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Why Insurance as an Investment is a Bad Bet

by Bruce Haring

If portfolio investments were guests at a party, then the elite group – real estate, growth stocks, exchange-traded funds, and retirement accounts – would convene in the middle or in their own little mighty group. Those lackluster-yet-reliable bonds would linger just outside that elite circle, trying to fit in and standing alone, close to the annuities, would be life insurance – complex, drab, and just not worth the time and effort.

Many investors prefer not investing in life insurance and using the money that they save on more profitable areas. Although term life policies do not build cash value, they are more affordable, easy to compare, and simpler to grasp. Experts say that if you are placing a price value on term and permanent life policies, and you get more coverage from the term, the smarter option is term policy. The difference in premiums can be used to add to your investment portfolio versus choosing a permanent life policy as an investment.

So you are then faced with the question of whether life insurance is a good investment at all. Furthermore, insiders say that life insurance products – whether permanent life, term life, or any other sort – are meant to provide protection to future generations of your family, financially speaking. They are not the same as investment products and should, therefore, not be considered as such, since they do not have the potential of being products that could be an investment vehicle.

Lack of Diversity in Insurance

You need diversification to spread out your money over various kinds of investments and companies. It is the one device that helps you lessen your investment risk without seeing a decrease in your expected return. Unfortunately, insurance is known to be undiversified. A huge amount of cash gets invested within a single company and you depend on that company’s sense of philanthropy, hoping to receive a decent return.

The insurance company determines what fraction of returns should be passed on to its policyholders after making its own investments, meaning that you are completely at the mercy of the company. Your return is sure to suffer if that single company experiences some underperforming years, changes its perspective on paying customers, or goes bankrupt.

You are exposed to a huge amount of risk if you decide on building a nest egg with a single company, and the basic foundations of diversification are then sacrificed. Careful evaluation of risk is a necessity and even if the company is Apple or Google, you do not want to put all your investment capital in one company.

Unimpressive Insurance Returns

Insurance salesmen talk about policy returns like they are guaranteed, but you need to keep in mind that they are not. The picture they paint on long-term growth is nothing but projections. There is a high risk that the actual performance will not be as good, worse, in fact, as what you were presented with during the sales process.

Let us assume that you have been “guaranteed” a 4 percent return. If you crunch the numbers using their growth chart, you can actually find that after four decades, the annual return can amount to as low as 0.74 percent. What does this imply? This implies that the guaranteed return should never be taken at face value. You are better off investing in a certificate of deposit (CD), which promises better returns, because your money is locked up for a shorter time period and is insured by the Federal Deposit Insurance Corporation (FDIC)

Longer Time for Positive Returns to Appear

As mentioned above, insurance salesmen paint a pretty picture, projecting a 4 percent return after about four decades or more. Here is where the glitch lies – the period of time it takes to reach that level. In the first few years of your investment, your return will be negative, and then several years later, it will grow to be positive, but at a very low level.

Sticking with your policy will help you get into a fair range of return, but if you decide to do something else at any point before that, you will find that you have wasted time and money only to receive poor returns. This means that you need to wait a few years before your insurance policy actually begins to generate any sizable revenue. This is why financial advisors advise against investing your money in insurance if you are looking for a return worth talking about during your Super Bowl party.

There are times when investing in insurance can come with many advantages. For instance, if you have a child with special needs or a disability, it could be helpful to have a permanent death benefit. The truth is that insurance is a useful product only in a small number of cases. If you are looking for a sound investment that offers you a return worth talking to your father in law about, you should keep in mind that there are many other wiser and better options to invest in rather than insurance.

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