Why Life Insurance May Be The Greatest Investment Ever

By | December 7, 2011

The ads and sales pitch are familiar, life insurance can be the answer to all of your financial worries including ones that you didn’t even know you had.  So the $64,000 question is: “Should I Use Life Insurance As an Investment”?

The trick here is in the question itself.  The question really should be what are my goals, needs, cash flow and alternatives.  The purpose of life insurance is usually to replace lost income or earning from someone upon whom there is a financial dependency.  Life insurance is a financial leverage tool – nothing more, nothing less -everything else is a variation.  You pay a premium, the insured dies and a death benefit is paid.   And on some policies, a cash value accumulates.

It’s the policies where cash accumulates that prompts the discussion.  So let’s get back to goals: Do You Need Life Insurance?  If the answer is no, you’re done – life insurance will not be a good investment for you as you are paying for the cost of insurance which you do not need.  If you don’t have a car would you buy auto insurance?   If the answer is yes to needing life insurance, then the next question is your goal – how long do you need the life insurance for?  If your need is short term- less than 15-20 years – a guaranteed level premium term policy will most likely best fit your needs (we’ll explore the details on this further in a subsequent blog post).  Most life insurance needs are short term in need as if you are saving and investing in retirement plans, mutual funds, stocks, etc – then these investments should grow to an amount that will exceed the amount of life insurance that you have or need.  There still may be a need for a small amount of life insurance.

So why do people say that life insurance is a great investment?  One reason cited is that life insurance is forever which as discussed is not really the case for most people.  Another reason cited is that the  cash value on a life insurance policy accumulates on a tax-deferred basis and can later be borrowed against – which is all true, however, the details here are important – 1) remember that you are buying a life insurance policy and you are paying for insurance (do you need it), 2) the cash value on a life insurance policy is currently tax-deferred, however, there is no guarantee that this will remain the case in the future and 3) you can borrow against it at low rates – however, there will still be loan interest and if you borrow too much you could end up having your policy crash without value and end up with a significant phantom income tax gain (see the article “Pitfalls of Policy Loans” at Life Insurance Sage – resources section or email me for a copy), 4) the companies crediting a 5%+ dividend pre-tax – (equivalent to a 7% return) – that’s great if that’s the true rate of return net of policy expenses, however, it’s not an it can take many years for a policy to earn anywhere close to that amount.

Remember the old adages, you get what you pay for and there are no free lunches.  My workbook is designed to walk you through these decisions for yourself.

 

Background: Tony Steuer, author of Questions and Answers on Life Insurance, has been in the life insurance business for 20+ years as a life insurance agent and consultant.  He is one of 30 licensed Life & Disability Insurance Analysts in the State of California.  Also, he currently serves on the California Department of Insurance Curriculum Board as appointed by the Insurance Commissioner.

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