Life Insurance as an Investment

Many insurance salesmen think of Life insurance as an Investment.  But is it really?

Life insurance and investments are two totally different entities.  Lets first explore the benefits of a life insurance policy.

Life insurance offers many benefits. These benefits include

Tax-free death benefits payout to your beneficiary

Ability to borrow money against the Cash Value

Premium reduction by using cash value to pay for policy

Increase in face amount payout by accumulating cash value through policy investments

Guaranteed payout amount though contractual and regulated industry

Insurance salesmen will tout these benefits as a sure fire investment.  Unfortunately, the cash accumulation of the investment aspect of your policy is at a very low rate of return. Only a portion of the premium money paid into the policy goes toward that investment option. A majority of each premium payment is a commission.  The insurance companies become rich, just like banks, by using your money to invest in real tangible assets with stable rates of return. Meanwhile - only giving you a small percentage rate of return for the use of your money.   The Life Insurance salesman play upon the fears and emotions of a family “cover” all aspects of a family’s financial picture with one nice policy that will provide everything for them. 

Granted the cash value amounts and death benefit amounts are an important aspect of any financial portfolio, but should not be consider the one and only full financial portfolio.  Let me explain in detail and use some examples.

Over the course of the last 30-40 years the stock market and economy has had exponential growth.  There have been some lean years for the stock market, but all in all and overall the rate of returns have been phenomenal for that time period.  If you were to invest a simple amount such as $100 a month over an extended period of time in a higher rate of return investment, your overall value or net worth from the investment would surpass the Insurance Policy Payout Many times over.

Using a mathematical simple rule called the “rule of 72”, which simplified mean $1.00 will double and become $2.00 over a period of time and interest rate that is divisible by the integers of 72.  For example, it will take 6 years for $1.00 to become $2.00 at a rate of return of 12%.  Conversely it will take 12 years for $1.00 to become $2.00 at a rate of return of 6%. ( 6 x 12 = 72, hence the rule of 72)

If you are playing into a Whole life insurance policy that is being used as an investment option, only a small portion of the premium is used for that investment. The rate of return is significantly less than the open market.

 Lets say you have $1,000.  You want to use that $1,000 for an investment.  In a life insurance policy less than half that $1,000 goes toward your investment.  In this example approximately on $450 of the original $1,000 is invested via the life insurance policy.  The guaranteed rate of return is a nominal 3-5 % based on the terms of the Life insurance policy itself.  Using our Rule of 72, and using the rate of 5%, your $450 left over will double to $900 in 14.4 years.  You can see your original $1000 after 14.4 Years is less than the original amount you paid into the Life insurance policy as an investment.  Yes you have all the other benefits, but this is about using Life Insurance as an Investment option.

Your $1000 used in the stock market or mutual fund that has a modest rate of return of just 10%, the original $1000, turns into $2000 in 7.2 years.   Both stock market investments and Life Insurance policies have fees, but you can plainly see that the Life insurance policy as an investment more than half of your money is not going towards an investment.

So the answer the simple question Life insurance as an Investment, the answer is plainly and simply No.  Use life insurance for its true purpose, protecting your family from the Loss of income.  Use investments for there purpose to grow your nest egg and retirement.  Don’t be fooled by the benefits of the life insurance policy as a smart investment for  your future.