Wednesday, September 7, 2011

Is Life Insurance a Good Saving Plan?

Anyone who tells you that life insurance is a saving or investment plan must be the one selling it!

Basically, life insurance is not a good saving plan. Why? Take liquidity as a factor. The insurer would never allow you to withdraw the full amount of your "savings" in the first place, since this is to cover fees and even non-payment of premiums. Secondly, the money would not be available on demand; you'd have to wait a few days for your policy loan to be processed. Therefore, in using life insurance as a savings plan, you have far less control over your savings portfolio and the fine print can trap you.

Moreover, life insurance is not a saving plan in the first place, although the plans are usually based on guaranteed interest rates. Life insurance is designed to insure you against an unwanted risk caused by an unfortunate event, by protecting those who are dependent on you financially.

Some life plans have savings or investment portfolios attached that use part of the premium to accumulate a cash value. This is because nowadays, as the market goes more and more competitive, insurance companies are coming up with different scemes that include savings to encourage you to purchase the insurance plan. With this type of life insurance, you can kill two birds with one stone: take care of your dependents and save up money by getting a whole life policy that will accrue cash value.

If you are worried about your loved ones needing money upon your death, then it's advisable to get an affordable term life insurance policy and save your money in some other kind of account where it is more accessible to you if you need it.

In other words, the best option is to keep your savings and life insurance separate. Use term life insurance (with no cash value) when necessary. Only if you need or desire permanent life insurance should you even buy cash-value policies. Never do so for the "savings" or "investment" though. You would likely regret it, as advised by the insurance professional I just consulted to.