Life insurance was originally created to provide security for your survivors. However, in some cases, it is now considered a good financial investment. Find out if this is something you should consider.
Before you go out and buy a life insurance policy, it is important for you to understand the various types of life insurance policies that are available. This will help you determine if a life insurance policy is a good investment.
Term Life Insurance
Term life insurance is the cheapest form of insurance and this is not considered an investment.
Payments are made each year and the only benefit received from the policy us a payment made upon the death of the policy holder.
Term insurance is considered to be ideal for people who don’t believe they’ll need life insurance in their latter years. The premiums for this policy get higher as one grows older.
Term insurance is mainly intended to protect one’s dependents.
Whole Life Insurance
This type of insurance is also referred to as cash value or permanent life insurance. Four types of insurance are available:
- Whole life
- Variable life
- Universal life
- Variable universal
Permanent life insurance offers coverage throughout a person’s entire life and it also features its cash value as an investment. The actual insurance on the policy is only a fraction of the premium payments. The rest of the premium payments are used by the insurance firm to create an investment referred to as an accumulation account. This is then invested in securities which earn interest.
The cash value serves to reduce the amount at risk to the insurer. This means the cost of the insurance is reduced over time.
The person being insured can access the funds in the cash value in the form of loans or other alternatives. These types of loans reduce the eventual death benefit. Premiums for these policies tend to be higher compared to those for term life insurance, especially in the early years of the policy.
An Investment Opportunity
The aspect of whole life insurance that paints it as an appealing investment opportunity has to do with the way the taxes are calculated. Many people love the fact that the money grows in a tax deferred status. This means the capital gains taxes on the investment are postponed.
Consider the High Fees and Costs
One downside is the high costs and fees that are associated with these policies. The only way to avoid these exorbitant rates is by opting for low-load or no-load insurance policies.
Another downside is that insurance companies frequently entice prospective clients using impractical and unlikely policy illustrations.
They also use unrealistic interest rate projections to make you believe the benefit is much larger than it will actually be.
Rather than invest in these, many experts on insurance advise that it is financially more sensible to buy life term insurance policies and to personally invest the balance in premiums during the plans’ intervals.
What Do Your Dependents Eventually Receive?
For permanent life insurance, it is only the policy’s face value that is paid to your dependents as benefits upon your death.
These three pointers/factors are strong enough reasons to demerit cash value life insurance as a means of investment.
Instead of investing in such it is better to opt for other retirement savings instruments that also offer tax deferment benefits. Investing in a ROTH IRA or a 401(k) will make more financial and investment sense.