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Pros And Cons Of Permanent Life Insurance As An Investment Alternative

Saturday, October 15, 2011 - 10:49 AM
Some financial advisors are pushing permanent life insurance as an investment alternative. I'm always skeptical when insurance is being sold as an investment. This New York Times article takes a look at this trend. Here are some of the pros mentioned:
Their argument is threefold: the rate of return on permanent life insurance is 3 to 5 percent, the money in a policy ultimately passes to beneficiaries free of income tax, and owners can borrow against the policy without incurring any taxes.

1
Ken TuminKen Tumin5,467 posts since
Nov 29, 2009
Rep Points: 124,996
1. Wednesday, November 9, 2011 - 8:42 AM
Insurance and Investment are two different things, with entirely different purposes. Insurance is intended to insure against a potential future catastrophe, whereas investment is intended to build up assets to fund a future purchase or retirement, and/or to generate needed income. Because of the difference in aims, whole life makes a very poor, and very expensive, investment vehicle. Run far away from anyone who tries to sell you whole life for investment purposes; the only retirement you'll be funding is the insurance agent's! So, what possible reason would someone have for purchasing whole life? It wouldn't be to make provision for your dependents against the possibility of premature death (i.e., during your working years), because you would only require life insurance for a certain term (i.e., so long as you have dependents who would be adversely affected by the loss of your income). So, as the previous post points out, inexpensive term life is the much better option. The only reason that I can imagine for having a whole life policy (i.e., actually keeping life insurance until you die, even if that is in old age, when term life would be prohibitively expensive) would be in order to quickly pay off your funeral expenses while your assets are frozen in probate. Married people wouldn't need it, because the surviving spouse would still have access to joint accounts. But someone who expects to remain single for life might find this a reason to purchase whole life. Even in that case, a policy with a death benefit of $10K would be sufficient. Buying whole life for any other purpose, in my opinion, would be a waste of money.
3
WilWil242 posts since
Feb 26, 2010
Rep Points: 1,281
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