Insurance Or Investment In Life Plan

Some people say that they can do better saving their money in a savings account rather than in cash-value life insurance. These people say they will not buy such insurance because “it is not a good investment.”

I agree. I agree with their analysis, but not with their conclusion. Read on.

First, we should be clear on some terms. Saving and investing are not the same thing.
Saving refers to setting some money aside, presumably for a short-term purpose, to be used for a short-term need, such as buying a car or getting together a down payment for a home purchase. Or the goal could be a somewhat longer need, such as accumulating an emergency fund for whatever may come up. Investing, on the other hand, usually refers to the accumulation of money for a long-term goal, such as a college fund or retirement.

When you are saving for a short-term goal, you need to protect the money from loss because you may need to use that money soon without being able to wait out a temporary setback in its value. When you are investing for the longer term, however, it is considered safe to expose the fund to some risk because the money will not be needed for a period of time and thus one can wait out a temporary setback on value.

So, the logical choice of a saving vehicle is a savings account, a certificate of deposit, or perhaps a money-market fund. The vehicle for an investment could be, depending on one’s risk tolerance, real estate or the stock market. Such instruments have greater risk of loss but are usually safe for the long haul and are chosen for their opportunity for better growth.

But when one buys life insurance, the goal is neither saving nor investing. Rather life insurance should be considered an expense that one chooses to make in order to transfer one’s risk of dying, shifting the risk from a family or a business to an insurance company.

The purchase of cash-value (CV) life insurance compared to term insurance should not be evaluated on its saving efficiency, that is, on its ability to accumulate funds during one’s lifetime. The only considerations should be the most economical way to provide the needed death protection for the desired period and the likelihood that it can be afforded for the entire period. If the need is short-term, say five or ten ears, term insurance will usually be best. For intermediate period, term may still be better.

But, because CV insurance build up cash which is available when canceling the policy, thus reducing the overall net cost, that may be the better choice. But, since the premium for term insurance increases down the road to unaffordable levels, CV insurance is always better for the longer haul.

And in this decision-making process it is important to bear in mind that typically the need for insurance typically never us goes away, but rather just changes.

People wind up wanting to keep their coverage for the future benefit of a spouse, an adult dependent offspring, a needy grandchild, or a charitable cause. Some just want to use life insurance in later years to increase the financial legacy that they leave behind.

But despite these aspirations, those with term insurance are forced by increasing premiums to discontinue their policies while the level premium of CV coverage allows them to keep the policy until death. It can last until it is needed.