When looking to invest your money, you need to use financial intelligence in order to maximise your outcome. And some distinctions have to be made regarding life insurance in an investment strategy: yes, you can use it, but not at all cost!
Protect your investment
The sole use of any kind of insurance is to protect an asset in case of something bad happens (like a car insurance) OR protect a liability (like a mortgage). When dealing with life insurance, the same logic applies. This means that when making an investment, you should always look at your financial context in the same way. You should ask the question: if somebody was to die prematurely, will the investment lose value or will we lose control over the investment?
-Liquid investment (like mutual funds, stocks, etc.): when making an investment in liquid assets, you are pretty much always in control of where your money is and you can access your money really quickly. So in case of somebody dies, the beneficiary of this invested money can redeem the money without losing capital or having to pay fees for early withdrawal (mutual funds companies do not charge deferred sale fees on when the owner dies). On the other hand, knowing that the money could be invested in a tax-deferred account, the person receiving the money will have to pay the taxes due on the withdrawal then the proceeds will be for him. So, with that logic in head, the use of life insurance with liquid assets is not mandatory but you might want to use it to cover taxes for the beneficiary.
-Debt-backed investment (like real estate, a new business, etc.): now when you make investments using any types of financing, there are 2 main ways to look at this.
- If your investment can sustain itself over time without you being there to constantly pour in money, like if you have a fourplex that rents are enough to pay all the monthly fees, you don’t absolutely need life insurance. In case of you pass away, the investment can go on without hurting anybody financially. You could also say that no matter what happens, I want my investment to be clear of debt, because it is an investment after all, you should use the proper amount.
- On the other hand, you could have made an investment that needs a lot of financial management or needs to move money from one account to another or need fresh new money constantly, like you are growing your company and you have to buy new furniture or hire new employees, you should be backed by a good life insurance! In this scenario, the lost of your management skills or your personal money will hurt the effectiveness of the investment.
It is really important to determine wether you need life insurance or not! After that distinction made, you now need to build the proper life insurance plan. There are many types of life insurance and it can get confusing. The most efficient type of life insurance is term life. It is made up so you can easily cover your needs for, let’s say, the next 35 years and you will pay a very small monthly premium. In fact, your premium will drop as the years go by. You might want to read term life strategies to help you discover how to work with it.
Do not invest in life insurance!
The way to use life insurance is to have a policy with the proper amount covering the debt you have contracted to make it clear of payments or to cover the tax invoice of tax deferred accounts. But for the very vast majority (like 95% of the population: the wealthiest AND debt-free people), you should never invest IN life insurance policies, like universal life insurance. Insurance policies must be used to protect you in case of a disaster. It is not set up to maximize the return on your investment. Have you ever seen a car insurance with an investment rider attached to it? Like for the last 15 years you have accumulated 4,000$ in cash values? Knowing that if you cancel and switch companies, you will receive a check? Euh… nah! Do not count on it. Please, separate investment from protection.