Have you ever thought about having a life insurance policy as an investment vehicle? I am talking about whole-life insurance policy, not the term insurance. A life insurance policy may be a good investment from diversification perspective. Let’s find out how a life insurance policy can be an important factor in securing your financial future and that of your family.
I don’t have a whole or a term life insurance. I have employer-provided group life insurance. I am insured for 8 times my gross income per year. I pay $12 per pay check (bi-weekly) as insurance premium, that hardly dents in to our financial health. I know if I stay alive, this money is simply draining out. To provide to your family you go out dining and watch movies, you go on vacation. I consider this insurance premium as another expense towards family’s well-being.
So, should we be having another life insurance as an investment?
We already have investment in Stocks, funds, bonds, CD, Savings account and peer-to-peer lending. Since, in whole life insurance, your invested capital (your premium) is secure, a whole insurance is risk free, like a CD or a Savings account.
Before I explore further. let’s first see what other financial experts are saying about life insurance as an investment option. The number one critic of life insurance as an investment is Suze Orman, the Jim Cramer styled personal finance guru (watch the video, you’d know). Even Dave Ramsey is vehemently against the need of a whole life insurance policy.And these are the biggest personal finance television personalities we have. They are brands.
Any personal finance expert don’t argue to the fact that life insurance is mandatory and essential for every earning soul. I touched this before by saying if investment is offense, insurance is defense. You need to equally strong on both. So, now the question is –
Should we have whole life insurance to cover for insurance and investment need or we should have term life insurance for insurance need and other regular options for investment need?
Here’s a simple equation for your easy understanding
For a million dollar a typical whole life policy costs $1,000 a month. For term insurance policy,it would cost around $50 a month. So if you buy the term policy and invest rest of $950 in a long term stock fund or retirement account, then by the time you retire you should have much more than the money accrued in your whole life insurance policy.
Still whole life policies are sold much more than term life policies, the reason – aggressive agents selling those policies to you, sometimes your relatives, friends or friends of theirs selling them inside your house.
Is there any merit of whole life insurance policy?
Yes there are, first to ensure your family receives living expense in case of your death and secondly if you’re alive your policy contributes towards your retirement. May not be as big of a contribution as your IRA or 401(k) would provide but you’ll get something, where as in term life insurance if you’re alive you don’t get back anything.
When Whole life insurance can be bought?
When all the following conditions are met, only then whole life insurance provides a viable investment diversification option.
- You are maxing out your retirement saving accounts including IRA and 401(k)/403(b)
- You have Emergency fund set aside
- Your mortgage is paid off
- Your child education (if you are going to contribute) fund is funded
- You are non-smoker and in great health
- You are in a high tax bracket (hence eliminating 95% of US population)
Only when you meet the above criteria, as a diversification and some tax advantage, you can go for a whole life insurance policy. I’d buy a variable life insurance policy and not the whole life insurance one. Also I’d make sure that my premium constitute up to 10% of my investible cash.
Benefits of whole life insurance policy as an investment option
A whole life policy has a ‘cash value’ feature that is not available in a term life plan. The insurer invests a part of your premiums and the returns on the investment get accumulated in your policy. The accrued value can be obtained at the expiration of the policy. Accumulation of cash value over a period of time can be of great use to those who have to take into regard substantial costs like college tuition for the kids, retirement savings and any other significant spending in the future.
You can enjoy tax benefits on your life insurance. You don’t have to pay taxes on the cash that you borrow for your kid’s college education, your retirement or other expenses.
Withdrawal of such cash is similar to that of a loan that you take from a bank, but the advantage here is that you have an option of not repaying the amount borrowed.
Other than being able to use the cash for any required expenses, your beneficiaries will receive a fixed amount as a death benefit in case of your death, albeit a reduced payment. Life insurance costs do matter and although it cannot be denied that such an insurance policy is more than what you would spend on a lesser expensive term life plan, think of it as a long term venture to safeguard your financial stability and that of your loved ones.
You are bound to receive a guaranteed income even during an economic downturn or job insecurity, not to mention guaranteed financial security for your family even after your death (which may be one of your biggest concerns).
Of course, you need to be judicious while buying an insurance policy, since there may be a number of attached (and often unseen) variables.
So you should
- Shop around – Make sure you consult an expert, check and compare policies before choosing one that is best suited to your needs. The internet is the best platform to shop for policies, and online insurance advisers can guide you in the right direction. You can take your time and compare quotes from hundreds of insurers present online. It’s your money, after all, so you wouldn’t want to risk investing it without actually doing a thorough research.
- Read the offer document carefully before investing! – Policies offered by different insurers differ from each other, so it’s recommended that you first read the fine print carefully before signing on the dotted line.
Coming back to the original question – Should you use life insurance as an investment?
Yes, you can depending on your financial situation. Most of us with moderate to average income will find no value in it but, when you buy a whole life insurance, make sure you consulted a fee-based financial advisor and evaluated other options for investment. Also ensure you compare various insurance providers and check their ratings and past performances before buying the policy.
Personally, I won’t ever buy a whole life insurance unless there’s an income increase somewhere in future that would need further diversification. Right now my cash surplus will go towards mortgage payoff. Oh yes, do get a term life insurance policy and secure your family’s future. Have one for each earning member of your family.
Kevin @ Growing Family Benefits says
Just because whole life insurance builds cash value does not mean it should be compared to pure investment options. They are two completely different animals.
The primary objective of whole life is to have permanent life insurance in place until you die.
Most comparison articles overlook its primary advantage. Your odds of becoming disabled are three times as high as dying young. If you were to become disabled, you might lose your job along with the group term policy you cited. You would also stop making 401K contributions, and other systematic investments.
Whole life has a waiver of premium feature which continues the coverage if you become disabled. None of the alternatives address this common exposure.
Joseph Hogue says
The ‘return’ on whole life isn’t great compared to other investments but the intangibles make it a part of everyone’s financial well-being.
– You need insurance anyway and the additional premium is not usually too bad
– It helps keep people contributing to their financial future. Having a required payment to make is necessary for some people to keep saving. If you have trouble saving or investing regularly then Whole Life may help keep you straight
Great post and some good advice
Financial Samurai says
Probably not. It’s too complicated and costly. If you have massive cash flow, why not. But for most, not a good idea.