Most people with families and dependents have life insurance, but few ever ask if their life insurance policy is really a good investment. For such a simple question, the answer is complex; there are different kinds of life insurance and each functions in a slightly different way and has different benefits.
Life Insurance; The Options
Broadly speaking there are two types of life insurance, and four kinds of policy. You can get a whole of life or term insurance which covers your life, or your health. There are also policies which cover you in the case of long-term disability or injury and death in an auto accident.
Whether or not your life insurance is a good investment depends on whether it suits your needs and your goals.
Whole of Life vs Term Life Insurance
A whole of life insurance policy is one which, as the name suggests, covers the policyholder (and any named persons) for the full duration of their life. Policies such as these often have a cash-in option which allows the policyholder to choose a tax-deferred cash sum or a regular disbursement which pays until all names policyholders have passed.
A term life insurance policy, by contrast, can be taken out for a fixed period of time, usually 10 or 20 years but it does vary. These policies are paid out purely on the basis of the death of the policyholder and have no cash value unless a claim is made on the policy.
Coverage Types
The most obvious type of coverage is life cover, which pays out on the basis of death. Many policies, however, have the option to add disability or injury insurance, health insurance, or even auto insurance (this is insurance on person, not your car).
In some cases, there are policies which offer all of this cover.
So, Is Life Insurance a Good Investment?
Well, many people would say that the peace of mind that life insurance gives your family, and the help it offers when planning a funeral, make it a good investment regardless of finances. Certainly, if you have no complicated financial needs or assets to protect this could be the only benefit you need from your life insurance.
However, if you’re clever you can turn a life insurance policy into a financial investment.
By paying premiums into a whole of life policy which is designed to build and retain a cash value which can be disbursed after a set term. Policies such as these can disburse either a tax-deferred lump sum or a regular amount. In either case, however, doing so will cancel the death benefit attached to them. This means that you should be certain you no longer need the death benefit for planning a funeral in the future or else set up a new policy when you decide to claim this disbursement.
Funds placed into such a policy are invested to accelerate growth and maximise the death benefit, this means that when you use such a policy as a form of future planning you can get a higher rate of interest than you would with an ISA. This is even accounting for the reduced amount that will be paid out (whole of life policies do not disburse the full death benefit when claimed).
So, however you look at it, a life insurance policy is almost always a good investment as long as you are sure to investigate which kind of policy is most suited to your needs and situation.
