Is Life Insurance a Good Investment?

Savings are Better in the Bank than in Cash Value Life Insurance

Jul 17, 2009 Victoria Anisman-Reiner

Life insurance is touted as an investment or savings strategy, but cash value life insurance may cost more than it's worth and take money from more lucrative investments.

Everyone wants to do right by family, and life insurance is exactly that – a way to take care of spouse, children, and other heirs or family members after death. In addition to standard insurance, though, many policies are adding features that turn insurance coverage into a form of savings, such as cash value life insurance. Are these policies a good investment, or are there better ways to help savings grow?

Life Insurance Sounds Like a Good Investment

On the surface, a life insurance policy sounds like a good idea. By paying into a standard policy each month, it's possible to leave a large sum of money behind to support a spouse or children for the foreseeable future.

Cash value life insurance policies add one more benefit to that by enabling policy holders to withdraw cash from their life insurance after a certain period of time. This money is available in several ways:

• Cash withdrawal against the final value of the life insurance policy. If $10,000 in cash value is drawn from a policy worth $500,000 upon death, some policies will only pay out $490,000 as a death benefit (and some will pay out much less).
• Using cash value accumulated in the policy to pay monthly premiums. This can usually be done without any penalty.
• Cash value withdrawal as a loan against the policy, usually at lower interest rates than those offered in a standard bank loan. This kind of loan may not require repayment, but it will be taken out of the death benefit with interest.

What's more, any money saved as cash value in a life insurance policy accrues tax-deferred interest.

How to Lose Money with Cash Value Life Insurance

While all of these ways to draw money out of an insurance policy sound promising, they each come with costs, most of which are taken directly out of the death benefit paid out at the end – the ultimate reason to have life insurance in the first place.

Cash withdrawals from savings in a life insurance policy can be deducted dollar for dollar from the final payout – or they may cut into the death benefit by much more than the amount withdrawn. Cash value costs more than standard life insurance, but only pays out the money once, making this kind of policy effectively a waste of money.

It's important to note, as well, that even standard insurance is not always the wisest way to invest money. Life insurance yields (in general) a low return on investment compared to other savings avenues and investment opportunities.

Insurance experts often recommend the relatively cheap term life insurance over more costly whole life insurance, and suggest investing the difference in price in an investment vehicle that will return more by the end of the term policy than would have been saved by purchasing whole life coverage.

There are circumstances in which insurance can protect loved ones and give peace of mind, but most cash value life insurance policies may be more trouble – and more expense – than they are really worth.

Reference

• Dodge, Mark, "Is Return of Premium Life Insurance As Good As It Sounds?" SoundMindInvesting.com, March 2006.
• Insure.com, "Cash value in life insurance: What's it worth to you?" Insure.com, 7 May 2008.
• Ramsey, Dave, "The Truth About Life Insurance," DaveRamsey.com, 2009.

The copyright of the article Is Life Insurance a Good Investment? in Insurance is owned by Victoria Anisman-Reiner. Permission to republish Is Life Insurance a Good Investment? in print or online must be granted by the author in writing.

Cash Value Life Insurance, Good or Bad Investment?

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