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Should I invest in life insurance?

I'm considering whole life insurance as an alternative to stowing money away in an ETF. The reason being that it seems to grow at a predictable rate with no downside, tax deferred, and I can borrow money from it. It also seems I could cash it out after a certain date (in my later years).

Any thoughts?

Apr 02, 2015 by Darren in  |  Flag
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Darren,

Before you consider investing in life insurance there are a few factors to consider and a few questions to ask yourself. Do you have life insurance that specifically provides a benefit if you die prematurely? Are you trying to use one policy to cover both investment and protection needs? Have you already taken full advantage of your ability to use tax deferred investments i.e. 401k etc. ?

Life insurance always has a cost associated with it (mortality cost) usually per thousand dollars of insurance provided, this cost per thousand will increase every year you get older. The main reason why people buy policies that build cash value (permanent insurance) is to pay a higher cost now (vs cheaper term insurance) but to lock in a constant premium that will be subsidized in later years via the cash value built up over time. A typical whole life/universal life policy will take roughly 15 years before you break even on the amount of cash value accumulated vs the amount of premiums paid.

Typically when looking for a policy to build maximum cash value, the face amount (death benefit) will need to be as low as possible and the premium will need to be as high as possible to ensure the majority of your extra premium is going towards your cash value. The most common problem is most commissioned insurance agents only get paid on the target premium (max commission-able) which is directly related to the amount of death benefit insured.

Example: Agent recommends 10k premium on $1,000,000 policy vs agent who recommends a 10k premium on 100k policy. You are paying the same premium in both examples but the 100k policy will build cash value a lot faster because the cost of insurance is much lower and the agents commission is significantly reduced on the policy with the lower death benefit.

If you have already maxed out your 401k plan etc. and are still looking for a tax deferred/efficient way to invest, life insurance may be suitable but be careful there are many insurance agents waiting to sell you something that could end up being a disaster later on in life.

I hope this helps.

Best regards,

Curtis

1 Comment   |  Flag   |  Apr 02, 2015
Darren

Thanks for the insight from all.

Flag |  Apr 09, 2015

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Although there are uses for life insurance, one should not "invest" in insurance for the following reasons: 1. You are mainly paying for protection for when you die. The insurance charges eat up your returns. 2. Although you can borrow from it, you are not able to get even the money you put into it until your later years. 3. You are still a creditor of the insurance company. If the insurance company goes out of business, you have to stand in line with other creditors. Even the largest insurance companies have default risk (think AIG)

Although I cannot give you specific recommendations without knowing your financial situation, you may wish to consider defined maturity exchange traded funds (DMETFs). They have the liquidity advantage of ETFs, they "mature" at a specific point in the future, and in the meantime, you receive monthly income from the fund. Since DMETFs own bonds issued by hundreds of companies, you have diversified your credit risk. Fidelity, Guggenheim and iShares offer these funds utilizing municipals, investment grade corporates, or high yield corporates as investments. You will find a great introduction to DMETFs at http://www.aaii.com/journal/article/defined-maturity-funds-a-bond-alternative-with-compromises.touch.

Comment   |  Flag   |  Apr 02, 2015 from Appleton, WI

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Darren, this is a great question, that many people have wondered about. Life insurance salesmen can make insurance sound SO amazing, like it is the only retirement plan you could ever want or need. And indeed, life insurance is a sound purchase for several reasons. So is it good alternative to an ETF? In order to provide a short answer to your question, I will list the good reasons for buying insurance: 1. You wish to provide your family or successors with quick access to the money that they will need to pay off the debt- like your mortgage or business loans- so that they won't be forced into a fire sale of your assets in the event that your income suddenly stops. 2. You wish to pass a large chunk of money on to your heirs in a tax- advantaged manner. 3. You wish to buy something like long-term-care insurance but you are concerned about paying all that money and never using the insurance. (Certain life insurance policies can guarantee you those benefits with the advantage that if you never use the long term care benefits, your heirs will receive the death benefit instead.) 4. You earn a LOT of income and you have maxed out all the other possible retirement plans (401k, SEP) and you still want to put cash into something tax-deferred. So Darren, if one of the above applies to you, life insurance may be a good investment for you. But before you sign on the dotted line with the insurance salesman, why not go see a local financial advisor and get a second opinion? there might be a better investment.

Comment   |  Flag   |  Apr 03, 2015 from Sayre, PA

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