Mike McAninch is a Practice Integration Advisor with Buckingham Strategic Wealth, where he specializes in helping dentists connect their money and their values to realize their most important financial goals.
From time to time, a dental client will share with me a life insurance illustration from an agent touting the policy’s investment features (i.e., rates of return, quality of the underlying investment portfolio, dividend yield, etc.). Naturally, my client wants to know whether that policy is indeed a good investment.
As a wealth advisor, I encourage my dental clients to purchase life insurance as a means of managing the risks associated with premature death. For example, the parent of a young child purchases life insurance to provide for the child’s care and education should the parent die before the child reaches adulthood. Or, business partners purchase insurance on each other’s lives to secure a means of buying out their partner’s share of the company or practice in the event of one of their deaths.
Managing this type of risk was the original reason life insurance was developed. Initially, life insurance policies charged a premium for a given term of coverage (what we know as term life insurance). The life insurance policy expired at the end of the stated term or when the buyer stopped paying the policy’s premium.
However, in response to competition from other areas of the financial services industry, life insurance companies developed policies with cash value and investment features. These life insurance policies (what we typically know as permanent or whole life policies) added an investment component to the death benefit component in exchange for additional premiums. Over time, an investment benefit accumulated inside the policy based on some investment formula or actual investments (e.g., mutual funds).
So back to my client’s question, “Is life insurance a good investment?”
In a word, no.
Life insurance policies with an investment component aren’t always transparent with regard to expenses and policy language. Premiums for these policies can be wildly different for the same amount of death benefit. Further, unlike investment accounts, it can be difficult to determine your “investment” value and can be nearly impossible to withdraw funds without incurring significant penalties and fees.
I generally recommend that my clients buy life insurance to manage the risks of premature death and invest their savings in separate investment and savings accounts. By separating these products, you can obtain competitive bids from a number of players in both markets. As a result, your overall premium costs likely will be lower along with potentially lower investment fees and expenses.
Still have questions? Please reach out to any of Buckingham’s Practice Integration Advisors. We are here to help you reach the destinations of a lifetime as you envision them!
In our next article, my colleague, Katie Collins, will discuss another vital component of your risk management plan: personal disability insurance.