Is Life Insurance a Good Investment?

Should you buy life insurance, and if so, what type?

Senior couple seated together at a table paying bills

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Your individual life insurance needs depend on your personal situation, but most investment advisors no longer recommend purchasing whole life insurance as an investment. Term life insurance can be an important piece of your financial puzzle, however, if you have people who rely on you for financial support.

Insurers also offer variable life insurance and universal life insurance, each of which has its own benefits and drawbacks.

Whole Life Insurance

Traditionally, whole or permanent life insurance was considered to be part of a sound investment portfolio. This type of insurance can provide investment returns in the form of dividends in retirement, then a cash benefit upon death. A whole life insurance policy covers the insured for their whole life while simultaneously building cash value, and the cash value grows tax-deferred.

The cost of a whole life insurance policy can increase as the policyholder grows older, with premiums peaking after age 80. But the premiums themselves don't generally increase. Insurers "pad" premium payments in the early years, building some extra room into them and charging more than what's likely to be needed to pay claims. They invest the extra.

The insurer pays out the cash value of the policy to the policyholder if the policyholder stops paying premiums.

Policyholders can borrow against the cash value of their policies, and they're entitled to claim the cash value of those early-year extra premiums when they reach a certain threshold and if they want to discontinue coverage.

Related: Best Whole Life Insurance Policies

Term Life Insurance

Term life insurance is pretty basic. It doesn't pay dividends, so it's not really considered a financial investment. Many people still consider it a sound investment in their financial security, however, because it pays a cash benefit to the policyholder's family or other beneficiaries upon the policyholder's death. In fact, this is the only time it pays out.

Term life insurance covers the insured for a specific period of time, which can be from one to 30 years. The premiums are a fixed rate, and the policy itself has no cash value.

Term life insurance is intended solely as financial protection for the policyholder's heirs.

Variable Life Insurance

Variable life insurance is similar to whole life insurance but it has the added feature of allowing 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 that can vary depending on the amount of the premiums and the performance of its investments.

Universal Life Insurance

Universal life insurance is also similar to whole life insurance, but it offers more flexibility with respect to making adjustments to premiums, to the face amount of insurance, and to when premiums are payable.

You can opt to make payments over and above the cost of the actual insurance. 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 anyone in your life.

Whole life insurance isn't a particularly good investment for most people with basic financial needs and those who have no complicated financial assets to protect. This also applies to variable life insurance and universal life insurance products.

But these products do have some tax-advantaged aspects. They're guaranteed to not lose value, and values don't fluctuate as unpredictably as some other types of investments can. They might be appropriate for beginning or more timid investors.