It’s what everyone’s thinking about when it comes to long term investments.
While life insurance isn’t exactly a regular long term investment plan, it’s still a way to gain some monetary benefits after a certain time period.
So, is investing in life insurance a smart financial move?
The way life insurance works is simple. You pay your premium periodically and, when you pass away, the beneficiaries get paid a nice sum of money. You would think they’re the only ones that will benefit from the policy, but that’s not always the case!
Some insurance policies also have an investment component.
You could opt for a whole life insurance and rack up some tax-free cash value. It’s scary to be pessimistic about it, but this is a classic win-win situation. Your money multiplies and, if anything should happen, your family is financially taken care of.
Is is smart to buy life insurance?
While there are certain cash benefits to buying whole life insurance, it’s better to be sure whether this is a smart financial move or not.
There are certain aspects to be taken into consideration before signing any policy. Is this something you really need or are there other, better investment options for you?
1. Do you really need life insurance?
Do you have immediate family relying on your income? Maybe your spouse and young children? If that’s the case, life insurance (whole life, term insurance or other types) can be a good investment.
If that’s not the case, maybe you should weigh your options before making any rash decisions. Can you find a better way to invest your money long term? Maybe you can buy term insurance, it’s a lot cheaper than a permanent policy, and use the money left to invest in something else.
2. How much does life insurance cost and is it worth purchasing?
When buying life insurance, the cost of each policy depends on the individual. There are many factors to be taken into consideration, such as age, health, lifestyle and so on.
Some people pay more in premiums, others pay less. Some beneficiaries are entitled to a large sum of money, others ‘get’ less.
Above all that, you also have to take into account that there are certain management fees and commissions you’d need to pay as well. If you find these fees to be exaggerated and a total waste of your money, then step away from your insurance agent’s office!
But before giving up investing in life insurance, take a good look at your financial advantages first.
3. Positive financial aspects of investing in life insurance
Time to talk about the actual positive aspects of having a life insurance policy. Besides the fact that your family will have financial security, ‘just in case’.
- Tax free cash value benefits. Like previously mentioned, a whole life policy has an investment component that translates into a tax deferred investment. It is possible to borrow against the cash value, if you need to.
- Financial security. Probably the biggest perk of having a life insurance is actually being able to benefit from it! Setting the grim aspect aside, an insurance policy is a great investment should you suddenly get ill. Ideally, you’ll live to be at least 100, but health is important, so if something should happen unexpectedly, you can at least have your medical bills taken care of.
- Great way to invest if your 401(k), IRA or other plans are maxed out. It doesn’t happen very often, but it is possible that 401(k) plans reach their limits. In that case, life insurance can be an alternative way to invest money.
- Retirement investment. If you’re thinking about how to save money for retirement, investing in a life policy could be a solution. After years of paying your premiums, you could take out a tax-free loan for retirement that you won’t even need to worry about paying back! Worst case scenario, they diminish your death benefit.
4. Negative aspects
The main question is whether or not it’s worth investing in a life policy. Unfortunately, there are many downsides to it that may get you to reconsider.
- Again, cash-value. Once you take money out of your insurance policy, it will start to accrue interest until you put the money back. On the same note, if you take out too much money from it, you could risk having your insurance lapse.
- Late or missed payments. If you make a late payment or miss even one, you could jeopardize your guaranteed policy. It could happen to anyone, maybe money is tight one month and you can’t afford to pay your premium. Before signing any contracts with your insurance agent, make sure you can afford to pay your premium on a regular basis.
- Waiting too long to buy insurance. Seeing how insurance benefits depend on your age and health as well, don’t take too much time to decide whether you need a policy or not. The longer you wait, the more life insurance will cost you.
- It may not be worth it. Purchasing life insurance for the sole purpose of investing your money may ultimately not be worth it. A permanent life insurance can definitely guarantee you a nice return, but before jumping in head first, make sure the cash value after paying years of premiums is actually worth it. There may be other ways for you to invest your money – like stocks, bonds, a 401(k) plan – that could be more beneficial from a financial point of view in the long run.
Investing in life insurance should be done after thorough research and after carefully comparing other investment options as well. In some cases, it may be the perfect financial decision, but that’s not always the case.
Have you ever thought about investing in life insurance? What advice would you share with someone who is thinking about it?
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