Is Life Insurance a Good Investment? Term Paper

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Life Insurance a Good Investment?

Life insurance may be grouped into two basic categories: term and whole life insurance. The primary difference between term and whole life insurance is that a term policy is life coverage only. In the case of death of the insured, term insurance pays the face amount of the policy to the named beneficiary. Term insurance may be purchased for periods of 1 to 30 years. Whole life insurance combines a term policy with an additional investment component. The investment may be comprised of bonds, money-market funds, or stocks (Feldpausch, 2004). This type of policy builds cash value that one may borrow against. The three most common types of whole life insurance are traditional whole life policies, universal and variable. Whole life and term insurance policies allow one to lock in the same monthly payment over the life of the policy.

Overall, whole life insurance carries many disadvantages. First, this type of policy is very expensive because payments are applied to the insurance component plus the investment portion.

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Typically, the investments offered with these plans are not good investment vehicles. Aside from the fact that there are many other ways to save for retirement, these policies come with high fees and commissions, which may take as much as 3% from the annual return (Kane, 2002). Furthermore, there are often up-front, hidden commissions that are typically 100% of the first year's premium (Kane, 2002). Finally, it is often difficult to determine what the return on the investment will be and how much of the payment is applied toward the insurance and how much toward the investment.

Premiums for term insurance are typically inexpensive for individuals in good health through the age of 50 years. Thereafter, premiums progressively get more expensive (Feldpausch, 2004). The same rate expenses hold true for whole life policies. However, individuals who require coverage starting in their 60s and beyond may have no alternative but to buy a….....

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