Life insurance as investment

It's quite common for financial advisers to recommend people buy one of the permanent life insurance policies, i.e. whole, universal or variable universal. The basis of the pitch sounds good. If you accept the idea of life insurance, you're throwing money away if you only buy a term policy. No matter which permanent policy you buy, a percentage of your annual premiums is invested, some of this money can be borrowed, and your family get a good sum when you pass on. Equally, there are persuasive voices telling you the only people who really benefit from permanent policies are the brokers who sell them. Which side of the argument is right?

Always start by asking how much insurance you actually need. If a more expensive permanent policy with an investment element is going to put your family budget under strain, this is not a good idea. You should also ask how much you or your family will receive. Remember the broker will want a commission and the insurer needs to make a profit. Look at how much you will pay over the years and how much you will receive. The longer the policy must last, the more the insurer can deduct for managing the investment. But, in thirty years time, will your children not be financially independent? Will your spouse not be in a position to live independently? Pause to consider how much you might have if you invested the quoted annual premium in your 401k, an IRA or a Roth IRA. In part the answer will depend on your tax allowances but if you earned the same investment return on both the life policy and your alternative investment, you would avoid all the management fees charged by the life insurance company. Only if the insurance product significantly outperforms your own investment choices will you lose out. Most independent financial advisors recommend you exhaust all your tax-free savings and investment allowances before you think of buying a life insurance product. If all you want is to transfer the short-term risk of dying, a term policy will achieve the effect at lower cost.

One of the claimed advantages of a permanent policy is the cash value you can borrow of you need to pay expenses. Why borrow and pay interest when you could simply use your own savings? If you have the self-discipline to pay a life insurance installment, you could pay the same amount into another tax-free investment or invest in the stock exchange where history shows the long-term benefits are to be found. What makes this more compelling is the general lack of transparency on the fees charged by life insurance companies. So, with independent advice, maximize your other investment opportunities and then buy a whole life policy with low fees and keep it to death. Do not borrow the cash value and pay interest. Alternatively, convert it into an annuity, assuming your family are financially independent by this time.