It has become popular among some life insurance agents, agencies, and companies to sell customers life insurance policies that are blended with an investment provision. But few people bother to ask if life insurance should even have an investment provision at all.
The basic idea has been to sell two very distinct financial products under the umbrella of one plan. For a number of reasons, this is usually a very bad idea.
Investment Provision Insurance vs. Term Life Insurance
Term life insurance is pure life insurance. That is, it is a life insurance policy that is life insurance only. There is no investment provision, and no get-rich-quick bells and whistles tagged onto the policy to make it more attractive.
Life insurance policies that incorporate investment provisions are much more complicated. They go by various names, including whole life insurance, universal life insurance, and various other titles. They have the basic life insurance provision, just as a term life insurance policy does. But they also pack a lot of special provisions into the policy.
That includes not only a growing cash value, but also loan provisions, distribution limitations, and fees – lots of fees.
Though many of the provisions seem like “added benefits”, there’s nothing added at all. That is to say that the insurance company isn’t giving you any sort of free benefits. In reality, you are paying for every benefit you receive with a life insurance policy that also contains an investment provision.
The Investment Provision is Usually Why You Can’t Afford Life Insurance
Millions of people are currently going without life insurance. They’re convinced that it’s too expensive. And if they had life insurance policies with investment provisions pitched to them, they’re probably right. In that case life insurance really is too expensive!
Life insurance policies with an investment provision are not just more expensive than term life insurance policies, but much more expensive.
We’re not talking about 20%, 50%, or even 100% more expensive either. A life insurance policy with an investment provision can be 10 times or more the cost of a term life insurance policy.
If you’ve been thinking that you can’t afford life insurance because the last premium quote you received – on a policy with an investment provision – looked something like $2,000 per year for a $100,000 policy, then you’ve been looking in all the wrong places.
You can purchase a term life insurance policy with an equivalent death benefit of perhaps just $200 per year.
I’m going to take a guess that the lower premium would make all the difference to you.
Multi-purpose Products Usually Don’t Do Anything Particularly Well
Apart from the fact that life insurance policies with investment provisions are radically more expensive than term life policies, there’s also the fact that products that attempts to satisfy multiple objectives are usually not very good at any of them.
We can certainly see that to be the case when it comes to life insurance policies with investment provisions. Whole life insurance, and other related policies, represent very expensive insurance. That means that they are not very cost-effective if purchasing life insurance is your primary objective.
But on the flipside, the investment provision usually doesn’t do that well either. You can easily get better investment returns by investing your money in an exchange traded fund that invests in the S&P 500 index, rather than what you will earn through the investment provision of a life insurance policy.
Life Insurance With an Investment Feature is Financially Inefficient
Life insurance policies with investment provisions are packed with fees. Those fees are mostly connected with the investment provision itself. One of the biggest expenses is broker/agent commissions. These eat up most of the cash provision in the first few years that you have the policy. This is why the cash value that you pay several thousand dollars in premiums per year for will have just a few hundred dollars after five years. Everyone connected with your policy will be paid before you are.
This is also precisely why life insurance agents and brokers will push you into life insurance policies with investment provisions. At least some of the higher fees that you pay for the policies will be paid to them.
Investment provisions also contain fees that are a lot like load fees on mutual funds. Insurance companies use proprietary funds in their investing activities, and charges substantial fees for doing so.
And while some investment provisions will offer guaranteed minimum returns, the same policies typically cap your investment earnings. For example, a policy that guarantees a minimum annual return of 3%, might limit your upside gains to 8% in any given year.
There are more efficient ways to invest your money, and life insurance policies with investment provisions usually don’t qualify.
If You Need Life Insurance, then Buy Pure Life Insurance
If you need life insurance, go with term life insurance. It’s pure life insurance, without all of the costly add-ons that come with investment provision life insurance policies. They are also a lot less expensive, which means that you can get more coverage, and customize the term to fit your actual need.
We specialize in term life insurance, so give us a call if you’re in the market, and just want life insurance – and nothing more. We promise to find you the best coverage for your needs at the lowest possible premium.
