Persia Insurance Group

The issue of mixing insurance and investing has been debated among financial planners, life insurance agents and financial commentators for decades. While the different sides of the issue can make some strong cases for and against, it remains an unsettled debate, largely because it isn’t always framed in the right context. Both are essential to the viability and ultimate success of an individual’s financial plan. For most people, especially those starting out, insurance and investing need to work side-by-side to create the financial security they seek. The debatable issue is how they should work together to produce the best long term results.

Investors Need Life Insurance

No competent financial professional could argue that life insurance does not play a critical role an individual’s investment plan. The purpose of life insurance is to ensure that the capital your family needs is available if you should die prematurely before you have had a chance to accumulate your own capital. Life insurance has also proved essential to the millions of people who, during the 2008-2009 market crash, lost up to 60% of the value of their retirement plans. The capital from life insurance proceeds replaced the lost investment capital for those who may have died before having an opportunity to recoup their losses.

When the debate is narrowed to the issue of using life insurance as an investment vehicle, the lines are more clearly drawn. Most planners would agree that insurance and investments serve two distinct purposes and that the two should be maintained as separate financial instruments. It should be noted, however, that life insurance was, at one time, a primary instrument for savings for a long while during and following the Great Depression when confidence in the banking system had evaporated. Cash value savings accounted for a large percentage of funds that were used to buy homes and supplement retirement incomes during the 1950s, 60s and 70s for the generations that emerged from the Great Depression and World War II.

Life Insurance is not an Investment Product

Since then, the financial industry has churned out an ever expanding menu of investment products and alternatives that provide even the smallest investors with access to the financial markets, and the U.S. Congress has created retirement planning options, such as IRAs and 401(k) plans for all workers to be able to take advantage of tax incentives and growth opportunities for their retirement savings.

Concurrently, the life insurance industry developed a number of insurance products designed to compete with investment products by offering investments wrapped inside of a life insurance policy in the form of managed investment accounts with variable life and high interest savings accounts with universal life. Both products offer attractive investment opportunities that parallel mutual funds and bank CDs respectively, but with the added benefit of tax free growth and access to the account values.

It is these life insurance products which lie at the heart of the insurance and investing debate. Although billions of dollars have flowed into these products over the last few decades, planners and pundits argue that people may be misguided if they are using these life insurance policies as investment vehicles. At the crux of their argument is the fact that investors should instead by maximizing their contributions to their tax qualified retirement plans, especially employer-based plans in which employer matches a portion of the contribution.

It’s not likely that they would receive any argument over that very valid point. Not only do qualified retirement plans offer current tax breaks that should be fully utilized, it is essential that people have a separate investment account earmarked specifically for retirement. To do otherwise can diminish the chances that you will accumulate enough assets to provide for a secure retirement.

Investment-Oriented Life Insurance as a Viable Protection Alternative

Taken in a different context, an equally strong case can be made for investment-oriented life insurance such as variable life or universal life, and to some extent, even whole life. Many people prefer permanent life insurance over term, or temporary life insurance for a number of reasons.

• They recognize that their need for life insurance will continue beyond a term policy’s expiration

• They want to protect their insurability.

• They are using life insurance to protect a business, fund business succession, or maximize the transfer of their estate.

• They recognize permanent life insurance to be a means of accumulating tax favored savings in addition to their qualified plans.

• They recognize that permanent life insurance may provide a more cost-effective means of maintaining life insurance coverage for the long term.

Those people who, for whatever reason, prefer to use a permanent life insurance policy for their protection needs, all have varying degrees of investment risk tolerance, and some are more likely to select an investment oriented product such as variable life because they prefer that their money have the opportunity to earn above average returns. Others are satisfied if they know that their money at work is earning competitive interest rates such as those available with universal life. Therefore, they might make the decision to “mix” insurance with investing to put the premium dollars that they are going to contribute anyway to work a little harder.

Their objective for their investment-oriented life insurance is not necessarily to get rich, or to replace their qualified retirement plans, rather, it is to provide for permanent life insurance protection that, through the opportunity to earn higher returns, could also create an asset that could provide supplemental income, or, perhaps, could provide the means to pay for their permanent coverage.

Critics will argue that these types of policies are loaded with expenses that can impede the growth of cash values, and therefore, are not good place to put your money to work. While these policies do have expenses, such as insurance and administrative costs, not found in non-insurance investment products, it shouldn’t bother the person who prefers permanent life insurance coverage that the net return of a variable life policy is 1% lower due to expenses, because their premium dollars are also providing the protection for which they are intended.

Variable life and universal life policies can provide higher returns than would otherwise be earned if your money instead sat in a low yielding, taxable savings account. Expenses can eat into returns over the long term, but many of the newer products available have cut their expenses significantly and many are available without sales loads. It is important to shop around and conduct a thorough comparison to find the most efficient investment-oriented life insurance.