17 January 2014 0 Comments

Life Insurance Is A Lousy Investment?

the right investmentA friend recently told my wife that she thought life insurance is a lousy investment.  Here’s my answer to this apparent slam:  Yes, life insurance is a lousy investment.  If you don’t die when the policy is in force, the entire premium you’ve paid is down the toilet.

You see, life insurance is insurance, not an investment.  Fire insurance on your house is also a lousy investment; if you don’t have a fire you get nothing back.  You can only expect a payback on your car insurance if you are involved in an accident or your car is stolen.  Insurance provides protection when an unexpected event causes a loss of an asset; in the case of life insurance it’s the loss of the human life value.  Life Insurance pays when the insured dies.  If that’s you, you likely won’t know that has happened, but your beneficiary will.  Life Insurance is not for the dead; it’s for the living.  Life insurance may not be a good investment for the insured; it’s a hell of a good investment for those left behind.

But wait just a minute!  Don’t some life insurance policies have cash values and haven’t I touted how that cash might be used to supplement retirement income?  Yes I have, but that is only when a life insurance policy has been constructed for that purpose and you faithfully follow a premium commitment (See my blog of 29 May 2013).

The initial development of cash value in policies was not intended as an investment.  Policy cash values were born out of the Armstrong Hearings in 1905 in the state of New York.  These hearings covered a myriad of issues dealing with protection for owners of life insurance policies.  Cash Values are reserves and as such a part of the death benefit.  Their primary purpose is to support the death benefit when the actual premium paid in a given year is not sufficient to cover the pure cost of the risk.  That said, because of the unique tax advantages of life insurance policies, when a policy has been structured with maximum premiums and minimum death benefit, it can produce a very effective after-tax income stream before death.  But, if you don’t pay the planned premium on those policies they can become a very lousy investment.   This is because Cash Value life insurance policies have very high surrender penalties if the policy is discontinued in the early years.

The lesson here is:

  • First, look at life insurance as protection, not an investment, whose cash values, if any, are intended to support a long range death benefit.
  • Second, when designing a life insurance policy as an investment to supplement retirement, only begin such a program when you are totally committed and able to maintain adequate premiums until your planned retirement.
  • Consider the primary purpose of life insurance to be the replacement of your human life value.  Term insurance is pure protection.
  • Finally, deal with an agent who understands that all types of life insurance policies have a place and knows how to assist you with your personal needs.

With that said, next I’ll discuss how frequently you should review your life insurance program.

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