Wednesday, 15 July 2009

Investing in Life Insurance

Life insurance is not an investment. Life insurance is a safeguard that must be in place to protect your family in the event of your death. For many years life insurance salesmen tried to sell endowment policies as an investment. They quoted huge returns on these investments which they advised us was the effect of compound interest. The simple fact is that anyone that has used life insurance as an investment vehicle has ultimately faced disappointment when receiving the payout many years later.

Endowments were the earliest form of life insurance investments. A valuation of the fund every three years allowed the fund to declare bonuses and allocate these to the value of an endowment policy. Linked policies became popular some time later. A linked policy allowed the investment portion of the policy to be invested in equity linked investments. Then there was deposit administration where investments were linked to a variety of investments including property. There were three main problem associated with all of these investment type policies. The first was the high commission that eats most of the first year's premium as well as much of the second. The second problem is the administration fees charged by the companies to facilitate the investment. The third is that no matter how well the investment performs, the cost of life cover remains the same throughout.

During the 1980's universal life policies became the main investment vehicle used by life insurance companies. Universal life differs from the earlier forms of investment linked life insurance. The first two problems remain the same, but the third problem disappears. As the investment grows, the amount of life cover required reduces leaving more for investment. Conceptually this is great, but the commission and expenses charged against this type of policy negate the benefits. Compare the commission charged against a straight investment and the commission on a whole life policy and the choice is clear and simple. Invest separately.

Suzie Orman has stressed stressed this point repeatedly. Do not buy whole life insurance. The only life insurance worth buying is term insurance, and when buying this get quotes from every reputable life insurer before committing yourself.

If you were thinking about taking out life insurance as an investment, think again. Term insurance is the only cost-effective form of life insurance. Investments can be achieved much more effectively through buying equities, property or through managed fund portfolios.

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