Is life insurance a good investment? Life insurance can be a wise investment, but not necessarily a good investment tool. Let me explain.
There are two main reasons to have life insurance. One is to cover the cost of a debt in case of the death of the person that is the main source income so that the debt will not be burden to those left behind. Second, life insurance can be used as a source to replace the income of someone who is the main breadwinner in a household.
There are two types of life insurance, term and permanent policies. Term insurance is the cheaper of the two because it is just straight insurance coverage for a set face amount for a certain term (time period). There is no cash accumulation and when the term is complete the coverage lapses. Term insurance is like renting a home (no equity). The other type is called permanent life insurance. This type is more costly, but has a cash accumulation component and will remain in place as long as you pay the premium. Permanent insurance is like owning a home (equity).
Term insurance is the less costly option of life insurance. There is no cash accumulation component and the policy will lapse if the premiums are not paid or at the end of the term. This is the most widely used type of insurance and will be able to meet most of your needs.
Permanent life insurance products have a cash accumulation and investment component that can allow the policy owner to earn money through interest and dividends. Be aware that there are additional fees & expenses associated with these type policies so there are not the best investment vehicles. Some people will overfund a permanent life insurance policy for the purpose of drawing tax advantage income from it later in life. This is not for everyone and needs to be done with the advice of a qualified financial advisor.
Some other reasons for life insurance are to be able to provide for kids education, to pay estate taxes (estate planning) and certain business uses. Businesses will use life insurance as a way of funding for buy/sell agreements and additional employee compensation.
There is a place for life insurance in every person’s financial plan. It is a necessary expense to provide the needed for protection for your spouse, children or business partners. Be wise to work with a qualified professional to identify the correct amount of life insurance coverage to buy and which type of insurance best fits your need.