Insurance is designed to spread the risk of loss among many people. Insurance anticipates loss and is designed to manage the expense of replacing lost value in terms of assets or revenues. Insurance is therefore not designed to be a wealth creation tool.
On the other hand, because the risks of some losses (such as the loss of life) may be relatively low over the course of many years, some insurance plans do offer enticements such as interest-earning savings to encourage people to join the insurance pools at an early age and to maintain their membership in those pools throughout their lives.
These investment options should not be viewed as significant means of creating wealth. Instead, they are better viewed as mechanisms that help to protect insurance policies against unforeseen financial difficulties. When you take out a “term” life insurance policy, you are required to pay a premium to cover the cost of the insurance on a regular basis. When the term (usually 20 years) expires, you get nothing. Your premiums all went toward managing the risk and replacing the losses shared by the members of the pool.
A Whole Life or Universal Life policy combines a premium that covers the cost of insurance with a savings account. The insurance company may use the savings account to increase its assets (in terms of legitimate wealth building) so as to decrease its customers’ premium costs across most or all insurance plans. The insurance company pays you some minimum amount of interest on the savings account (and in times of higher interest rates in the market you will earn more interest).
The advantage of using a Whole Life or Universal Life policy lies in the fact that your premiums will never increase and in the fact that the policy will not expired during the first 90-100 years of your life. By carefully managing your savings account, you can maintain your life insurance even when you are unemployed or experiencing reduced income, at least until you have exhausted the savings.
These kinds of insurance plans work best when you join them before the age of 35 because life insurance becomes more expensive as you get older. Waiting until you have bought a house or gotten married before you take out life insurance is a poor decision. You should invest in a Universal or Whole Life policy at the youngest possible age. Parents and grand-parents are allowed to buy these policies for children as young as 1 year old.
You should expect to find superior asset growth opportunities and channels in other forms of investment. You should only invest enough money in an insurance policy to protect your low premium against future financial difficulties. However, if you do build up a substantial savings in your Whole Life or Universal Life Insurance policy, you may be able to take out a loan against the value of the policy and pay yourself back. The interest on your payments goes back into your savings account.
These loans, when managed carefully, are better vehicles for navigating through financial distress than high-interest commercial loans. However, taking out a loan against your insurance policy does not affect your credit worthiness with respect to normal loans offered by banks and lending companies.