Is Life Insurance an Investment? ?

For years and years, many people viewed life insurance through a single lens, as a necessary hedge in the case of one's death to help provide for heirs, for a spouse, to help cover personal loans or business loans, etc. Life insurance for some was simply an option checked off as one of the "benefits" received through an employer, and no further thought even needed to be devoted to such a remote possibility as one's passing.

Lately, though, some advisors are recommending that life insurance be considered an "investment". Why? In part, because of volatility with the stock market-as equities (that is, "stocks") go up and down based on seemingly nothing more than investor's emotions, it's distressing to see a portfolio-especially a retirement portfolio-shrink to almost nothing.

Certain policies, however-even if they are invested in the market-carry with them certain guarantees of protection of principal, etc. Of course, the investor (in this case, the life insurance policy owner) pays for those guarantees in the form of fees and charges, but that may be a price certain investors are willing to sacrifice in return for protection of a "nest egg".

So is life insurance as an investment the way to go?

The answer is that if you are looking for whole life ONLY as a way to provide for heirs, you are often best served by purchasing a term policy in an amount that will cover major expenses (discuss this with your advisor). Those types of policies are often the most cost-effective.

If you are looking for an investment to protect a part of your portfolio, insurance may NOT be the most cost effective solution. There are exceptions, though, in terms of estate planning and gifting-for which insurance can be an excellent means to protect a portion of an estate that one is planning to pass along to an heir (meaning, a portion of your portfolio that you will not need access to for income.)

Typically, those who can benefit from insurance as an estate planning strategy are those who have an estate above the federal exclusion amount (right now, that amount is $3,500,000). When such an estate is passed along, estate taxes of 55% are assessed. However, if a portion of that estate/portfolio is as part of a permanent whole life policy, payable on the death of the owner, the beneficiaries are not assessed taxes for that part of the estate.

The other use for such permanent life insurance is "gifting"-passing along a portion of your estate to a charity or a specific heir-by making that entity the beneficiary of a life insurance policy.

If you don't fall into one of those categories-for example, if your estate is not above the three and a half million mark-is insurance as an investment not for you? You may find that wealth transfer strategies and estate planning (for any size estate) can benefit from judicious use of life insurance policies. It is worth a conversation with your advisor.