The Basics of Life Insurance and Investing

by Investing School on March 3, 2012

Life insurance is an important and sound part of financial planning. Of all of the financial planning that one can do, life insurance is the most vital, and fortunately it can be the most affordable. But traditionally, we have been taught to buy life insurance and do our investing separately. This has been a common thread of advice from many many respected and revered personal finance specialists. But there are so many different kinds of life insurance that it makes sense to look at combining investment and insurance on a case by case, or at least type of insurance by type of insurance basis.

There are four different types of life insurance.

The first is term life insurance. This type of insurance does not encompass an investment component. It is straightforward insurance. You pay a monthly amount and you are covered for some amount of time of your choosing. This is also the cheapest form of life insurance but it does expire once the term ends and although in some cases it is renewable, it can be rather expensive to renew.
The next type of insurance is whole life insurance. It is called whole life insurance because it lasts your whole life and does not expire like term. Whole also has the investment component. In fact, most of the money that you pay monthly is invested rather than used for actual insuring purposes. Whole life insurance invests the way that banks do, in very low interest investments that yield extremely small returns. One of the features of whole life insurance is that you can borrow from the cash value portion of your life insurance policy (for a steep fee), so the company has to keep at least part of their investments liquid. This also means that not all of your money will be invested, so your returns will be even smaller.

Another somewhat less well known type of life insurance is universal life insurance. Like whole life insurance, universal also does not expire. The difference between all three of these different types of permanent policies is that they invest in different places. Universal life invests in money markets. The problem with this type of investment is that money markets are short term (in this case for a year or shorter), while life insurance, by nature, is meant to be for long periods of time (like from adulthood on to old age). Therefore, there is a conflict of interest, and returns grow at a variable rate rather than a fixed one. But universal life insurance allows you to use the interest to pay the premiums on your insurance policy.

Variable life insurance, the third type in this series, also lasts your entire life. Once again, the only real difference is that each type of insurance invests in different places. Variable invests in mutual funds. Now a mutual fund works like a diverse investment portfolio made up of stocks, bonds, and money market accounts, and so on. Often, the one who is being insured has the option of choosing between a few different types of mutual funds. This is usually the most expensive type of life insurance. Now variable funds have a very high risk meaning that there can and will be times when the investment does not do well, and you have to pay more for the policy making it even more expensive.

So why do experts recommend that you stray away from cash value life insurance (whole, universal, and variable) and instead stick with term life insurance? First of all, term life insurance is extremely affordable while the other three can get very expensive. Second of all, you want full control of your investments. Having a financial advisor is helpful, but completely handing off the task to a strange company is unwise. And often times the returns do not outweigh the premiums.

This post was written by Tatyana Levin who works as a content writer for

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