2-Minute Money Manager: Is Life Insurance a Good Investment?

Photo by Santiago Cornejo1 / Shutterstock.com

Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about investing; specifically, whether life insurance should be a part of your investment portfolio.

Watch the following video and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “7 Questions You Need to Ask Before You Buy Life Insurance” and “8 Ways to Save on Life Insurance.” You can also go to the search at the top of this page, put in the word “insurance” and find plenty of information on just about everything relating to this topic.

If you’re shopping for life insurance, you can click here for quotes from multiple companies. And if you need anything from a better credit card to help with debt, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to the “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this two-minute answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.

Today’s question comes to us from Fernando:

“I am 42 years old and single. I finally paid most of my debt and I’m ready to invest. I have no clue where to start or what’s best for me. I can invest $3,000 a month. I’m thinking $1,000 in life insurance, $1,500 in stocks, and $500 in a savings account. Is this a good idea?”

Well, Fernando, I don’t know what you already have in emergency savings. But if you don’t have much, I want you to bulk that up first. The other two ideas you’re considering are relatively illiquid, meaning more difficult to convert to cash. So, you want to have a fat savings account before you do anything else. You also want to make sure you’re putting as much as possible in whatever retirement plans you’re eligible for.

We’ll assume for the sake of this question that you’re fully funding your retirement plan and have adequate emergency savings, and that this $3,000 monthly is extra money available to invest.

Fernando says he wants to put $1,500 in stocks, which I think is great. But $1,000 a month in life insurance? Let’s talk about that. Here are three things to consider when approaching life insurance as an investment:

Thing No. 1: The types of life insurance

There are two types of life insurance. There’s term, which insures your life for a certain term — like five, 10 or 20 years. Then, there’s permanent life insurance, which you theoretically keep until you ultimately die.

Here’s how people typically use insurance: They buy term insurance when they’re 30ish and have young kids. Should they die prematurely, the death benefit will take care of their family. They maintain the coverage until age 60 or so, when the kids are grown, on their own and the need for insurance fades. As they reach the end of the term and insurance starts getting expensive, they don’t need it anymore, so they drop it.

Note that with term insurance, the only way to get cash from the policy is to die. Like your car, home and health insurance, it’s protection. It’s not an investment.

As the name suggests, permanent insurance is a policy you intend to keep permanently. Part of your monthly premiums pay for the death benefit, and another part goes into an internal savings account. With a permanent policy, you don’t have to die to reap some benefits because you’re building cash value. This type of insurance could be considered an investment.

Thing No. 2: Permanent is more expensive

You’re probably thinking, “Since permanent insurance comes with an investment account, and it’s bound to pay off sooner or later, it’s a better deal, right?” Well, not necessarily, because it costs a lot more.

Here’s an example I recently read: A 30-year-old, healthy, nonsmoking woman can get a $1 million, 20-year term life insurance policy for $500 a year. But that same woman buying the same $1 million death benefit in a permanent policy might pay $10,000 a year. It’s building some cash value, but is this the best possible use of your extra cash?

In other words, it’s an investment, but is it a great investment?

There’s a common expression among financial advisers: “Buy term and invest the difference.” It means that instead of putting $10,000 annually into a cash value, permanent policy, you’re better off paying $500 for a term policy that will protect your loved ones, then investing the $9,500 difference into something else, like maybe a stock mutual fund.

Why? Because permanent life insurance policies have a lot of fees and administrative expenses that often make them less efficient as an investment than other choices.

Thing No. 3: Permanent isn’t always bad

There are situations where permanent insurance makes sense. For example, if your heirs could be facing an estate tax problem, permanent insurance can help pay the taxes when you die. However, you’ve got to be rich for that strategy to make sense. In 2018, with proper planning, a couple can shelter $20 million from estate taxes.

Life insurance as an investment does have other benefits. For example, you don’t pay taxes on the interest or other earnings until you take them out. Also, you have the ability to borrow against a cash value policy. Still, most experts will say these benefits aren’t enough to offset the higher expenses that often accompany these policies.

When approaching insurance or any other type of investment, I’d urge you to talk to a general financial planner, not an insurance salesperson. Looking at what Fernando suggests, investing $1,500 in stocks and $1,000 in insurance, leads me to believe he got that advice from a commissioned insurance salesperson, not a fee-based, holistic financial planner.

I hope I answered your question, Fernando.

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!

The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Surveys For Money Sites To Get Paid For Your Opinion
5 Surveys For Money Sites To Get Paid For Your Opinion

Yes, you can earn extra cash by taking online surveys. But some websites are better than others for this. Here are a few of our favorites.

My Favorite Amazon Purchases From 22 Years of Shopping There
My Favorite Amazon Purchases From 22 Years of Shopping There

Yes, I’ve been shopping on Amazon since the 1990s. These are among my most beloved buys.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

15 of the Fastest-Growing Jobs Today
15 of the Fastest-Growing Jobs Today

Times are tough, but these career fields are thriving.

How to Get the Best Possible Deal on Car Insurance
How to Get the Best Possible Deal on Car Insurance

This is the last article on understanding and shopping for car insurance that you’ll ever need.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

10 Things You Should Never Do With Bleach
10 Things You Should Never Do With Bleach

Does the pandemic have you reaching for bleach more than ever before? Learn the ins and outs of using this powerful disinfectant.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.