When Investing in Life Insurance Makes Sense…
Life insurance is usually best purchased when you’re relatively young and healthy, although there are different kinds of life insurance to peruse, such as universal policies and whole life policies. Bear in mind that different life insurance types make you eligible for different payments upon your death, with whole life policies growing due to dividends and paid-up additions while universal policies tend to stay the same.
Of course, life insurance is inherently complicated and changeable depending on your personal circumstances, so be sure to educate yourself and remain in the loop regarding your policy. Here we give you some tips on when life insurance makes sense for you.
When you know what you’re getting into
Before taking out life insurance, you should understand how it works and what it entitles you and your beneficiaries to. Chris Acker of CB Acker Associates Insurance Services explains:
“[Life insurance purchases are] not investments per se. Traditional whole life policies are bundled life insurance policies with no transparency of insurance costs, administrative costs, or interest rate assumptions.”
Also bear in mind that insurance costs grow with time, meaning that the cash value of a policy will inevitably change. Before signing, you need to be armed with knowledge about any costs and fees, as well as future projections too. This information will help you to make well-informed life insurance decisions.
When you’re the appropriate age
If you’re looking for universal and whole life insurance policies, you should ideally be someone in your 30s or 40s who is financially disciplined and able to make the necessary payments on time. On the contrary, term life insurance is usually cheaper and thus better when you’re still investing funds into a diversified portfolio. As Marc Lichtenfeld, chief income strategist for The Oxford Club says:
“Even if you pay your premium every month for years and obtain the full benefits of the [permanent] policies, the total returns will be roughly equal to that of a diversified stock portfolio. So you really don’t come out ahead.”
As a result, it is important to consider your life stage and financial future when deciding to take out life insurance of a certain kind.
When you know how risky you want to be
Some people buy insurance purely for the safety of having insurance and protecting themselves and their loved ones down the road. On the other hand, sometimes people are a little riskier and buy insurance because of the cash value’s potential gains in the future. If you’re a riskier person who is buying the policy for its cash value growth, then you should aim to fund the policy with the maximum amount, as this will encourage the policy to gain consistently.
On the other hand, universal and whole life insurance policies can equip you with tax advantages. As a result, insurance can be issued as a non-MEC or modified endowment contract, with non-MECs being treated like a Roth IRA when it comes to taxes. If you manage the gains properly and effectively, there will be no tax due on the gains apart from when you withdraw them.
When you’re able to afford it
It’s easy for baby boomers to sit back in their comfy homes and tell millennials that they should be investing in life insurance right now, but this isn’t always possible for younger people or those with lower incomes. As the cost of living rises but wages don’t adequately rise with it, people are cutting back on expenses wherever possible, and life insurance is something which many people simply aren’t concerned with in their day-to-day lives. Although you could argue that this is unwise, it may be a good idea to find your feet with a car, house, decent career, and the beginnings of a retirement fund before looking into a good life insurance policy.
Life insurance policies are among the most confusing and misunderstood policies when it comes to insurance. If you’re having trouble navigating your way around the complicated world of life insurance policies and you aren’t sure whether you should invest in one, speak to us today and listen to our industry-leading advice.