Let me start off by saying, I’m not against insurance. It’s a valuable tool in your financial toolbox. I personally pay for a lot of insurance every month, including auto insurance, homeowner’s insurance and an umbrella policy. Your insurance needs are different than mine. I don’t carry any life insurance because no one financially relies on me and I’m already rich. If I die it will be a windfall for my beneficiaries, not a financial burden to anyone.
THAT SAID, I get the question a lot “Should I invest in a permanent life insurance policy?” (These types of policies come by many names… universal life, whole life, equity-indexed life, etc). The answer is no. Here’s why:
Life insurance is a tool to protect people who rely on your income against your untimely death. Permanent life insurance is a bundle, partly made up of life insurance and partly of an investment product. I think the insurance companies saw all those fat payments going into IRAs and 401ks and wanted in on the action. So they decided to get into the investment game with this type of product.
But here’s the problem. The life insurance companies can’t magically create more wealth from the stock market. They aren’t able to squeeze more profits from the companies of the world. They have available to them the same growth and profits as any other investor. But they also have expenses. Rent, salaries, commissions, profits, etc. If you invest through an insurance product, you get what’s left after they take their cut. That’s the cold simple reality.
So what do you do? You buy term life insurance. Since term is usually about 10x cheaper than permanent insurance, you invest the other 90% of that payment in an index fund. When the term is up, your kids will be grown, and you’ll be rich from your investments. No more life insurance necessary.
As always, reminding you to stay healthy by following the two PFC rules: 1.) Stay at home and 2.) Wash your hands early and often.