Is Life Insurance a Good Investment?
Many financial advisors cast serious doubts on the investment potential of a cash value life insurance policy. It’s easy to see why. According to Moshe Milevsky, professor of Finance at Toronto’s York University, “policies that combine insurance with an element of investing- such as whole life and universal life-earn a lousy pre-tax return.”
Rather then trying to get a financial return on the money you spend on premiums by mixing investing with insurance, you should realize that what you’re really buying is protection….and then seek a way to get the most bang for you buck.
What about dividends?
The dividends paid on life insurance policies are not the same as other types of investments. Life insurance dividends paid to policyholders result from an overpayment of premiums paid on a participating policy. The amount of dividends paid depends upon company discretion, based on its expenses and profitability in a given year. And dividends are not guaranteed!
Most people are under the impression that dividends are some type of profit on their investment. But, they’re only returning some of the money you over paid on premiums- that’s why you don’t have to pay income tax on them.
What about borrowing from your policy?
This is often used as selling point for cash value policies. You should be aware of the following:
1.Interest is charged on a policy loan, even though it may be lower than what you’d pay for a traditional bank loan.
However, if your money was accumulating in another investment fund, you could withdraw your earnings without paying interest.
Why would anyone interested on having any kind of investment when you have to pay interest on your own money?! It’s your money! You should never pay interest on your money!
2. Loan may reduce your death benefit.
If you borrow from your policy, but die before you’re paid back the loan, your death benefit will be reduced by the amount borrowed. But with term insurance and a separate investment fund, withdrawals from saving do not affect your life insurance protection.
3.Potential tax benefits are often used as a selling point for some cash value policies.
But as with any other investment, you should exercise caution when a large portion of the benefit is based on complex tax law considerations.
Be aware that:-
-Tax laws are subject to change. You cannot be sure that these current so called tax breaks will be there when you need them.
-These potential tax benefits are based on complex assumptions. If your situation varies from the norm, you may be subject to future tax liabilities that could dwarf any promised benefits.
-Relying on promised tax benefits to justify any investment is risky. It would be wise to seek the advice of a qualified tax expert- not life insurance salespersons- when considering the tax consequences of your investments.
How do you know what you are paying?
This can be hard to determinate in a bundled product, especially with universal and variable life. In addition to the cost of death protection, whole life policies have significant fees. (this is the reason life insurance agents are pushing whole life insurance policies as with those fees the commission is much higher then it is on a term life insurance policy).
With the ‘two-in-one” approach, it’s difficult to separate the cost of insurance from the other elements of the policy. This makes comparison shopping difficult at best. And any time you’re not sure what you’re paying, you risk making a bad decision!
With term life insurance and separate savings or investments, the cost and specific charges are easier to determine. Because you control your investment choice, you can easily track its performance. It puts you in control!
Next Step: Buy the Right Kind of Insurance!
Learn more about these Four Facts about Life Insurance
Everything you have to know about Term Life Insurance
Find Out How Term Insurance Fits
Questions about Cash Value and the answers your should know.
Important Tips for Making a Wise Insurance Purchase.
Money Saving Tips When Buying Life Insurance
Have You Made These Life Insurance Mistakes?
What to Consider When Replacing a Policy?
Related posts:
- Some Questions about Cash Value
- Term Life Insurance
- Tips for Making a Wise Insurance Purchase
- Money Saving Tips When Buying Life Insurance
- How Term Insurance Fits?
- Income is Important, but Cash Flow is King
- What to Consider When Replacing a Policy?
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