Years ago life insurance was a very simple product. It was based on a mortality table and was designed to pay your survivors a certain amount of money should you die. It had guaranteed values that were hardly good investment numbers.
In the 1970s and before life insurance was available in two ways. One way was called “term insurance.” This insurance was simply a death benefit. You might buy $10,000 for 10-years. At the end of ten years the policy would end. Whatever money you paid would be lost but your family would have been protected for that time.
The problem that occurred was that if you needed insurance again then you were 10 years older and the rates would go up. Obviously at some point the rates would become prohibitive.
To get around this people would buy the second type of coverage and that was called “permanent insurance.” This was much more expensive but was intended to be in force for the person’s “whole life.” As such it was called “whole life insurance.”
This policy would yield (usually) around three-percent cash values and in mutual companies would pay dividends although they were not guaranteed.
Some agents at that time would approach customers to use the life insurance policy as an investment one of two ways. First, simply looking at the values from the guarantees and dividends over time the policy would yield a return on money paid in. Other agents might use the “term and invest the difference approach.”
This method consisted of taking the cheapest term insurance available and using the difference between that price and the price of permanent to invest in savings or stocks.
Later this concept was fleshed out in other life insurance products and is used to this day.
The cash element of policies may be made up of many different types of investments from savings elements to stocks to bonds to variable annuities to share accounts.
This all brings us back to the question “Is life insurance a good investment?
I was an agent for years and ultimately became an executive vice-president of a life insurance company. I contend that life insurance is not a good investment. Why do I say that?
Life insurance is designed for a specific reason when it comes to family life insurance. To move away from that objective can have dire consequences; you are taking chances with your family’s future.
Life insurance amounts in the purest sense are based on “human life value” with respect to debt and retirement.
What I mean is that if a 30-year-old man earns $10,000 per year, (to make it easy) then over a 35-year career he could expect to make $350,000 with an added cost-of-living factor.
This man might then insure himself for $400,000 to make sure that his family had the funds needed to complete his work should he die and if he lived he and his wife would have funds for retirement that they could annuitize or invest in some other way.
A person who was putting aside money in a bank account equivalent to the premium for this life insurance policy would no doubt have more money after 35 years.
From that standpoint life insurance is not a good investment and yet, as you can see, if the fellow simply saving money dies early, the family is in a mess.
Life insurance is not a good investment but it is not meant to be. Its purpose is first and foremost protection and unfortunately that is often forgotten.
Unfortunately due to the marketing strategies of life insurance companies, there is not always the availability of good life insurance agent like there once was. They are worth their weight in gold.
While life insurance is not a good investment, sometimes there is a life product that has been adjusted for investments. If you have a good agent that you trust, then work together to build a program.
Usually the payout from a life insurance plan is tax free. However, if the payout and the existing estate value nudges the estate over the threshold for paying no inheritance tax, then any amount over the threshold would be liable for inheritance tax
I have never met a person that erred when they put their family first.