Is life insurance an investment?
Life insurance is not intended to be your retirement nest egg
WE keep hearing life insurance is a good investment that can secure your future when you retire. This is often said by insurance agents, who also refer to themselves as financial advisors. As a result, this has led a lot of people to believe that life insurance is an investment instrument. However, is life insurance really an investment instrument? And is it a good one?
Life insurance is a form of protection, much like a medical insurance, motor-vehicle insurance, property insurance, etc. It is a binding agreement between the insured and insurer, where the insurer will pay a sum of money to the beneficiary when the insured passes away.
A few things to remember about life insurance
Life insurance is a necessity for almost everyone. This is the only form of financial instrument where you can be protected for a million while only paying an annual premium of 10 thousand (more or less).
It is the lone financial instrument where financial risk of passing away can be mitigated. If the bread winner of the family passes away, the proceeds of life insurance can assist the surviving family members’ financial needs (i.e., it can mitigate the financial responsibilities covered previously by your earnings/income). The insurance proceeds can also help cover hospitalization and funeral expenditures.
The most common life insurance are:
Term life insurance. Similar to motor-vehicle insurance, it is “use it” or “lose it”. Premiums are typically the lowest and remain same throughout the policy life, no cash value build-up, and static death benefit.
Whole life insurance. This type of insurance remains in force until policy matures. It can accumulate cash value and has death benefit. It cost much more than term insurance.
Variable life insurance. Commonly referred as life insurance with investment feature. Part of the premium you pay goes to the insurance coverage and part goes to investment feature. Typically loaded with fees.
Life insurance is not intended to be your retirement nest egg. Yes, there are some forms of life insurance that can accumulate cash value in the future… but the accumulated amount will be significantly less compared to placing your money on the right investment facilities.
You can take out loans on life insurance. You can also opt to get the corresponding cash value in the future. However, life insurance is not intended for such use.
Kids can also be covered with life insurance. This is another common pitch an insurance agent makes. In reality, most kids are better off invested on higher yield investment instruments compared to life insurance.
With the power of compounding, the combination of higher yield returns and length of time will provide greater
returns than the cash value an insurance accumulates.
Just imagine, with just a single investment amount of P100,000, an annual yield of 10 percent. Through compounding, it will total P250,000 in 10 years, P650,000 in 20 years, P1.7 million in 30 years, P4.5 million in 40 years.
If placed on life insurance with the same investment objective, how much will the cash value reach on the same time horizon? Definitely, significantly lesser.
Life insurance can be used as one of your tools for estate planning.
The beneficiary receives the proceeds from the policy without legal process.
Irrevocable beneficiaries receive the entire proceeds because it is exempted from estate tax.
For revocable beneficiaries, applicable taxes need to be paid on the proceeds.
When talking to insurance agents, it is best that you talk to trusted ones. In particular, those that will place your needs as priority over what they will earn from selling you the insurance policies. If you are not sure where to begin, you can contact us and we will be happy to refer you to the right individuals.
Before we end, if your main objective is to secure a retirement fund, it is better for you to consider other paper assets such as mutual funds, exchange traded funds, unit investment trust funds, equities/stocks, bonds, etc. depending on your objectives, risk tolerance and time horizon. Over time, these investment instruments will yield a much larger retirement fund than the cash value of life insurance policies.
Last, as part of my community service. If you already have insurance policies or other investment instruments that you do not understand, vaguely understand, and would like to get a better grasp of, we can interpret and explain those for you. All you need to do is secure an appointment by e-mailing limchrc@gmail.com or call/send a text message to 0932-867-7424.
Invest wisely!
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Christopher Lim is a Registered Financial Planner of RFP Philippines. He is a co-founder of www.pinoyFIQ.com and an investor on Financial and Real Estate industries. He is also a Coach and Resource Speaker on Financial Management, Investments (such as Bonds, Mutual Funds, Stocks, and Derivatives), Estate Planning, and Real Estate.
Source: http://www.businessmirror.com.ph/index.php/en/business/banking-finance/32752-is-life-insurance-an-investment
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