Insurance agents who approach to sell you a life insurance policy may have been peddling this notion to you. Read on to learn if life insurance can really be considered an investment.
What is life insurance?
Life insurance is used as a means to provide financial security for your dependents upon your unexpected death. A Shariah compliant version of life insurance is known as family Takaful. The different types of life insurance will provide a different type of coverage. As such, if an unfortunate event happens, the amount of compensation paid out, and whether or not a disbursement will be given to the nominee, will depend on the life insurance policy taken. Therefore, life insurance is not only essential for you, but instead meant to cover your spouse, children, parents, siblings or anyone who will be financially affected should anything happen to you.
Term life insurance
You pay premiums for a specific number of years, and if your death occurs within that term, the insurance company will then pay your dependents.
Whole life insurance
This type of insurance will remain as long as you continue paying the premiums. Additionally, some of the money which you paid for the premiums will accumulate cash value over time. So, in time you can use the cash value for retirement, or even to take out loans with your whole life insurance policy tied to it as collateral.
Other types of life insurance policies available in Malaysia are:
- Investment linked
- Supplementary rider (cover)
- Mortgage reducing term assurance (MRTA)
Life insurance is essentially taken to provide coverage as it can financially safeguard your family in case of your untimely death. It can help them maintain their lifestyle, pay for necessary expenses and achieve their life goals even after your untimely demise.
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Is life insurance an investment?
It can be considered as an investment, although it would be a long-term investment. Life insurance is a long-term investment which will provide financial relief to your dependents upon your untimely death, or if an unfortunate event causes you to be permanently disabled and you can no longer generate income.
As for life insurance, you have the option of investment linked life insurance policy. An investment linked life insurance means the premium you pay will be used to buy life insurance protection along with units in a fund managed by the life insurance company. The benefits that will be paid to you or your dependant will depend on the price of the units of the fund at the time you surrender your policy or when you pass away. Surrendering your policy means a full cancellation of a life insurance policy. Take note that there may be fees charged with your surrender known as surrender charges.
Currently, many insurance products in the market are tied with riders including saving features that allow you to claim your cash value once your policy matures in the future and it is usually higher than the total premium you have paid over the whole period. When talking about using insurance as an investment, this usually means it is a whole life insurance policy. Whole life insurance differs from term life insurance in two major ways, firstly that it doesn’t expire, and it has a cash value portion.
Do take note that whole life insurance is more expensive than a life term policy. When you pay your premium for a whole life insurance policy, part of that will go to the life insurance policy, and part of it to an interest earning investment that goes up in value like any other long term investment. Because you’re essentially using your premium to pay for both your insurance, and fund the investment part of the policy. The policy will last into your golden years (a time when you are more vulnerable and premiums will be more expensive), which is the reason whole life insurance policy is more expensive. Many use whole life insurance as an investment because they think of it as killing two birds with one stone. They get life insurance, which is important, and then they also have the investment part, which is taken care of for them, which is also important.
Term life insurance, unlike whole life insurance, does not have any cash value, and therefore does not have any investment component. However, term life insurance can be considered as an investment in the sense that you are paying premiums in exchange for a relatively large death benefit for your dependents.
Therefore, an insurance can be considered as an investment, depending on what your intentions were upon taking up the policy. Ultimately, adding a permanent life insurance policy to your investment portfolio can be a good option to help ease the risk of early death, and build some cash value that can be used for a variety of purposes, including retirement income. However, it should not be used as your only method of investment planning because there are other products that can offer better returns for your money.
Do also remember that even though life insurance policies can be used as investment vehicles, its true purpose is to function as a risk management tool. Finally, buying a life insurance will require you to think long term, and also require you to carry out some research before deciding on a policy that will best benefit you and your dependants.
See also: What Does Life Insurance Really Cover?