All you need to know about life insurance as investment
Life insurance can play a vital role in financial planning. It can be a great financial tool. But if you use it the wrong way, it can lead to a terrible investment. So, if you are thinking about getting life insurance as investment. You need to make sure you’re doing it the right way. You’re gonna know how to do that with the help of this article.
First of all, investing can be a rabbit hole. Maybe, at first you think it’s simple, all you need to do is throw money in the stock market. But as you dive deeper, that’s when you will realize that the stock market isn’t just about stocks. It can be overwhelming when you look at the different investment options shown to you. Every time it happens, you could present it with a simple solution.
Invest your money into life insurance. Let the insurance company invest your money for you. The good thing about this is, they will manage your investments. In addition, they are the one who will deal with the market volatility and you get a return without putting yourself into stress.
But is life insurance really a good investment ?
The short answer is no. Actually, insurance is almost never a good investment. But insurance, life insurance to be specific, is very important to a financial planner. Which is why using it the right way is a must. If you ask insurance companies if life insurance as an investment is good. Some of them will answer you with a straight yes. But if you ask a seasoned investor, they’ll tell you the exact opposite.
So, before we dive deep into life insurance as investment, let’s look at what investment means first. Investment is something that you put your money into things that are supposed to give you a return. A return on your money from the long. Take note that the longer you invest your money, the more money you’ll make. But investing has risks and there’s no 100% guarantee that you’ll make money from it. Well, that’s the goal of investment.
Actually, Life insurance works the other way around. It can give you better returns in a short period of time. The way it works is you’re gonna pay a premium. When you die, the company will give a big check to your beneficiaries. Let’s say you’re paying $100 monthly premium, when you die. Your insurance company will pay a million dollars.
If you die two months into your contract, the insurance company will still pay you a million dollars. Although you’ve only paid them $200. But if you’ve been doing this for 30 or 40 years, you’re gonna get a lower return. It’s because you’ve been paying a lot of money to an insurance company and now they have to pay you a million dollars.
What do insurance companies usually do?
They take the money that comes from your premiums and then they invest it. Usually in stocks or bonds. By investing it they can estimate how long you have to live. And based on that they can calculate how much money they’re gonna make in the market. But don’t worry, they’re gonna give you a taste of their profits.
If you die sooner than expected, your beneficiary will make more money. If you live longer than expected then the insurance company makes more money. But obviously your life is way more important than money. We just simply want you to understand how this works in a financial context. In the insurance world, you or your family gets the best return if you die young.
We all want an investment that’s gonna be on our side and win with us. Where the longer we invest the better we can get. But of course it doesn’t work like that. In insurance you’re gonna invest this money and then your insurance company is the one who’ll invest your money in the market. Take note that insurance companies need to pay for the rent. They’re gonna have to pay their salespeople, their money managers. And then after paying, that is what you are left with.
These fees can eat most of your returns but you can invest in very similar ETFs in the market. Wherein you can get the same returns that your insurance company is getting without the fees. This way you can keep the money yourself. However, this only works if you have discipline with money. Because if you don’t have then you are not going to be consistent with investments.