There are many avenues to consider when determining with what investment vehicle a person will contribute her hard-earned money to. Because whole life insurance policies present the opportunity to earn interest on the policy, a person may look to this policy as the best way to make an investment. However, research suggests this may not always be the case.
Function
Whole life insurance policies (the chief type that features an investment component) serve two functions. The first is to serve as a secondary source of income for the policyholder's beneficiaries. Many use life insurance policies to cover funeral costs, future college expenses and other expenses a beneficiary may rely on. The second function is as an investment. Whole life insurance--named because they extend throughout the policyholder's life--acts similarly to a savings account in that money is earned every year. Investment vehicles include mutual funds, which represent a number of stock investments that may accrue in value in various amounts over time. Just as a whole life insurance policy is considered to be a fairly safe investment vehicle, mutual funds are one example of an investment considered to be more stable, even during a recession period.
Returns
When considering the best investment vehicle for your money, consider the potential returns on investment: a whole life insurance policy is considered to be significantly more expensive than other policy options that do not feature an investment vehicle. Consider this example: a whole life insurance policy may cost $100 a month, while another noninvestment policy for the same amount may cost $7 per month. With returns that vary from 2.6 to 7.4 percent for whole life insurance, a person may not experience the same return on investment as a mutual fund, which offers an average return of 12 percent.
Time Frame
A whole life insurance policy is good for the duration of a person's life, meaning the policy is guaranteed to pay out when a person passes away. Other insurance policies (known as term policies) may only last for the duration someone has purchased them--anywhere from one to 35 years. Other investment vehicles--stocks, mutual funds or others--are considered the person's property and last for as long as the investor wishes to hold the policy.
Misconceptions
Many view a life insurance policy as a lucrative way to ensure the future of their beneficiaries as well as earn interest. However, many of the expenses associated with the life insurance contributions represent commission payments, expenses and other factors that can raise the monthly cost of the insurance premium. However, it is possible to purchase what is known as a no-load life insurance policy, which is a noncommission-based policy. This makes the policy's cost significantly lower, which makes whole life insurance a better investment.
Considerations
When considering insurance as an investment or to contribute money to another investment outlet, it is generally the case that you will experience better returns through purchasing a term life insurance policy and investing the remainder in mutual funds, stocks, bonds or another investment. However, there are some times when a whole life insurance policy is considered a good investment. These include the possibility that you may not be able to secure insurance later on in life due to a pre-existing condition.
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