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Life Insurance: Investment or Protection?

Life Insurance: Investment or Protection?
Daniel Cohen
UpdatedMar 17, 2014
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    3 min read
Key Takeaways:
  • Life insurance is a smart choice, if your family depends on your income to cover key monthly expenses.
  • Term life insurance is the most popular life insurance policy.
  • Understand the risks if you buy a policy that includes investment features.

Choosing the Right Type of Life Insurance

Life insurance is a great idea, but it is not an investment in the strict sense of the word. In an investment, you put money into a venture, asset, or financial instrument with the expectation of a return. Insurance, on the other hand, transfers part or all of your risk of loss to the insurance company. You may not think of insurance as an investment, but if you die unexpectedly, your heirs sure will be grateful you bought insurance.

Objectives of a Life Insurance Investment

Buying life insurance is a hedge against unexpected death. You cannot predict when you will die, but you can be be proactive and take the right steps to prevent your death from being a financial burden for your family.

Life insurance is a critical step in any financial planning process if you have a family, because it protects your partner and dependents. For example, if you are married and responsible for not only providing the income that covers key household expenses, such as making the monthly mortgage payments, then it is critical to have life insurance. With the right coverage, you'll provide the mans for your partner and surviving dependents to pay off the mortgage and fund living expenses.

Two Types of Life Insurance

There are two main types of life insurance: term life insurance and permanent life insurance, also known as whole life insurance.

  • Term Life Insurance Term life insurance provides protection for a specific period of time. A good analogy for term insurance is renting an apartment: As long as you make your monthly payment you have access to the asset. In this case, your beneficiaries receive a payout if you die while the policy is in effect.
  • Whole Life Insurance Whole life insurance offers a cash payout at the end of the policy. Whole life insurance is similar to owning a house, your monthly payment may be higher than monthly rent, but you have the opportunity to build equity. Your insurance company invests your premiums so that when you reach retirement age, it has a cash value. Companies offer different types of permanent life insurance. You may be able to choose between fixed and variable premiums, have the flexibility to change payments, take on higher investment risk for a potential higher return, or choose to cash-out value that has built up.

It is possible to buy a mix of both term and permanent life insurance. Talk with your financial advisor about your financial goals and suitable life insurance options available for you.

Investment policies come with risks. For one, the investments may not perform as well as the examples your insurance agent shows you.

Life Insurance Investment or Not?

Life insurance is not, primarily, an investment. However, this doesn't mean that life insurance is not necessary. Having the appropriate life insurance will cover your dependents against financial loss such as mortgage payments and other financial obligations. Talk with your financial advisor about your life insurance options, to find the plan right for you.