If you're thinking about buying life insurance, there are many factors at play. Your individual needs will depend on your personal situation, and will ultimately be a personal decision; but even so, most investment advisors no longer recommend buying whole life insurance as an investment. Term life insurance can be an important piece of your financial picture, but it may not be for everyone; life insurance does the most good when you have people who rely on you for financial support.
Insurers also offer other forms of life insurance, such as variable life insurance and universal life insurance, each of which has its own benefits and drawbacks.
- Whole or permanent life insurance was once thought of as a valid part of a sound investment portfolio, though term life is more often recommended.
- Term life insurance can be a crucial facet of your overall financial picture if you're the main source of income or financial stability for some other person or persons in your life.
- Term life insurance covers the insured for a set period of time, which can be from one to 30 years.
- Whole, variable, and universal life insurance are not always good investment choices for most people with basic financial needs and no complex assets to protect.
Whole Life Insurance
At one time, whole or permanent life insurance was considered to be part of a sound investment portfolio. This type of insurance can provide two types of returns: first, in the form of dividends during retirement, and second, a cash benefit upon death. A whole life insurance policy covers the insured for their whole life, while at the same time building cash value. Also, this cash value grows with taxes deferred.
If you purchase a whole life insurance policy, the cost may increase as you grow older, with premiums peaking after age 80. But the amount you pay will be agreed upon and put on a schedule, with the risk of later years worked into your quote when you first enroll. Insurers will "pad" your premium payments in the early years, meaning they build some extra room into them and charge more than what's likely needed to pay claims. The model relies on the fact that most people will pay more into the fund than they will ever claim, so this extra padding can be used to invest.
If you purchase life insurance and you change your mind, you won't be locked into payments for the rest of your life. Your contract has a clause that allows you to get back a full or partial amount of what you've paid thus far, in the event that you stop making payments.
In most cases, you can borrow against the cash value of your policy. As a policyholder, you're entitled to claim the cash value of those early-year extra premiums when they reach a certain threshold and if you want to stop coverage.
Term Life Insurance
Term life insurance is pretty basic. It doesn't pay dividends, so it's not often thought of as a way to invest for extra income, but it may be a sound way to protect your or your loved ones. The main reason you might purchase a term life insurance policy is for the cash benefit it pays to your family or other beneficiaries upon your death. In fact, this is the only time it pays out.
Term life insurance covers the insured for a set period of time, which can be from one to 30 years, or any span in between. The premiums are set at a fixed rate, and the policy itself has no cash value.
Term life insurance is meant solely to protect the policyholder's named heirs. These can be family, friends, or other loved ones, so long as they are named as beneficiaries on the policy contract.
Variable Life Insurance
Variable life insurance is similar to whole life insurance, but with an added feature that allows you as the policyholder to invest some of the premium payments in a separate account, which can consist of different investment funds.
It will pay your beneficiaries at the time of your death, and it also has a cash value. This cash value will vary depending on the amount of the premiums and how well its investments perform.
Universal Life Insurance
Universal life insurance is also much like whole life insurance, but it offers more flexibility. You have more choice in the details and are allowed to adjust premiums, choose the face amount of insurance, and decide when premiums are to be paid.
You can also opt to make payments over and above the cost of the actual insurance. This can be a worthy bonus because the extra money earns interest.
Is Life Insurance a Good Investment?
Term life insurance can still be an important part of your overall financial picture if you're the main source of income or financial stability for any other person in your life.
For most people with basic financial needs of for those who have no complicated financial assets to protect, whole life insurance is not a good way to make investment income. This also applies to variable life insurance and universal life insurance products.
But this doesn't mean these products are without value either. They are simply not big moneymakers. Their goal is to keep your loved ones secure. That said, they are not very risky either. These products do have some tax-advantaged aspects. They're guaranteed to not lose value, and values don't rise or fall wildly, as some other types of investments can. For these reasons, they might be just the thing for newer or more timid investors.