Before getting into different insurance products, first of all, we all know that life insurance companies are not non-profit organization. That mere fact simply means that on the average (almost like gambling), you are likely to lose from buying the life insurance than gaining from it (at least financially). However, there are rules, assumptions, and circumstances in every “game”. And if you study in more details, it is possible to at least tilt the winning odds toward your side.
A few years ago, maybe about 8 years ago, I remember that it was a good time to buy into life insurance. But that was in the past. What do I mean by “good time”? At that time, financial communities have a very unrealistic view on forward-going inflation rate which seemed to be low all the time, while the expected gain on financial investment (bonds & equities) seemed to be high. Furthermore, life insurance companies were in the more competition phase. Most of the things were in favor to insurance buyers. But things have changed, and some have made the turning point, especially inflation rate (& its expectation). Nowadays, it’s harder to find a policy that lock you into a lower fixed premium for a more extended period of time than before. If you have friends who bought insurance policy earlier, you could ask them what they are paying. I don’t think you can get the same deal anymore.
That brings the question of the pricing structure of life insurance. What are you paying for exactly? Life insurance if it’s term-only, is essentially a bet against yourself. It’s like buying put option against your stock holdings. It’s an insurance, that can potentially smooth out your finances when things go terribly wrong. If you lock into a policy with a fixed higher premium for a given number of years, the higher premium simply reflects how insurance company factors in the expectation of returns and inflation rate for that period. If you buy the whole life insurance or any other insurance with cash value, it is like buying a term life insurance plus a pension plan investment. Pension plan can also grow tax-free. Insurance however has the added advantage of totally tax-free for the pay-out.
I assume that once two products are combined into one, it becomes much easier for the salesman or the company to muddle with all the numbers and keep more for himself, and keep less for you. I’m sure you’ve heard the pitch from insurance agent such as “the policy will pay for itself after some years”. This is true, but it’s paying for itself because you paid for it. If you like forced saving, you can definitely consider such plans. But consider pension or annuity investment too.
However, all of above products have a characteristics of nice stable return, but FIXED. In other words, they are like bond-like investment for the people who don’t know much about how to invest in stock markets. For the long time readers on this blog, they should know very well that I would only recommend bond-like investment for people who simply have extra money to lose. Inflation going forward should be heightened. Any fixed payout is likely not going to serve your need. Therefore, I would suggest that unless there are other compelling reasons, it may be better to just buy a term life insurance and invest the extra dollars in the stock market for the long term.
There are still many different issues around life insurance. And others may disagree strongly with my outlook on inflation. However, I have tried to give you one opinion from my investing angle into life insurances. The correct answer is highly dependent on individual circumstances. And there are always some people who should have bought certain life insurance, and some who shouldn’t have. Unfortunately, it’s always after-thought. You should try to decide for yourself what you and your family need.
