There is a constant battle within the financial community between permanent life insurance and term life insurance. Most individuals are best served by inexpensive term life insurance policies that are straightforward: pay a premium, receive a benefit if you die within the specified term. Permanent life insurance, which encompasses whole, universal, and variable products, is much more complicated and expensive and thus needs more guidance before you sign on the dotted line. You will find financial advisors that get commissioned off of the sale of a permanent life insurance policy intentionally pushing the product hard to earn their commission instead of putting the needs of their client first.
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One of the benefits an advisor will tell you about permanent life insurance is it isn’t just insurance — it’s an investment, too! Your permanent life insurance policy is really made up of two portions: the insurance benefit your family will receive when you die, and an investment portion that supposedly fluctuates in the market based on the investments you select. This is how things get very complicated very quickly. When you are just dealing with insurance, be it car, home, or life, you focus on two things: the benefit you receive and the premium you pay. This keeps prices low and transparent, and your decision is usually easy to make.
When you start factoring in an investment portion with the insurance — and most people don’t understand investing to begin with — it can be easy to be duped by the advisor and the insurance company.
Here are 5 reasons permanent life insurance is not really an investment.
Have you ever sat down to buy something that you thought was a simple transaction, and suddenly there are pages of contracts and fine print to read? Do you dive right in or does a red flag go off in your head?
Permanent life insurance is chock full of fine print about commissions, what happens if you cancel the policy within a certain number of years (answer: you lose almost everything you’ve paid into the policy), and what the company isn’t responsible for. Contrast this with a term life insurance policy that essentially states that you pay a certain premium every month, and if you die during the term, they will pay your estate your policy death benefit amount. Term life insurance is cut and dry; permanent life insurance is a mess.
If you opened an investment account at ShareBuilder today, you would be encouraged to set up automatic investments from your checking account into a mutual fund. You might contribute $100 per month to get started. You make it through the first 6 months fine, but something happens in your life and you need to stop making payments. You cut off the automatic payments, but you still own the shares that you purchased over the previous 6 months. Their value is dictated by the share price in the marketplace.
With permanent life insurance, if you stop paying the premiums, you can lose all of the money you have “invested” into the policy. It’s not an investment if you don’t hold an asset or shares.
Continuing with our above example, if you wanted to sell the shares you purchased over the 6 month period of time to cash out the account, you could sell the shares out on the market. With permanent life insurance, you can’t sell your policy to anyone.
Once you sign up for a permanent life insurance policy, it is usually impossible to make changes. You are locked in to the premium and projected rate of return.
This is the opposite of every other type of investment available. If your portfolio is 100% stocks today, and you want to be 50% stocks and 50% bonds tomorrow, you can make adjustments to your account. That’s not possible with permanent life insurance.
Your home can be seen as investment because you can sell it to someone else via the open real estate market. Your stock, bond, ETF, and mutual fund holdings can be seen as investments because you can sell them on the stock exchanges. That’s not possible with a permanent life policy because you don’t hold shares in anything. There is no exchange where the free market determines the value of your insurance. Without a market of some kind, insurance simply can’t be seen as an investment. And with permanent life insurance policies costing many times over the cost of a term life policy, it doesn’t make sense to own one based on it being a potential investment.
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