10 September 2012 0 Comments

How Does Life Insurance Stack Up As An Investment?

The primary purpose of Life Insurance is not to function as a savings, or investment account.

Its main purpose is to indemnify beneficiaries for financial loss when the insured person dies.  That said, permanent polices do build cash values that are available prior to the death of the insured.  This cash value is a reserve so that overcharges in the early years can be used to cover the higher mortality costs as a person ages while producing a premium that does not increase with age.

If the only objective is to create a lump sum of cash available during the lifetime of the insured, there are better ways to do it than through a life insurance policy.  It’s pretty simple to figure out.  If you had the choice of depositing money into one of two accounts, both paying the same interest, but one of them deducted a charge for mortality costs, which one would you choose?  Right, why incur the charges for the life insurance element if you don’t need the protection?

Also, Life Insurance cash values tend to build very slowly in the early years, so unless you continue payments for many years you won’t even get back the amount you’ve paid in.  Do not use life insurance on the life of a child to build cash for his/her college fund.  Do not use life insurance as a way to create a down payment for a house.  Do not use life insurance to create an emergency fund.  Use life insurance to provide death benefits.

With that said, I do call your attention to my Blog of 11 May 2012 “An Alternative to The Roth IRA”.  If you have created all the life insurance death benefit protection you need… and if you have a minimum of 15 years before retirement… and if you can commit to a premium paid until retirement, a Life Insurance policy has some unique tax advantages that are worthy of exploring.  I like the Indexed Universal Life policy as a way to produce tax free income at retirement while extending a death benefit both before and after retirement.   This approach works most effectively when you squeeze as much premium into a policy as possible without creating a Modified Endowment Contract (MEC).

In my next few entries I’m going to cover some basics of the structure of today’s life insurance contracts to give you a better understanding of your options. 

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