Is life insurance a good idea to invest in?

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Is life insurance a good idea to invest in?

This was a great question asked on Quora. Here's the answer I posted:

Insurance should not be thought of as an investment. Insurance is a protective measure to cover the risk of unpredictable but costly events. You should never expect a return on your insurance dollar. The best return on insurance is no return!

Let’s take a look at life insurance specifically. Traditional term life insurance policies are a smart idea for most people who have dependents or other obligations. These policies are relatively cheap and pay out a tax-free death benefit to your beneficiaries if you die before the end of the policy term. They can use this money to pay off a mortgage, pay college expenses or fund living expenses. The alternative is cash value life insurance (e.g., whole, permanent, universal and variable life policies). These products promise a return on part of your insurance premiums. They pay a traditional death benefit plus an investment return on part of your premium (the pitch is for you to build up savings for retirement). For most people this is an unwise purchase because the cost of cash value life insurance is 12-15 times higher than term insurance! Once the insurance company adds in commissions and expenses, the investment return is typically much lower than you’d get in the market.

You’re better off buying term, taking the difference in premiums and investing the rest of your money in pure investment vehicles (e.g., your 401k or IRA). To learn more on this topic check-out our blog post: Why it's a bad idea to think of insurance as an investment.