Don’t Invest Through Life Insurance

 

In China there is a trend of taking out a universal life (UL) insurance policy on newborn children as an investment vehicle. UL policies are a combination of life insurance and savings.  Essentially the policy holder pays for life insurance and then some.  The money that does not go toward the insurance premium becomes savings with interest.  While it makes sense to have some level of life insurance on children to pay for funeral expenses should something bad happen, UL type insurance is not the best method to save for their college or first house.  In China most policies will produce up to 4% interest on the excess cash.  Inflation is expected to be 5% which amounts to a –1% savings rate on the money invested in a UL policy.

When attempting to do a job it is always best to use the best tool to do the job.  If you want to have life insurance for funeral expenses and to help the family along if a working member of the family should pass away there are better vehicles to place your money into than UL.  Term life is a much cheaper option and better suited to most people’s situations.  Term life provides coverage at a fixed monthly rate through the term of the insurance.  The insurance cost never goes up during the term, but there is no cash out at the end of the term.  Recently there has been a price war among term life companies and coverage is extremely cheap.  A 20-year term policy for a mid 30’s male in great health will go for around $60/mo for $1,500,000 of coverage.  If you need to only cover your salary for a couple of years and pay for your funeral you will need much less.  A basic term policy for most people is as affordable as renters insurance.  If you want to make a sizable charitable donation upon your death then of course you will want one of the giant policies described above.

In the US there are many other options than UL for investing for your children’s future such as a 529 Plan.  Life insurance is best used for providing for your funeral expenses, leaving some for your family, and donating to charity.  The savings from going with a term life policy vs. a UL policy can be invested in some other vehicle that will hopefully outpace the inflation rate. 

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