As people continue to turn their backs on volatile investment strategies, life insurance as a vehicle for securing one’s financial future has become a popular topic, and several opinions can be found in favor of or against it. The problem with most of these opinions, other than the fact that many of them are biased, is that they try to sway people in one direction or the other regardless of the fact that each person has his or her own set of circumstances that need to be addressed on an individual basis.
It can’t be denied that we have found ourselves in some painful financial times. News surrounding the increasing statistical figures of unemployment, poverty, and crime rate doesn’t seem to quite capture the devastation experienced by the individual or their family. While people continue to suffer through this deep economic recession, they naturally question the financial decisions they’ve made in the past and look to make better choices for their future.
Those who are currently surviving this country’s economic meltdown aren’t necessarily people who struck it rich, are highly educated or have had top-paying jobs. Also generally not included on the list of survivors are those who invested primarily in the real estate industry, stock market or other high-risk ventures. The survivors, rather, are made up of individuals who secured their financial future through wise planning, decision making and investment diversification.
The two different types of life insurance are term life insurance and cash value life insurance. Term life insurance is more common and is similar to auto or health insurance. In exchange for a small fixed premium, which can be broken down into monthly or annual payments, the insurance company provides financial protection to your family or other beneficiaries by committing to pay a large sum of money to them should you die within a certain period of time (e.g. 20 years). If the term ends while you’re alive, there is no payout. It has no cash value unless your heart stops beating during the term of your policy.
Cash value life insurance, commonly known as whole life insurance, protects the beneficiary in case of death, but it also builds cash value and can be borrowed against. Life insurance can also be set up for many purposes including estate planning, income replacement, liability protection and retirement supplement. Once you decide what your premiums will be, they remain constant throughout your entire life as long as you continue to pay them. While part of the premium is used towards a death benefit similar to term life insurance, a large portion of the premium, referred to as the cash value of your policy, is either conservatively invested for you as the insurance company sees appropriate or you may select how your money is invested. The cash value accumulates on a tax-deferred basis and may be used for various reasons throughout your life. If you decide to cancel your policy, the cash value is yours to keep. Alternatively, you may borrow against the cash value and maintain your policy and its fixed premium.
Because it’s a conservative investment vehicle, whole life insurance’s rate of return does not compete short-term with higher risk investments. Some financial advisors focus on this fact when arguing in favor of higher risk investments and against life insurance as an investment tool. They know that once you’ve committed to an insurance policy, it will be difficult to convince you to cancel your policy and invest in their higher risk ventures. On the other hand, many insurance agents will sell you more insurance than you need and ask you to put all of your extra money into a policy, making the investment inefficient and causing your investment portfolio to be too conservative and non-diverse. It’s advisable that you consult with an experienced agent from an insurance company that is financially stable and has an excellent rating from Standard and Poor’s or some other independent agency that rates financial institutions. As with your unique, personal investment strategies, it’s important that you obtain a life insurance product that is tailored to your specific financial needs and goals. It should serve as a long-term investment anchor while allowing you the freedom to invest in higher yield, short-term ventures.
In summary, wise planning, decision making and investment diversification are the keys to long-term financial security. Life insurance has long been, and continues to be, amongst the viable options for investment diversification and an integral key to many individuals’ investment portfolios. During both the prosperous and tumultuous times, life insurance remains constant and serves as a foundation for many financial survivors.
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