Whole life insurance — which are life insurance policies that come with a cash value — can reasonably be regarded like investments, but for the vast majority of people, these financial products usually aren’t a good investment.
Life insurance policies are primarily designed to provide your loved ones with a financial safety net should happen to you, not to be used as investment tools. That being said, whole life insurance policies can in some cases be part of your investment portfolio. Let’s dive into this matter and see if Empire Vie assurance is something you should consider.
Life Insurance As An Investment: What You Need To Know
Let’s start by defining what an investment is : it’s typically an asset that one purchases with the explicit intent of selling it for a profit in a distant or not-so-distant future. The most common examples to come to mind include real estate, stocks and bonds. Considering this definition, is term life insurance an investment? The short answer is no, and here is why: term life insurance policies don’t have cash value, and therefore have no base amount from which compound interests grow. These policies are in a sense the purest form life insurance: you pay your premiums in order to keep the policy active, and the only way for your beneficiaries to get the capital amount of your life insurance policy.
On the other hand, life insurance policies are atypical investments, thanks to the aforementioned cash value. That’s the reason why they’re treated as such in legal proceedings (divorces come to mind…). How does it work? A certain percentage of your premiums goes automatically to the cash portion of your policy. This portion is tax-deferred, meaning you won’t have to pay taxes on these earnings until you withdraw the money. It gives you the ability to grow some money at a predetermined rate, but beware: a decent cash value takes more than 10 years to build up.
Is lt A Good Idea?
Now that we’ve determined that while whole life insurance policies are technically investments, let’s answer the most relevant question in this whole conversation: is it a good investment? Unfortunately, as we’ve mentioned in the beginning of this article, the answer is usually no, and here is why.
It’s an expensive and complicated investment vehicle
Whole life insurance policies typically cost five to fifteen times more than fairly similar comparable insurance term policies, and this difference quickly adds up. That’s one of the reasons why almost half of whole life policies are abandoned in the ten first years following the initial purchase — which negates the whole point of trying to grow your cash value, as we’ve outlined above : people who forfeit their whole life insurance policy so early generally don’t recoup as much as they put in premiums in the first place.
One of the reasons that explain this statistic is that life insurance policies with cash come with several hidden costs comprised of penalties and fees. The most common of these items are administrative fees and other operating expenses charged by the company; an automatic reduction of death benefit of the policy when you tap into the cash value; another penalty if you completely empty the cumulative cash value; additional charges if — during the surrender period — you make a withdrawal from the cash value; and last but not least, the possible forfeiture of the full amount of cash value if you cancel your contract, still during the surrender period.
You Can Get Better Returns On Other Investments
And that point pretty much settles the whole debate on using life insurance as an investment vehicle or not. On top of the high number of fees and penalties we described above, life insurance policies with cash value have relatively low rates of return as well as fairly limited investment options. Plus, the rate advertised by your insurance company is applied on your premiums net of the fees and penalties, which means that your cash value won’t grow nearly as fast as you expect. In conclusion, over the long run, you can easily outperform them by investing in a 401(k), a mutual fund or an IRA.