Should you use Life Insurance as an Investment?

Life insurance is often used as an investment for retirement planning. Basic life insurance can be divided into two general categories, term insurance and whole life insurance. When you buy term insurance, you pay premiums in exchange for a death benefit over a specified period of time. This is the least expensive type of life insurance. Because the death benefit is all that you get with term insurance, it's never sold as an investment.

Whole life insurance, also known as permanent- or cash value life insurance, not only promises to protect you for your entire life, but also includes an investment – the cash value. Initially, the premiums are higher than term life premiums, but later in life they become more comparable and could possibly even be lower. With the excess premium paid over the actual cost of the death benefit, the insurance company sets up an investment, which is known as an accumulation account.

The appeal of whole life insurance as a retirement investment is its tax treatment of the accumulation account. This money grows tax deferred, which means that taxes are postponed on income and capital gains. Assuming that you need life insurance at all, the argument over whether whole life insurance is a good investment basically centers on the question of whether you would be better off buying an inexpensive term policy and separately investing the additional amount that the whole life policy would have cost. In making that decision, there are several issues that you should consider:

• Your ability to pay the premiums. First, you should determine how much insurance you need. Next, you'll need to check the premium costs for both term and whole life policies. If you can afford only the term policy, buy it. You should never skimp on the amount of your death benefit.
• Your federal and state tax brackets. The benefit of a tax deferral is only as valuable as the amount of taxes that would be deferring. The higher your tax bracket the more valuable the benefit is.
• The possibility that you might not be able to get affordable insurance later in life. As potential health issues increase with age, this could be of major concern. If it is, compare guaranteed renewable term policies with the price of whole life.
• Your willingness to shop for no-load (or, no commission) insurance policies. Unless you buy no- or low-load insurance policies, the costs of whole life erode returns so much that it almost always makes more sense to buy term insurance and invest the difference.

Unfortunately, there isn't a cookie-cutter answer when it comes to using life insurance as part of your investment portfolio. A clear benefit of investing in insurance products is the tax-deferred treatment of the cash accumulation part of the policy. Of course, the higher your tax bracket and the longer you have until retirement, the more valuable this benefit can be. However, a very important disadvantage of using life insurance as an investment is the high fees and expenses that make it difficult to compete with the returns of even ordinary security instruments, such as mutual funds.

Weigh the pros and cons carefully when deciding whether life insurance has a place in your investment or retirement plans. If it does, educate yourself and shop wisely, preferably opting for low- or no-load products that will meet your needs.