The main purpose of insurance is to help restore you to your original financial position in the event of a loss. This can mean lost wages, an inability to earn a living, and property loss all through unforeseen circumstances. Some of the most common ways people use insurance as investments are through permanent life insurance options and annuities. I am going to focus on permanent life insurance since far too often I see people in these types of policies for the wrong reasons. Here are some of the promises you will hear with permanent life insurance.
You Are Covered For Life
Permanent insurance is indeed meant to cover you for life but the reality is that most people do not need a lot of life insurance once they retire. A small $25,000 policy may be all that is needed in order to cover funeral expenses but most people will have already accumulated assets and income streams for their spouse to live on and will typically not have any children to support later in life.
The only reason you should be concerned about being covered for life is if you do not have enough assets to cover your own funeral, you are a caregiver for someone who will likely outlive your care, you will not have enough assets or income streams for a surviving spouse to live on, or if you have a large estate ($5 million or more) in which you want life insurance to pay the estate tax so your assets can be passed to your heirs or a charitable organization.
Unless you fall into one of the categories above, an inexpensive term policy should be sufficient to cover you until your debts are repaid and you’ve accumulated a good amount of assets to replace your income in the event of your death.
Your Premiums Will Pretty Much Stay Level
If you have a whole-life policy, your premiums will stay the same through the entire length of your policy. However, if you are in a variable, universal, or variable universal life policy, the underlying investments and interest rates are ever changing and if for some reason there is a big drop in the market or interest rates, your premium may increase over time to ensure the policy stays in force. If you end up borrowing or withdrawing the cash value from the policy, you may find yourself paying in significantly more than you anticipated or find that the policy has lapsed leaving you without any type of life insurance protection.
Ensure you make the differentiation between a whole life policy and other types of permanent policies before taking out any coverage. You don’t want to be paying in significant premiums over the years only to find out there are changes that you didn’t anticipate.
There Are Tax-Advantages
Yes, it is true that your cash value (the difference between the premium you paid and the cost of insurance) grows tax-deferred within the policy. Another benefit is that you can borrow your cash value (take a policy loan) for a much lower interest rate than you would from a bank. In my opinion, why not just save on your own outside of a life insurance policy? Many times the costs of these types of policies outweigh the tax advantages. There are sales charges, loads, internal fees and these are worked into the policy premiums where unless you’re paying close attention, you are not fully understanding all the costs!
So unless you need permanent insurance for the reasons listed previously, or your family just wants that added security, use insurance for how it was originally intended. If you’re set on getting a permanent policy, make sure you understand all the costs involved and have a plan. Such as planning to supplement your retirement income with the cash value therefore decreasing your coverage, or planning on receiving a large inheritance where your estate is going to grow significantly. Again, most are better off investing on their own outside of permanent life insurance but not all of these policies are bad news. Discuss your goals with your adviser and remember that it never hurts to get a second, objective opinion if somebody is trying to sell you that you don’t completely understand!
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions of failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor or CFP® who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used, and trust. Thanks for your support!