Investments & Life Insurance

Written by: David Scott

Let’s say, after reading our article titled How Life Insurance Works, you are now considering, whether it’s a good investment for you or your family. The answer is as always, it depends. If you are single with no dependants, I believe the answer is a clear no. Unless you have extensive investing knowledge, it’s better to just follow the world’s greatest investor’s, Warren Buffet’s advice and invest some of your monthly income into low-cost index funds. On the other hand, if you have dependables, a wife, children, or other family members you are taking care of, life insurance can be one of the best investments you can make, to ensure your loved ones are all taken care of in case of your untimely demise. Is life insurance a good investment for you? Let’s find out!

How to Choose the Right Life Insurance?

Is buying life insurance on your to-do list, but you cannot choose from all the different types of insurance out there? You’re not the only one who feels this way; a lot of people have a hard time finding an insurance product that fits their needs. Is it worthwhile to get the insurance that is 5-15 times more costly due to the investing component? Well, we will walk you through the two most frequent forms of life insurance plans (whole-life and term-life insurances) and their major characteristics. This will assist you in selecting the insurance coverage that is most suited to your needs.

Whole-Life Insurance

According to the American Council of Life Insurers, “whole-life insurance” or “permanent insurance” is the most popular kind of life insurance in the United States today, accounting for 60% of all individual policy sales. Whole-life insurance is intended to last your whole life; it offers lifelong coverage as long as payments are paid. Thus, whole-life insurance is also known as “permanent life insurance”. Premiums are fixed but more costly since it includes an investment component in addition to the death benefits. A part of your premium payments is placed into a savings component known as “cash value”.  Growth in cash value is possible, and it is normally tax-deferred. When circumstances go tough, you may rely on your policy’s cash value, which rises with interest, as a safety net. Cash value may be used to pay your insurance premium, a loan can be taken out against it, or the whole amount can be withdrawn if you find yourself in financial difficulty. You may even surrender the insurance later in life if you choose to live off the proceeds.

Term-Life Insurance

Term-life insurance, on the other hand, is intended to offer protection for a certain length of time (10/20/30 years), taking into account how your requirements vary over time. In the years when you are most likely to need it, it gives you the protection you need; throughout your thirties, forties, and fifties, when you may have a mortgage to pay off and/or small children to support. In general, premiums are cheaper, but they go up as you get older. Term life insurance is often more economical than permanent life insurance since it is limited for a certain period of time. But, this sort of insurance does not provide “cash value” growth. Your loved ones will be compensated if you pass away before the end of your term; the death benefit is given in one of three ways: monthly payments, annuities, or a lump sum. Amount and duration of coverage must be specified when signing up for term life insurance as the insurance company takes these factors into consideration when determining your premium rates.

My Term-Life Insurance Is Nearing Its Expiry, What Happens Next?

As your term approaches its end, it may be prudent to re-evaluate your coverage requirements. If your family no longer needs life insurance’s financial protection, you may simply let the policy lapse. However, if you do still need coverage, you have three options:

  • Convert your term-life to a permanent-life insurance policy
    • If your term policy has a conversion rider, you may be able to convert it to a permanent life insurance policy without having to resubmit to the underwriting.
  • Extend the term of your existing policy 
    • Your term life insurance policy is guaranteed to be renewed if you choose to extend your coverage. That implies you won’t have to undergo a medical exam to renew your insurance.
  • Purchase a new life insurance policy
    • If you are in good health, you may apply for a new life insurance policy. However, given the cost of insurance rises with age, expect to pay a larger premium rate.

Whole-Life vs Term-Life Insurances (Pros & Cons)

Whole-life insurance has the benefit of building cash value over time and having a set premium payment. However, as previously stated, the premiums are high, and the death benefit is lower. Aside from being the lowest life insurance option, term-life insurance provides enough cash aid to settle debts, pay future needs, and function as a financial safety net. It is only valid for a certain length of time; thus, you only pay for the coverage you need. However, if you outlast your insurance, your loved ones will not be compensated. It also has no monetary worth. Furthermore, when your original contract expires, renewing might be costly and cumbersome. On a side note, the death benefits of both whole-life and term-life insurances are tax-free.

Cash Value (Pros & Cons)

People who seek more coverage than simply the death benefit that typical insurance plans give may benefit from cash value life insurance as you may receive interest on your money. Usually, you can also take some or all of your money out of your account before you pass away. With that said, cash value accounts usually limit your gains. Furthermore, these accounts often have significant fees, and if you withdraw money from the account before death, your death benefit will be reduced. To prevent this from happening, some people may be better off keeping their investments in mutual funds separated from their life insurance policy. It is also important to know that when you pass away, your family will receive none of your cash value; instead, the insurance company keeps the whole sum.

Final Thoughts

With its cash value component, whole-life insurance is an alternative to make more money. Nonetheless, since permanent plans are more complicated and costly, many people adhere to the ancient adage, “Buy term-life insurance and invest the remainder.”

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