There are three things a person needs to secure his or her financial future: an emergency savings account, solid investments and life insurance. Many modern consumers see life insurance as a form of investment, just like betting money on the stock market or buying seafront property. However, some consumers may see life insurance as a good investment, while others may consider it possibly one of the worst types of investments ever.
When opinions are heated like this, it’s important to know exactly why life insurance can be even considered an investment in the first place. Is committing oneself to a whole life insurance policy the same as protecting wealth by buying gold? Well, life insurance is basically defined as financial protection in the event of an untimely death. Of course, life insurance protects family members of the person who is insured. The insured quite literally doesn’t live to enjoy the monetary fruits of a life insurance policy.
All Life Insurance Policies are Not Made Equal
When it comes to life insurance, it’s very important to understand the different types of policies to determine if one can be considered a form of investment. There are essentially two types of life insurance policies: whole and term. Whole life insurance policies are the most commonly available. These cover individuals from the date they purchase the policy to the day they die. Whole life insurance policies are rarely cancelled, and many include a savings portion that can generate significant amounts of cash value over couple of decades. Most policyholders see this savings component as a good form of investment.
Term life insurance policies, in contrast, last only for the period it is purchased. An individual can purchase a term life insurance policy for a decade, and if the policyholder dies during this period, the insurance company pays the beneficiaries. If the holder is lucky to be alive for the duration of the policy, the insurance claim ultimately expires and no one gets anything. Term life insurance builds little cash value over time, and therefore, consumers do not usually consider these as forms of investments.
Looks of a Policy Can be Deceiving
As whole life insurance policies come with an option to save and build cash value over time, some buyers believe it is a form of investment, which is about as good as spending funds to buy gold. Here lies the problem. Investments are not defined simply by cash value. A good investment is something that returns more money than the initial capital spent. The main problem with whole life insurance policies is that these come with very high premiums. When these premiums are summed up, they may not necessarily be lower than the cash value of the policy as a whole over time. For example, an average whole life insurance policy held for approximately 40 years have a return of about 4%. That is a very low rate of interest. In comparison, a U.S. government bond, a relatively safe but low-rate form of investment, has historically returned at least 5.4%. Historically, meaning, after the bond values have suffered even recessions and wars.
And the Answer is…
No. Whole life insurance policies are not a good form of investment for multiple reasons. As mentioned above, the premiums are too high and the returns are too low. Also, these policies are undiversified. If the insurance industry suffers as a whole, your money will be gone, too. Despite what the television advertisements tell consumers, whole life insurance policies have no guaranteed returns. In addition, a whole life insurance policy has little to no liquidity.
Considering all of the above reasons, whole life policies are too risky, illiquid and take a long time to generate returns to be considered a good investment. Therefore, consumers who want to secure their financial futures should look toward other forms of investments, like real estate for example, instead of buying life insurance.