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Is Life Insurance An Investment Option?: Assignment Submitted by

Life insurance is a contract between a policy owner and insurer where the insurer agrees to pay a designated beneficiary a sum of money upon the death of the insured. There are two main types of life insurance - term insurance, which provides coverage for a specified period of time, and whole life insurance, which provides lifelong coverage and includes an investment component through a cash value accumulation account. While term insurance is solely insurance protection, whole life insurance can function as both an insurance policy and investment due to its tax-deferred growth. However, high fees and expenses associated with whole life policies make it difficult to compete with ordinary investment returns. Therefore, life insurance may be a viable investment option for some individuals depending on their needs and tax situation.

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49 views4 pages

Is Life Insurance An Investment Option?: Assignment Submitted by

Life insurance is a contract between a policy owner and insurer where the insurer agrees to pay a designated beneficiary a sum of money upon the death of the insured. There are two main types of life insurance - term insurance, which provides coverage for a specified period of time, and whole life insurance, which provides lifelong coverage and includes an investment component through a cash value accumulation account. While term insurance is solely insurance protection, whole life insurance can function as both an insurance policy and investment due to its tax-deferred growth. However, high fees and expenses associated with whole life policies make it difficult to compete with ordinary investment returns. Therefore, life insurance may be a viable investment option for some individuals depending on their needs and tax situation.

Uploaded by

jithinjoseph
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© Attribution Non-Commercial (BY-NC)
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Is Life Insurance an Investment Option?

Assignment Submitted by

Denis Thomas

Section D

0920307
Introduction

Life insurance or life assurance is a contract between the policy owner and the insurer, where the
insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the
insured individual's or individuals' death or other event, such as terminal illness or critical illness.
In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump
sums. There may be designs in some countries where bills and death expenses plus catering for
after funeral expenses should be included in Policy Premium. In the United States, the
predominant form simply specifies a lump sum to be paid on the insured's demise. As with most
insurance policies, life insurance is a contract between the insurer and the policy owner whereby
a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by
the policy.

The value for the policyholder is derived, not from an actual claim event, rather it is the value
derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse
financial consequences caused by the death of the Life Assured. To be a life policy the insured
event must be based upon the lives of the people named in the policy.

Types of Life Insurance policies:

1. Term Insurance
2. Permanent Life Insurance
 Whole Life Coverage
 Universal Life Coverage
 Limited – Pay
 Endowments
 Accidental Death
Life insurance as an investment option

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.

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. Thus we
can conclude that Life Insurance policies are a good investment option.

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