This is a guest post. It takes a look at the idea of using an insurance policy that builds cash value as an investment. While I disagree that this is the way to build an investment and prepare for retirement, it is worth it to consider an alternative viewpoint. Feel free to share your thoughts in the comments.
Both insurance and investing can be risky games to play. Investing requires you to guess what will be profitable in the future, with limited resources (i.e. no insider information or credible future telling skills) to help you make this decision.
Insurance, on the other hand, entails you entering into a contract, the terms of which you may possibly not understand until it is time to file a claim and you actually need to use the insurance. The biggest uncertainty with insurance is if and when you will ever need to file a claim or get the cash value or your policy.
This is especially true for life insurance.
Life insurance is a possible way to combine insurance and investing, but these two practices can remain separate as well.
There are two different types of life insurance: term and cash value.
Term life insurance is a set amount of life insurance for a specific term. For example, you can get a term life policy providing you with say half a million dollars’ worth of coverage for 30 years. Once your term expires, you no longer have life insurance.
Term life insurance is usually an inexpensive policy that is focused solely on life insurance and stays away from investing.
Cash value life insurance works differently. A much more complicated concept than ordinary term life insurance, there are three different types of cash value life insurance policies. All of them work fairly similarly.
When you pay your premium, part of the money goes to your life insurance and the rest is invested for you and acts as a sort of retirement fund. Unlike term life insurance, cash value life insurance never expires and lasts your entire life.
The main difference between the three different types of policies is where they invest your money. The more expensive the policy, the more potentially profitable these investments are.
It is important to know that these investments are only potentially profitable. They are not completely safe and there is no guarantee that you will get a return. In fact, it is even possible for these investments to go sour and you lose money.
Now it may seem like an interesting concept to split your money between insurance and investing while having the same people in charge of both, but this investment component makes your life insurance premium significantly higher. Term life insurance premiums, however, are very affordable.
Should you combine investing and insurance?
To answer this question you must compare what you gain to what you lose. In terms of investing, the most valuable thing you lose is control. With set investments managed by huge insurance companies where you are one of millions that you cannot control or change, you allow a huge insurance company to control your financial future.
Now there are people who would rather not think about their investments and want someone else in charge of them, but this is a dangerous precedent the less secure these investments become.
Ultimately, the choice to combine investing and life insurance is a personal one, but relinquishing control of the financial aspect of your retirement can be a risky move.
Post written by Tatyana Levin, a copywriter for BMCCinsurance.com. In her free time she enjoys reading personal finance blogs, planning for the future, and cooking. You can follow her on Twitter.