Term Life Insurance Articles
When A Life Insurance Policy Is Considered An Investment
2011-07-29
A life insurance policy is often thought of as a type of financial investment, but from a strict perspective, this isn't the case. Not all types of life insurance are investment life insurance, and in order to be actually considered a viable long-term investment, a life insurance policy needs designed to meet certain criteria.
In order to be an investment, a financial product needs to provide a return on invested funds that is greater than the initial value of those funds. A life insurance policy generally isn't considered an investment because in the most popular types of policies, there's no guarantee that premiums will be returned at all, much less with interest. Level term life insurance policies, for instance, only have a payout when the policy holder dies. If the policy holder doesn't die, premiums paid into the policy are forfeit to the life insurance company. This isn't a typical type of investment, so financial planners and other experts often refer to term life insurance policies as financial products rather than investments in order to draw attention to the difference.
However, there are types of life insurance policies with investment potential. Universal and whole life policies, for instance, can pay out premiums after a certain point, so they're technically considered investments. While these life insurance policy types don't offer a tremendous return as compared to 401(k) plans and other traditional retirement investments, they at least offer some type of return for buyers. Return of Premium (ROP) term life insurance policies are another example. ROP policies provide a direct return of the premiums paid into a term life insurance policy while providing standard life insurance protection, although ROP policies also have a set term length (as opposed to universal and whole life policies, which don't necessarily have set term lengths).
Despite a traditional investment potential, many buyers choose standard level term life insurance policies, as these policies can be set up in a way that protects investments. Term life insurance policies are most effective when paired with a responsible retirement account; the investment life insurance policy provides financial safety for beneficiaries for a certain number of years, at which point the investment account is matured enough to take over these duties. Term life insurance policies are popular in this type of arrangement because of their low costs and flexibility. Ultimately, every type of life insurance can be used differently as a standalone investment or to insure a retirement account. Buyers who are looking for investment term life insurance should consider universal, whole life and different types of term life insurance policies to form a responsible investment strategy.
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A life insurance policy is often thought of as a type of financial investment, but from a strict perspective, this isn't the case. Not all types of life insurance are investment life insurance, and in order to be actually considered a viable long-term investment, a life insurance policy needs designed to meet certain criteria.
In order to be an investment, a financial product needs to provide a return on invested funds that is greater than the initial value of those funds. A life insurance policy generally isn't considered an investment because in the most popular types of policies, there's no guarantee that premiums will be returned at all, much less with interest. Level term life insurance policies, for instance, only have a payout when the policy holder dies. If the policy holder doesn't die, premiums paid into the policy are forfeit to the life insurance company. This isn't a typical type of investment, so financial planners and other experts often refer to term life insurance policies as financial products rather than investments in order to draw attention to the difference.
However, there are types of life insurance policies with investment potential. Universal and whole life policies, for instance, can pay out premiums after a certain point, so they're technically considered investments. While these life insurance policy types don't offer a tremendous return as compared to 401(k) plans and other traditional retirement investments, they at least offer some type of return for buyers. Return of Premium (ROP) term life insurance policies are another example. ROP policies provide a direct return of the premiums paid into a term life insurance policy while providing standard life insurance protection, although ROP policies also have a set term length (as opposed to universal and whole life policies, which don't necessarily have set term lengths).
Despite a traditional investment potential, many buyers choose standard level term life insurance policies, as these policies can be set up in a way that protects investments. Term life insurance policies are most effective when paired with a responsible retirement account; the investment life insurance policy provides financial safety for beneficiaries for a certain number of years, at which point the investment account is matured enough to take over these duties. Term life insurance policies are popular in this type of arrangement because of their low costs and flexibility. Ultimately, every type of life insurance can be used differently as a standalone investment or to insure a retirement account. Buyers who are looking for investment term life insurance should consider universal, whole life and different types of term life insurance policies to form a responsible investment strategy.
