Last week I seemed to cause a bit of a kerfuffle when I wrote about which life insurance may or may not be appropriate for the general consumer. For the readers that sent in emails and comments – thank you! It’s much appreciated and we enjoy the feedback.
Twitter was also flitting and chirping with the commotion. In particular, the discussion really narrowed down to, and most of the comments we received were regarding the comment I made on life insurance not being an investment.
And that’s still true. It’s not. Now there are plenty of people that will argue with me that it is an investment for this reason or that. For this writing I am hoping to explain and to clarify what I meant as an investment.
From a pure investment standpoint – meaning saving and investing one’s money for retirement and or college or just saving and investing for capital growth; life insurance is not this type of an investment. Accounting for the actual costs of insurance, policy fees, expense ratios of the underlying funds (as seen in variable life and variable universal life), surrender charges (lack of liquidity) and agent commissions life insurance will almost always underperform an outside, well diversified, low-cost investing strategy like indexing or a passive approach in mutual funds or ETFs.
The reason why is in variable policies, a person has access to the markets as well, but pays a much higher cost for that access.
Another consideration is whether or not a person actually needs life insurance. If there is a life insurance need, term is generally the best bet. If there is no life insurance need – meaning there is no need to protect against a premature death – then no life insurance is needed. None.
Finally, I heard more and more about the “investment” in one’s family and the “investment” in one’s peace of mind. This is usually the dogma of a slick salesperson, trained to use key words and emotional triggers to induce an unknowing client to buy their more expensive product. And yes, one could argue those are excellent investments – but it wasn’t what I meant and I’m certain most readers, if not all understood that.
It would be like me saying food is an investment for my retirement. I need it to live to retirement and to survive throughout retirement. It sounds good, makes sense, but is a complete misuse of the word.
Food is food.
Life insurance is life insurance…
…not an investment.