The answer traditionally to this question is that life insurance is not an investment, it is insurance. On the other hand there are some industry experts who believe that with changing times and underperforming stock market, life insurance policy in the investment portfolio is a good financial decision. You may have read all about the cons and pros of investing money in a number of different ways. Even after extensive reading, it is not very simple to figure out if a life insurance is an option you want to consider as an investment. The answer is not as easy as one may believe, as sometimes life insurance policy can be an excellent investment option, but not always. It is based on various factors such as health, age, financial situation as well as the lifestyle of the prospective life insurance policyholder. In addition to that there are some policies which present a better investment potential.
When you hear an insurance agent talking for a few minutes you may be convinced that it is a good investment, even though quite complicated, and may even decide to take it. Self-employed individuals are especially targeted by this industry and they convince you to believe that life insurance policies are tax beneficial investment and a ticket to relaxed retired life. You may even end up buying the policy without even hearing the words ‘death benefits’.
It is not a good idea to invest your hard earned cash in life insurance policies unless you require death benefit. It is important to know that life insurance policies carry fees, commissions as well as other charges like mortality charges that reimburse for the death benefit, which most of the other conventional investments do not have. Confusing insurance with investment is a common mistake made by many individuals. In any investment, money is deposited somewhere and one expects something more in return, but when we talk about term insurance, this is not true. In case of the policy holders’ death during the tenure specified in the policy, nominees will get a certain amount but if he or she lives beyond that period, no one will get anything.
This may sound a raw deal, but this is what life insurance policies are about. It may sound satirical, when one invests in life insurance; it is more about death than about life. In an attempt to get something from the premium paid to insurance companies, investors can select permanent insurance policies which also offer something back even while living.
Life insurance policy can be bought in two key forms:
- Temporary insurance
- Permanent insurance
Temporary life insurance, also known as term life insurance has basically not been designed to last a person’s lifetime. This typically offers insurance coverage for a few years or a certain period. It can be one year, five years or even up to thirty years. Temporary life insurance policy has been structured to last less than the lifespan of normal individuals. To put in simply term life insurance does not provide any cash value and when it expires or is canceled the policy holder does not get anything back. For younger people the premiums are low, but with increasing age term life insurance can become very cost prohibitive. As typical, temporary life insurance policy does not have a cash value; it does not meet the criteria of being an investment. It does not allow any profit or generate any kind of financial income for the policy holder. Keep in mind that term life insurance is not a lifelong coverage and you may end up paying much higher premiums when you want to renew it.
Permanent life insurance on the other hand has been structured to last an individual’s lifetime, where typically level premiums which are paid for life. When a person buys this policy the premium is high, but it actually costs less in a person’s lifetime as compared to the temporary life insurance. There are some permanent life insurance policies which offer cash surrender values, and if an individual wants to cancel the policy, he or she will get some cash amount in return. It is also possible to borrow from the concerned life insurance corporation by using your death benefit and cash values as collateral. When permanent life insurance is able to engender some profit or generate income for the individual who owns the policy, it can be termed as an investment as per the definition offer by the English language dictionary. When you buy a permanent life insurance policy in the form of an investment, find out if it generates a profit and is a source of income for you.
The basic fact is that every kind of life insurance comes with its unique disadvantages and advantages and we are not here to compare them. In fact any life insurance policy is an agreement formed mutually between the policy buyer and the insurance company. The individual agrees to disburse an amount as premium for a stipulated period. The insurance company in return agrees to reimburse the notified beneficiary the agreed amount and benefits if the policy holder expires during the contract period.
To conclude…is buying life insurance policy an investment? Some policies meet the definition of investment as per the dictionary. But is life insurance an investment for you as an individual can only be answered after you consult a life insurance professional or conduct detailed research. Life insurance may not be an investment which benefits you but will surely guarantee income for the person who is nominated in the event of your demise. It makes a lot of sense if you care for your family and want to safeguard them financially when you are not there for them. It is best to initially understand what the life insurance policy can do for you, prior to purchasing it. There are positives and negatives to all kinds of investments and each person is permitted to have their own individual perspective.
