Using Insurance Products as Investments: Advantages and Disadvantages
Most often, insurance products are viewed as a hedge against the unknown or the unexpected; but in addition to providing protection against some of those unknown events, many of these products have an investment component. Policies such as whole life, universal life, and variable life provide both for insurance coverage and have a savings or investment component attached to them. Even though such products may be attractive, it is always necessary to understand their advantages as well as disadvantages before choosing them as investment products.
Advantages of investing in insurance products
One major advantage of investing in insurance products is the death benefit they will provide. Life insurance policies give a source of funds to see that one’s beneficiaries are financially provided for, if the policyholder dies. Thus, the double service of this tool can make the life insurance a very popular product for people who wish to invest while, at the same time, securing one’s family members.
Another benefit is tax advantages. The cash values in whole and universal life insurance policies are considered to grow on a tax-deferred basis; meaning that the policyholder does not have to pay taxes on the gains until money is withdrawn. Also, the death benefit is usually received tax-free by beneficiaries, which could be a huge financial advantage for the heirs.
Insurance products also offer a savings component. Policies, such as whole life insurance, accumulate cash value over time that can be borrowed against, or withdrawn, if needed. That’s a nice savings account to apply against major needs in emergency situations or to help fund a financial goal you have, such as paying for college or buying a home. Other policies assure a minimum return that may not always be available with traditional investment products.
Disadvantages of Using Insurance Products as Investments
While these have their advantages, there are significant disadvantages to take into consideration. Probably one is a higher cost. Insurance products with investment aspects usually have high premiums compared to term life insurance. The paid premiums may have administrative fees, mortality costs, and commissions, which may erode the returns on investments. Many people might not find the use of insurance as an investment worth the cost.
A drawback of insurance is that they are usually complex. Being a means of insurance investments, they are abundant in numbers, and there are numerous riders and potential penalties that crop up if one attempts to withdraw his investment before maturity.
When these investments are hard to understand, policy holders lose track and fail to comprehend what their investment means. This intricacy may offer investors a simpler and clearer way of investing in traditional instruments such as stocks, bonds, or mutual funds.
Further, the returns on investment may be relatively low compared to other traditional investments. Where the insurance products guarantee returns, such returns are usually very small as compared to the possible growth value in equities or real estate. Generally, those who would want significant growth may have to rely on something else other than just the insurance products.
Conclusion
In this regard, insurance products as investments give a unique blend of protection along with growth potential, which will attract some investors. The advantages are huge: the death benefits, tax-deferred growth, and the savings component. However, these investments do tend to carry more significant costs, are relatively complicated, and usually fetch relatively lower returns.
All of these considerations including financial objective, risk tolerance and terms of policy have to be taken into account before the investment using insurance products. Talk to a financial advisor also could be useful in determining options that best fit one’s overall strategy. In short, although insurance products can serve as dual purpose products, proper judgment should be applied with regards to their pros and cons.
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