What You Must Know Before You Invest in Life Insurance


Editor’s Note: Information contributed by Genworth Financial.

My husband and I have just had our first child. All of a sudden we find ourselves catapulted into the unknown, from the micro to the macro. Everything is new to us from the diapers, to the (lack of) sleep schedule, to the re-budgeting of our expenses.

We find ourselves thinking about finances a lot more than we used to. And it has occurred to me that one of the benefits of being together for a long time is that our finances have had time to knit themselves together. Sometimes, I rhetorically think to myself that falling in love might be easier than deciding on things like joint bank accounts – although that is debatable.

The latest topic that our fledgling family has found itself immersed in is life insurance as one way to invest inthe family’s future. We wanted assurances that our child would be provided for if something happened to us. The more we understood about life insurance, the more it became clear that mortgages, car payments, college education and even the future of the family business could be guaranteed.

Here are some of the things we learned:

Types of Life Insurance

It’s a good idea to educate yourself about the types of policies available early on as policies tend to be less expensive the younger you are. Generally, there are three types of policies to look for.

  • Universal Life Insurance: A flexible policy that you can structure around your needs and your monthly income. You can adjust the premiums paid per month if your income varies over time. You just have to ensure that you pay enough to keep the policy valid and in effect. There may be a death benefit option that can either increase or reduce the death benefit as needed. This is especially useful if you have young children and want certain levels for lengthy periods of time, but then want to be able to reduce the benefit when your children are grown.
  •  Term Life Insurance: This kind of policy will maintain a certain premium for a distinct time period, after which you can opt to continue coverage with a premium that increases annually. You might decide that you want life insurance for 15 years with guarantees that your premiums will remain fixed. If you have a fixed budget, this might be especially useful.
  • Whole Life Insurance: This offers a guarantee on the death benefit and guaranteed cash value for a guaranteed premium.  This is often most expensive kind of life insurance, but may pay dividends (refunds of unneeded premium) that can be used in a variety of ways.

How Much Should I Pay Per Month for Life Insurance?

First and foremost, you need to determine how much you can afford to pay on a monthly basis. Rather than thinking of that money as being additional income that must be earned, look at your expenses and consider where you might stretch your budget to save a few dollars each month. Cutting down on a lunch out here, a cappuccino there can add up to significant savings. There are a number of resources available to assist you in saving money, including GenworthFinancial’s budget calculator.

Life Insurance Is an Investment

Life and death come with financial risk. It’s possible to look at life insurance as a guarantee for the future financial security of your family. Life Insurance policies have much in common with aspects of the investment world.

Understand the “Cash Value”

I mentioned above that some policies contain a guaranteed cash value for a guaranteed premium. At the start of the policy, the premium is larger than it would be in a term policy so that the additional premium can be invested in a “separate account” in order to grow the cash value. This can be controlled by either the insurer or the policy holder. Earned gains can be utilized in a variety of different ways.

Tax Benefits of Investing in Life Insurance

There are important tax benefits within a universal life insurance policy that are similar to 401Ks and IRAs. Annual earnings on the investment part of the policy don’t get taxed, and any taxable gains when cashing out on a policy can be reduced by the amount of insurance protection the plan provides. The policy holder’s gains usually aren’t taxed in case of death.

Policies can offer a range of investment options, including stocks, bonds, balanced mutual funds, international mutual funds and money market accounts. When deciding to invest, work with an advisor just as you would a financial advisor, and always invest just as much as you foresee needing, neither more nor less. Genworth also offers a life insurance calculator to give you a sense of what you might need for coverage.

Have you invested in your future? Tell us about your experience with life insurance.

 


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Discussion

  1. Spondooli on the 17th November

    Thank you for this share I am actually thinking about investing in life insurance and didn’t have a clue about it. This has given me a great insight into life insurance.

  2. Travis on the 21st November

    If you are really interested in the protecting your family and “investing” in life insurance you may want to re-consider your choice of insurance carrier. You should really consider one of the big four mutual life insurance companies such as Guardian, MassMutual, Northwestern and NY LIfe. Mutual life insurance companies Whole Life products have traditionally paid higher dividends than their publicy traded competitors. Some some disclosure, I do work for one of the big four I mentioned but am able to work with any carrier I that I feel is appropriate for the situation. When it comes to who it is the best, I can say that over the long run that you would be safe with any of the four that I mentioned. As with all business some years one company is better than the other. Dividends that are paid out by these companies are determined by mostly by profitability(investment income, controling expenses and managing insurance losses) Where as premiums are determined by mortiality costs, expenses and risk appetite of the insurance carrier.

    I know that many insurance companies are aggressively marketing Universal policies as “cheaper” alternatives to traditional whole life insurance policies due to the low interest rate environment but I would suggest avoiding them. I say this because I believe that one of the main reason to buy life insurance to pass risk to the insurance company and universal policies end up shifting some of the risk back to policy holder. With out getting too technical, this is basically about keeping policy fully funded to provide the death benefit as you expected when you purchased it.

    Sorry about the long post on insurance but I hope this helps you make a more informed choice….as an insurance professional it pains me when I run into people who don’t have the protection or cash value that they have been counting on.

    Just my two cents…FYI I loved your post….you were able to explain the basics of life insurance then many of my co-workers…lol

  3. Brian on the 28th November

    I don’t see life insurance as an investment, but rather as sharing the risk to provide income replacement. I have term life only with my plan being that once the term is up I no longer need life insurance, I am now self-insured with enough assets to live on.

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