Should life insurance even be considered as an investment? The idea that life insurance could be perceived as such is ludicrous to some financial experts. That school of thought positions life insurance as a barely useful financial tool that is of limited value. The opposite perspective exalts the utility of life insurance. This category of believers includes insurance salesmen, agents and brokers.
Life insurance as an investment became a common notion after Universal Life insurance plans came into existence. The “investment” aspect is not necessarily a fancy way of presenting an old concept in a new way. Insurers structure the Whole Life and Universal Life plans as investment plans that can provide capital growth and reinvestment. Stating that life insurance is an “investment in your family” is just sales lingo.
Of course, the two sides of the divide will always have something to say about each other. The life insurance minimalists would suggest that the other side advocates life insurance as an investment to dupe people. Their motive is sinister. The objective is to boost commissions for representatives and premiums for insurers.
The life insurance believers would simply state that the minimalists do not properly understand financial reality and how the plans work. They advocate that life insurance can comprise of the major aspects of financial planning. More than an investment in the future, it provides you with a living benefit that could be used for myriad purposes.
The unadulterated reality is that some cash-value life insurance plans are really good and others are of dubious value. Some plans are useful in some circumstances but not in others. Certain life insurance plans can be used as a good investment while others cause you to lose money.
Forced savings are a major argument for cash-value life insurance as an investment. Saving and investment are related but different concepts. However, the forced savings can be translated to forced investment with variable universal life insurance or dividend options on Whole Life plans.
Variable Universal Life insurance has been criticized for overpromising and underperforming. This is because insurers tend to market the plan based on lofty future projected rates. The actual performance rarely matches projected performance, often with predictable losses to the client.
A better poster child for life insurance as an investment is the paid-up additional insurance option offered on certain life insurance plans. This is a dividend payment option that involves dividends being used to purchase additional insurance coverage. The dividend amount on these plans will be based on the amount of cover, so this will have a compounding effect on the annual dividends and the value of the Whole Life plans.
Fixed Universal Life insurance provides a stable rate of return. The savings portfolio on this plan can be viewed as part of income options on a diversified portfolio. The major limitation with viewing Universal Life Insurance as an investment is that investment contributions are sometimes limited by insurers.
In a broad sense, life insurance is an investment in income protection. However, life insurance can also be considered as a savings and investment tool. It must be noted that life insurance is not a perfect investment tool and should not be used exclusively as such. Cash-value life plans are more expensive and provide less coverage per dollar. This is why some experts advise people to buy term insurance. Ultimately, it is possible for some insured persons to use life insurance as a sound investment plan.