If youâ€™re considering buying insurance as an investment, youâ€™ll want to consider the pros and cons of the various insurance policies available. There is a lot of debate as to whether using an insurance policy as an investment is a wise financial strategy or not. You will need to evaluate your unique situation to decide if itâ€™s right for you.
Term life insurance is usually relatively affordable. Whole life insurance policies are much more expensive, but they are sold to customers as investment vehicles. Whole life insurance policies promise either a variable rate of return-which is tied to the stock market or whatever investment vehicle the insurance company is using, or a fixed rate of return, which is usually tied to a policy with higher fees and commissions.
Insurance investment options are touted as tax-deferred or tax-free, and the policies are often linked to annuities, which will pay out in increments over the years after a certain period has passed. The scary part about tax-deferred investments is the fact that tax rates can change over time, and investment payouts can put you into a higher tax bracket at the time of the payouts, which can cost you more than expected.
Policies vary considerably, and fine print can be intimidating. It can be very challenging to determine which policies are truly advantageous and which will cost more than they are worth.
When considering an insurance policy as a financial strategy, youâ€™ll want to ask the insurance agent selling the policy the following questions: What happens to my investment should I die before the policy has paid out? Can I roll the policy over to my spouse? My heirs? When can I begin withdrawing money, and what kind of penalties are related to withdrawing those funds if I must take out my money before the proposed date? What will I be paying in fees? What percentage of my investment will go towards internal charges, and what percentage will be invested? What happens to my investment if the stock market tanks? What is my guaranteed rate of return, if any? Does the agent selling you the policy make a commission off the sale?
Youâ€™ll want to get financial advice from someone who does not get a kick back from the sale to see what a neutral party says about the policy you are considering. A neutral adviser may recognize pitfalls the agent selling the insurance did not mention. Insurance as a financial investment is definitely not a good short-term option, but it can be a good long-term option if you are concerned about providing for a spouse or heirs after your passing.