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Is life insurance a good investment?
Submitted By: N.Prasanna 0921225 MBA-L
Universal Variable Life is the type of insurance that offers control of cash value account policy and has multiple features. There are penalties for early termination. With the excess premium paid over the actual cost of the death benefit. Initially. This provides some extent of asset protection for a family. It provides for borrowing from the policy during the policy lifetime. LLCs and trusts. and succession planning. Life Insurance proceeds are tax-free and can be applied to partnerships. the policyholder can live. It pays a death benefit to the beneficiary named and offers low-risk. which is known as an accumulation account. the family is provided for with a lump sum cash payment. the insurance company sets up an investment.Life Insurance Is Now an Investment Tool Life Insurance has become a very valuable tool in wealth building. tax reduction. There is no guarantee on the cash value. Universal Life Insurance provides permanent protection for your dependents and is more flexible than whole or variable life. Three basic things can happen during the term of a Life Insurance Policy. die. but later in life they become more comparable and could possibly even be lower. In some states. tax-free cash accumulation: it allows the death benefit to vary in relation to the fund returns of the cash value account. It pays a death benefit to the beneficiary and offers low risk tax deferred cash value options: it offers separate accounts for investment in such as money market. Cash Value Policies Term Life is pure insurance. The main goal of Term Life policies is • • To pay a lump sum to a beneficiary upon the death of the policy owner. and bond funds: it the policy holder to make withdrawals or to borrow from the policy during. Whole Life Insurance provides • • • • Permanent protection for dependents while building a cash value account of the policy owner. Life Insurance is protected from creditors. . It pays a death benefit to the named beneficiary and offers a low risk cash value account and tax deferred accumulation: it allows the policy holder to earn market rates of interest on the cash value of the account: it offers the right to borrow or withdraw from the policy during your lifetime. it can be very simple—with cash value received at the end of the term. stock. or become disabled. which complicate the structure of the terms. the premiums are higher than term life premiums. in the event that a spouse dies. but there are now different types. corporations. The perspective that a good practitioner will have on a client’s need for Life insurance will depend upon many variables.Life Insurance is very complicated.
If it is. this could be of major concern. If your whole life policy is set up with an annuity. Unless you buy no. If you can afford only the term policy. the higher your tax bracket and the longer you have until retirement. there isn't a cookie-cutter answer when it comes to using life insurance as part of your investment portfolio. A clear benefit of investing in insurance products is the tax-deferred treatment of the cash accumulation part of the policy. you'll need to check the premium costs for both term and whole life policies.or low-load insurance policies. you can receive a regularly monthly payment that is drawn from your built up cash value for as long as the value lasts. Next. buy it. People with great wealth often will use whole life insurance policies as a way to pay off estate taxes when they die. Your federal and state tax brackets. For example. The benefit of a tax deferral is only as valuable as the amount of taxes that would be deferring. As potential health issues increase with age. Some people may choose to cash their policy out when they retire in order to supplement their retirement income. You should never skimp on the amount of your death benefit. Of course. no commission) insurance policies. • • . In this way. your life insurance policy can also double as a retirement plan. the whole life policy can be a good tool for protecting other investments against high estate taxes. or by taking a loan against the cash value. which means that taxes are postponed on income and capital gains. if your annuity is set up to begin when you are 65. the more valuable this benefit can be. you should determine how much insurance you need. there are several issues that you should consider: • • • • Your ability to pay the premiums. an insured's heirs will not have to go through hardship in order to claim their inheritance. First. compare guaranteed renewable term policies with the price of whole life. Assuming that you need life insurance at all. This money grows tax deferred. Whole life insurance policy can be used as an investment • Simply by its virtue of building cash value that earns interest. the costs of whole life erode returns so much that it almost always makes more sense to buy term insurance and invest the difference. you will receive payments after a set number of years that will come at regular intervals for the rest of your life. Through the use of a whole life annuity. The cash value that a whole life policy accrues can either be accessed by surrendering the policy and cashing out. Because of the tax-deferred status of the policy. The possibility that you might not be able to get affordable insurance later in life. In making that decision. Your willingness to shop for no-load (or.Whole life insurance as a retirement investment Its tax treatment of the accumulation account. This is an excellent way to insure a steady income during your retirement years. the argument over whether whole life insurance is a good investment basically centers on the question of whether you would be better off buying an inexpensive term policy and separately investing the additional amount that the whole life policy would have cost. The higher your tax bracket the more valuable the benefit is. Unfortunately. In this way.
Because whole life insurance policies present the opportunity to earn interest on the policy. The second function is as an investment. a person may look to this policy as the best way to make an investment. Many use life insurance policies to cover funeral costs. research suggests this may not always be the case. future college expenses and other expenses a beneficiary may rely on. However. Misconceptions . Consider this example: a whole life insurance policy may cost $100 a month. a person may not experience the same return on investment as a mutual fund. Function Whole life insurance policies (the chief type that features an investment component) serve two functions. mutual funds or others--are considered the person's property and last for as long as the investor wishes to hold the policy.4 percent for whole life insurance. Whole life insurance--named because they extend throughout the policyholder's life--acts similarly to a savings account in that money is earned every year. which represent a number of stock investments that may accrue in value in various amounts over time.Life Insurance Vs. which offers an average return of 12 percent. while another noninvestment policy for the same amount may cost $7 per month. mutual funds are one example of an investment considered to be more stable. Time Frame A whole life insurance policy is good for the duration of a person's life. With returns that vary from 2. consider the potential returns on investment: a whole life insurance policy is considered to be significantly more expensive than other policy options that do not feature an investment vehicle. Other investment vehicles--stocks. Returns When considering the best investment vehicle for your money. meaning the policy is guaranteed to pay out when a person passes away. Investing Overview There are many avenues to consider when determining with what investment vehicle a person will contribute her hard-earned money to. Just as a whole life insurance policy is considered to be a fairly safe investment vehicle. even during a recession period. Investment vehicles include mutual funds.6 to 7. The first is to serve as a secondary source of income for the policyholder's beneficiaries. Other insurance policies (known as term policies) may only last for the duration someone has purchased them--anywhere from one to 35 years.
He will pay an annual premium of Rs.600/. but only pays out the money once. it is generally the case that you will experience better returns through purchasing a term life insurance policy and investing the remainder in mutual funds. Example :. 29. How to Lose Money with Cash Value Life Insurance ? While all of these ways to draw money out of an insurance policy sound promising. 36. Keep in mind that in order to earn this 8 per cent per annum return. 10 lakh for a term of 30 years.e. This makes the policy's cost significantly lower. stocks. .5 lakh after 30 years. which is a noncommission-based policy. many of the expenses associated with the life insurance contributions represent commission payments. Cash value costs more than standard life insurance. However. they each come with costs. Let us assume the higher return of 8 per cent per annum. no money if the insured survives the term of the policy. Considerations When considering insurance as an investment or to contribute money to another investment outlet. On the other hand. Cash withdrawals from savings in a life insurance policy can be deducted dollar for dollar from the final payout – or they may cut into the death benefit by much more than the amount withdrawn.430 . the annual premium for the same sum and duration for a term plan would be Rs. 894. it is possible to purchase what is known as a no-load life insurance policy. making this kind of policy effectively a waste of money. The term plan offers only insurance i. It's important to note.to be paid over the next 30 years as insurance premiums. These include the possibility that you may not be able to secure insurance later on in life due to a pre-existing condition. expenses and other factors that can raise the monthly cost of the insurance premium.A 30 year old male purchases an endowment plan for a sum of Rs. Life insurance yields (in general) a low return on investment compared to other savings avenues and investment opportunities. Especially when the endowment plan could provide returns in the range of 6 to 8 per cent per annum. The man might argue that he spends all that money and gets nothing in the end. bonds or another investment. 3. However. the insured has to commit an aggregate sum of Rs. there are some times when a whole life insurance policy is considered a good investment. which makes whole life insurance a better investment. However. as well.820. most of which are taken directly out of the death benefit paid out at the end – the ultimate reason to have life insurance in the first place. which means the insured receives a sum of Rs.less than 12 per cent of the cost of the endowment plan.Many view a life insurance policy as a lucrative way to ensure the future of their beneficiaries as well as earn interest. that even standard insurance is not always the wisest way to invest money.
but most cash value life insurance policies may be more trouble – and more expense – than they are really worth.430/per annum. Insurance customers solely depended on insurance agents for product information. Assuming that the surge in the market will not continue for a very long period. "What will I get from it?" It has been a quirk of character that allows us all to believe that our lives didn't matter enough to cover the risk of losing it.44 per cent. we could look at the returns earned by such funds in the last 6 months. ostensibly to provide higher income (it had a lot more to do with higher commissions to the agents) compared to low premium pure insurance plans or term plans. The savings and investment portion has always been on top of the mind . Which would have given exactly the same benefit at a fraction of the cost. 26. translating into an annual 16 per cent return. Equity-linked tax saving funds have provided returns of 48 per cent over the last one year. .5 lakh in 20 years or faster. He decides to invest the balance 88 per cent of what would have been his annual endowment plan premium (a nice little sum of Rs.one bought life insurance asking. His premium is Rs. Hence the value for the risk cover always seemed insignificant.he purchases the term plan. Moreover. The insured could actually earn over Rs. life insurance has been sold as a tax-saving product for years. 34 per cent over the last three years and around 44 per cent for the last five years. and suggest investing the difference in price in an investment vehicle that will return more by the end of the term policy than would have been saved by purchasing whole life coverage. The agents dumped high premium plans on the clients. That shows an average return of around 8. let's assume the other alternative .390/-) in an equity-based tax-saving mutual fund. awareness about the actual returns or yields earned on insurance products was quite low. 35. 3. Thus Savings are Better in the Bank than in Cash Value Life Insurance. Conclusion In India.There are circumstances in which insurance can protect loved ones and give peace of mind.Now. Insurance experts often recommend the relatively cheap term life insurance over more costly whole life insurance.
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