Last night I read a very interesting article published by the CFA members magazine debating the idea that life insurance should be treated as a distinct asset class. At first I thought it was a very odd idea but as I read on and continued thinking about it, it started to make a lot more sense.
It’s Not An “Investment” If…
For many, life insurance is protection against bad scenarios where one person’s death would create a financial burden which would create significant issues for surviving family members. I’d agree that in such a case, treating life insurance as an investment does not make sense.
Likewise, for many, the ultimate goal is to be able to live life to its fullest even once they retire and avoid running out of money. That is certainly also a great outlook on investing and there’s no way I could argue with those going for this. In such a case, annuities are a more appropriate investment.
But For Others Including Myself
My objective goes beyond “not running out of money”. I’d like to leave something to my kids to help them out, to insure that the next generation can do even better. I’m not only saving with myself as a beneficiary but also hoping to leave money down the road and I don’t intend “come close”. So for me, investing in a life insurance makes some sense because the risk/return characteristics are so different from any other investment out there. As of right now, I only hold a term life insurance so I can’t consider that an investment really (in the sense that it will only hold value if I die in the next 20 years or so). But I do intend on buying a whole life insurance at some point which will be added to what I’ll be able to leave to my wife and kids at some point down the road. There are fiscal advantages as well which I will explore here in the future.