Today’s blog post begins by asking a fundamental financial planning question: Does life insurance build wealth? Or, to make it more personal, you might be asking: Should I use a life insurance policy as a long-term investment?
To answer these questions, we need to first understand some regulatory compliance issues and essential cautions that you need to know before purchasing certain kinds of life insurance.
These are great questions… let’s dive in!
Does Life Insurance Build Wealth?
At Master’s, we believe that life insurance is first and foremost, a protection strategy. However, some life insurance policies do offer an element of investment return.
To answer our original question, we need to dig a bit deeper by asking yet another question; how does the insurance company make their investment decisions?
Understanding Regulatory Requirements
Enter, Regulatory Capital Requirements. These requirements force insurance companies to avoid excess stock market risk within their own investment portfolio. For this reason, the lion’s share of most insurance companies’ investment portfolios must be invested in bonds. So, when you sift through all the layers, your expected results from using life insurance as an investment vehicle will likely be “bond-like” returns.
Simply not our first choice for long-term investment portfolios!
Caveat Emptor (Buyer Beware)
Caution! As with any purchase or investment, it’s essential that you are aware of and considering all potential risks. Some life insurance policies may offer you the ability to position your policy “cash value” into variable investment accounts, directly exposed to the stock markets.
While the potential returns can certainly be higher, these policies will push all the market risk back to you, the policy owner. During lengthy, or steep market declines, you could jeopardize the viability of your policy, potentially losing the desired protection component!
We strongly recommend thorough due diligence and analysis before buying this type of policy.
The Vital Role of Life Insurance in Your Financial Planning
While we don’t see life insurance as a great long-term investment, here are the ways it can play a vital role in your personal financial planning:
- Protection for your Spouse & Family – Having adequate insurance on the lives of a couple, especially if they have a family, is a necessity in making sure their financial plans (including future earnings) are not jeopardized by a premature death.
- Protection for Business Continuity – Having adequate life insurance on the owners/partners of a business entity ensure that the business can continue in the event of a sudden death of one of the owners/partners.
- Tax-free Wealth Transfer to Family – Utilizing specialized life insurance policies to efficiently transfer wealth to the next generation (often tax-free) can be a highly effective planning strategy.
The Bottom Line: Life Insurance is a Financial Planning Tool
Our conclusion is this: utilize life insurance for the three planning strategies mentioned above and do your long-term investing elsewhere, in well-diversified investment portfolios built for that express purpose!
Check out the other blogs in our Life Insurance Series for more tips on this topic.
Does today’s blogpost spark any questions? Talk with us. We welcome your questions and will gladly provide a complimentary analysis of your existing life insurance policies.
