Life Insurance as an Investment
Today, more people are becoming interested in getting insurance as part of financial planning tool. Compared with the earlier years, some people think of getting insurance as a necessity that must be met to ensure financial security of the family. With the various insurance products pervading the insurance market, people are buying life insurance and making it part of their investment portfolio.
But, what is a financial investment and does life insurance fit the bill?
Investments are assets that are paid for and that provides the owner with a potential for financial or monetary gains. Normally, people can make investments, like buying real property, gold or stocks – commodities that are often viewed to have a potential for further growth that can result to capital gains.
Life insurance, on the other hand, is a policy that provides a cover to the insured individual for either a period of time (term insurance) or his entire life (whole life insurance). The primary goal of insurance is to provide financial protection. This implies the mitigation of financial risks that are posed by an untimely death, and clearly indicates that the protection is primarily enjoyed, not by the insured, but by the insured’s family or loved ones.
When you buy term insurance coverage, you pay premiums for death proceeds for a period of time. Normally, term insurance does not have additional cash value features, thus, marking it as a purchase, and not an investment. Permanent life insurance provides you with protection for your entire life and provides you with an additional incentive of a cash value. On the surface, whole life plan premiums are more expensive than their term counterpart but over time, the payments for the permanent insurance can become much lower.
However, an attraction of whole life plans is that they can provide the insured with an ‘accumulation account’, a cash investment that is set up by the insurance firm for the insured person. This account is tax-deferred – taxes are postponed and not deducted from the income as the gains from the investment grow over time. This feature becomes more valuable when the insured person belongs to a higher tax bracket.
The disadvantage of life insurance, when viewed from a perspective of an investment, is the high fees and costs that are associated with getting one. This is the reason why more people will more likely invest in mutual funds than get policies that provide cash accumulation.
At the same time, some people prefer to invest in tangible things with gains that they can hope to experience in their lifetime, not only leave investments that only benefit their heirs.
These are some reasons that can either motivate you to buy a life insurance as part of retirement or financial planning and investment, or dissuade you from getting one. There is no one sure formula to declare that insurance is an investment or a potential liability for an individual.
The choice whether a life insurance plan can be advantageous for you or not depends on your prevailing health and financial situation at a given period, as well as your long-term plans and goals. So check your status and your options and work on that list of goals you are aiming for. Only you can best decide whether or not getting insurance is a good financial investment for you and your family.