In my previous Reader Mail post, I posted and answered the question:
“Is insurance an investment?”
I said that it is not an investment, but just a form of protection.
I also said that getting term-life insurance and short-term health insurance is important. In fact, you should have them before you even think of investing.
As a final point to my answer, I said that buying insurance with an investment component such as VUL’s and whole life insurance is a “second-tier investment” and the only reasons why you should buy them are:
- You’re “too lazy” to look for better investments.
- You already have funds and stock investments.
- You want to help a friend who’s selling you that type of insurance.
Yesterday, a reader left a comment in that post saying that he found my reasons “OUTRIGHT OFFENSIVE” – and for that, I’d like to apologize for hurting his feelings, and hope that we can just agree to disagree on this topic.
In any case, I’d like to further explain those reasons, as I think it’s important for everyone to understand why I said those statements.
On Being Lazy
Buying term insurance and investing the difference requires effort on your part to look for investments that will help you achieve your financial goals.
This means studying how UITF’s, mutual funds, the stock market and other securities work and make money. It will also require having the discipline to actually invest regularly and resist the temptation to spend your money instead.
If you’re “too lazy” to do all those, and you’re okay with getting the stated guaranteed cash value and possible dividends from whole life, or believe that the fund value of the VUL will perform at par or better than mutual funds – then go ahead and get them.
Note: Thanks to Ron for the added info in the comments section.
To be fair, insurance companies nowadays are coming up with better insurance + investment packages, with more options and more flexible terms. But as of the moment, if it were me, I’d rather invest it in an equity fund that could give an annual compounded return of 20% – refer to question 10 of the link provided.
Furthermore, it seems that Salve Duplito shares my views on this:
On Being a Second-Tier Investment
I’m a big fan of diversification when it comes to investments.
So if you already have the “best” ones such as investment funds and stocks, and you’re looking for a “paper investment” to add to your portfolio – then graduating your term-life insurance into a whole-life insurance is an option.
Personally, I’d rather buy more stocks or invest in a new fund with that money and just renew the term policy until the time comes that I don’t need it anymore.
Here’s Dave Ramsey explaining why you don’t need to be insured your whole life:
On Helping a Friend
Insurance agents earn on commission, and since a whole life insurance costs so much more than term life insurance, they’ll get more money from the sale. So if you want to help an insurance agent / friend make more money, then buy a VUL from him or her.
Unfortunately, Suze Orman thinks that your friend may not be your friend at all. Personally, I think that the friend is just “misinformed”, and I’m sure he or she has good intentions for selling whole life insurance.
So I hope Vic now understands why I said those reasons. And wish that we could just agree to disagree on this one.
Having a life insurance is important, but just like any product out there, not all types are good choices. I’m a big believer in term-life insurance, and I hope this post has helped you understand why.