannot be filled is precisely the biggest difference between insurance and all the products mentioned above.
Insurance: You Are Buying a Promise
Placed within the three-layer framework, insurance belongs to tools, but it is a highly specialized type.
The key difference between buying insurance and buying funds
With funds, you hold an asset; the fund company merely manages it on your behalf. If the fund company fails, the asset remains in the custodian bank and still belongs to you.
With most insurance, you hold a promise from the insurance company. The assets belong to the insurer, and it owes you a sum calculated according to the contract.
Therefore, when deconstructing insurance, beyond the three questions, you must add another layer: between you and the underlying assets lies the insurance company's balance sheet. This explains why that cell in the previous table cannot be filled.
Distinguishing Two Types of Insurance
To better understand insurance, we must distinguish two types: consumption-type insurance and savings-type insurance.
Type 1: Consumption-type insurance (short-term medical insurance, accident insurance, term life insurance). Regardless of the policy type, premiums flow into the same large capital pool of the insurance company for unified investment. Short-term medical and accident insurance are characterized by the fact that this money usually needs to be paid out for claims within a year, so the investment horizon is short, leaning toward cash and short-term bonds.
Type 2: Savings-type insurance (annuities, increasing whole life insurance, etc.). Premiums also enter this pool, handed over by the insurance company to its internal asset management subsidiary to invest in bonds, stocks, etc. Your policy's value is calculated according to fixed rules written in the contract (cash value tables, pricing interest rates) and does not fluctuate with the performance of these assets.
Money for both types of insurance enters the same pool. The difference lies in what you get back: consumption insurance provides payouts upon an incident, while savings insurance provides a contractually calculated sum.
Where Does an Insurance Company's Profit Come From?
Breaking down an insurance company's accounts roughly looks like this: collected premiums plus investment gains from those premiums, minus claim payouts, minus various expenses (including commissions to agents and banks).
Float: Why Buffett Values Insurance Companies
Premiums are collected upfront, while payouts occur later. Between collecting premiums and paying claims, this money remains in the insurer's hands and can be invested. Buffett calls this "float".
As long as the insurance business itself breaks even or profits—meaning premiums sufficiently cover payouts and expenses—float acts like an interest-free loan. If the underwriting side actually generates a profit, it is equivalent to others paying you to use their money.
In 1967, Buffett's Berkshire Hathaway purchased its first insurer, National Indemnity Company, followed by subsequent acquisitions like GEICO. Today, its float exceeds $100 billion. A significant portion of his stock purchases and corporate acquisitions is funded by this money. Buffett himself has stated multiple times that insurance is the core business of Berkshire Hathaway.
Ranking by "Who Bears the Investment Risk"
The lower you go, the closer it gets to the funds discussed earlier; the higher you go, the farther it moves from pure investment.
Consumption-type insurance has no underlying asset. You are buying risk transfer, relying on the law of large numbers: many pay premiums, few receive payouts. Mathematically, buying insurance is always a loss because premiums embed the insurer's costs and profits. What you exchange it for is protection against low-probability, catastrophic losses that could otherwise ruin your life.
Where do insurance companies invest their money? The true underlying assets are the insurer's investment portfolio: bonds make up the bulk, followed by bank deposits, non-standard assets (infrastructure debt plans, trusts, etc.), and long-term equity investments. Stocks and funds account for just over 10%. The overall strategy is conservative to match liabilities decades into the future.
Insurance Channels: Who Else Sells Insurance?
Looking at it from another angle, this section asks: besides the numerous middle-aged career-changers, who else sells insurance? They are your peers and your competitors.
Insurance is primarily sold through five channels.
Individual agents. The insurer's own sales force, largest in number, with relatively low entry barriers, and a common choice for mid-career changers. Advantage: face-to-face explanation of complex products and long-term follow-up service. Challenge: can only sell proprietary products, income relies heavily on commissions; client acquisition often starts with friends and family, after which professionalism must win over strangers.
Bancassurance. Sold by relationship managers at bank branches. Banks bring built-in traffic and trust; depositors are often pitched insurance alongside savings, so bancassurance primarily sells savings-type products like annuities and increasing whole life insurance.
Insurance brokerages and independent agency companies. Independent of insurers, they can sell products from multiple companies, helping clients compare and select across providers. This is their key distinction from exclusive agents.
Internet platforms. Alipay's Weibao, WeChat mini-programs, insurer websites and apps. Primarily sell simple, low-cost products like million-medical insurance, accident insurance, and term life. Customers self-compare and self-order, requiring almost no human explanation.
Group insurance. Purchased collectively by employers for employees, such as supplemental medical or accident insurance. Individuals typically do not participate in selection.
Viewing these five channels together reveals a pattern: the simpler the product, the easier it is to move online for self-service purchase, and the more transparent the pricing. The more complex the product (e.g., savings insurance, critical illness insurance), the more it requires someone to explain the terms clearly. For agents, competing on price for simple products against internet platforms is nearly impossible; real value is demonstrated by clarifying complex offerings.
Selling insurance starts with choosing the right product to sell. For products like auto insurance, available everywhere with near-zero differentiation, the room for sales effort is minimal. There is room for sales survival only in products that require trust and clear explanation. (I am planning a dedicated article on this topic.)
Channel costs are baked into the product. Unlike funds, insurance distribution costs are embedded in the product price. Agent and bank commissions are concentrated in the early years, which is a primary reason why savings insurance has low cash values initially and high surrender penalties. This is also why identical products are often cheaper on internet platforms.
Only by Distinguishing the Three Layers Can You Identify Three Types of Risk
The utility of the three-layer structure isn't just deconstructing products. Each layer corresponds to a specific risk:
Underlying asset risk: Market fluctuations. If stocks fall, stock funds will definitely fall; no tool or channel can shield you from this.
Tool risk: Fees eating returns, leveraged liquidations, locked-up capital, fund manager errors.
Channel risk: Platform insolvency, embezzlement, exit scams. Domestic P2P collapses and the FTX failure belong to this layer: the underlying asset itself may be fine, but the intermediary institution fails.
Many people lose money without being able to pinpoint which layer caused the loss. Once clarified, you will know what to guard against next time.
Applied to Insurance
Underlying asset risk: Guaranteed products largely transfer this risk to the insurer, so you barely feel it. This is their strongest selling point.
Tool risk: This is the heaviest layer for insurance. Capital is locked for long periods, surrendering in early years leads to principal loss; terms are complex; non-guaranteed portions of projected benefits may not materialize.
Counterparty risk: When buying insurance, the third risk lies primarily not with the channel, but with the insurance company itself. In China, protections at this layer are relatively strong. Laws prohibit life insurers from voluntarily dissolving; if revoked or bankrupt, life insurance policies must be transferred to other life insurers for continuation. If settlement assets are insufficient, the Insurance Security Fund provides rescue, though it is not a 100% guarantee: current regulations cap rescue coverage for individual life policies at 90% of the original policy benefits.
In Conclusion
Next time you encounter any instrument that exchanges money for returns, ask three questions first:
What did your paid money ultimately become?
In what form is it held?
Where do you buy it, and whose account does the money sit in?
When encountering insurance, add one more question: Whose promise is this?
Consumption-type insurance is risk transfer and should not be viewed through an investment lens. Savings-type insurance is best understood as ultra-long-term bonds issued by insurance companies. When reviewing a savings policy, focus on three things: how much is guaranteed, how many years until break-even, and whether the insurance company is reliable.