Is life insurance a good investment? Before we answer this question, let us first see whether life insurance can be called an investment at all. In the opinion of many financial experts, it is wrong to call pure life insurance an investment because it offers no return. Theoretically speaking, this is true. A life insurance plan cannot be considered an investment unless it is a cash value plan. And, this is what insurance agents keep reiterating to persuade you into buying life insurance plans that are more expensive than simple term plans. If you trust them blindly, you will only help them earn a huge commission from your insurer, and the life cover you will receive from those costly cash-value plans will not be sufficient either.
It is wrong to dismiss life insurance altogether as a form of investment. If it is a cash value plan, it will allow you to save money for future, as it offers a lump sum on maturity. But, the death benefit it offers is less than that offered by a simple term plan. So, in terms of life cover, a term insurance plan is way better than any cash value plan available in the market. In that sense, life insurance is an investment, which guarantees future financial security in return.
Is Life Insurance a Smart Investment?
Now that we know that life insurance can be considered as a form of investment, let’s come back to the question asked at the beginning of the article. Whether life insurance is a good investment or not depends on your situation. So, here, let us consider a few scenarios in which a life insurance policy would be indispensable.
Scenario 1: You have dependent parents
As your parents grow older, they become more and more dependent on you, both emotionally and financially. Just as spending more time with them, making them feel important and wanted in your family will give them a feel of emotional security, similarly, it is also necessary to provide them with financial security in life. If your parents are financially dependent on you, that means they do not have any other source of income. Now, if anything happens to you, and you are unable to work and earn, how will you financially support yourself and your family? But, if you already have a life insurance plan, it will cover unfortunate incidents like death or job loss due to critical illness or accidental disability. So, life insurance is important if your parents are financially dependent on you, as it will provide them with a lump sum assured in case of any exigencies in life.
Scenario 2: You are getting married
With marriage comes more responsibility in life. You start taking personal finances more seriously now. You start saving money for buying a house or a car etc. You may even end up with some financial liabilities like loans or mortgage. But these things do not worry you much because you know that you will be able to repay all your debts slowly. But, what if life doesn’t follow the path you have planned for it? Life is uncertain. An accident, a heart attack or simply a natural calamity may claim your life, leaving your loved ones behind. Under such a situation, how will your spouse be able to manage everything on his/her own? Needless to say, your spouse will land in a nasty financial crisis. This is the reason why everybody (especially those about to get married soon) needs a term plan. A term Insurance plan not only gives financial security to your spouse but also keeps him/her away from a possible debt trap in case of your untimely death.
Scenario 3: The birth of your child
As soon as you and your spouse start expecting your first child, you two should be as much concerned as overjoyed. Gone are those days when rearing a child required no financial pre-planning. Now, a child’s birth entitles you with more financial responsibilities. Sending your child to one of the best schools in town, fulfilling their wishes by buying them things that they have asked for, or simply giving them a quality life requires a serious financial planning. You do everything to provide your child with the best life you can afford for him/her. But, what if an unfortunate incident costs your life all on a sudden? The life you had planned for your child will suddenly go unplanned with your death. Let your child never suffer because of the lack of sufficient life coverage. Buying a life insurance, therefore, becomes a necessity for those who are going to be a parent soon.
“Buy Term and Invest the Difference”
You may have heard this adage time and again but never really thought of applying it to your personal financial planning. Financial experts have always supported this statement. They have always preferred term plans to any other form of life insurance. According to them, if you want a return on your investment, it is better to invest in equities or debts. Life insurance is not meant for wealth creation, it is for providing financial support in times of needs. In other words, a life insurance policy offers a lump sum assured in case of your untimely death.
So, life insurance should be purchased on the basis of the amount of life coverage it provides. There is no need of buying an expensive life insurance policy like permanent life insurance plan or endowment plan as the life cover offered by them is less than that offered by a term insurance plan. Therefore, instead of investing in an expensive life insurance plan, it is better to buy a simple term plan (that offers comprehensive life coverage). Now, keep aside the difference between the amounts of premium you have to pay for your term plan and the amount you would have paid if you had purchased an expensive cash value plan. You can invest this kept-aside amount into the Capital Market for the growth of your money. This is probably the best way to meet both your insurance and investment needs at one go.