Choose among different investment vehicles when planning to grow and protect your income. While the profitability side of financial investments is a major consideration to examine, it is also equally important to put a premium on protection plans to cover future needs and events. Mutual funds and life insurance help you meet these objectives. Understand the differences between the two to make informed decisions.
Life Insurance Defined
Life insurance is a protection plan that ensures your beneficiaries’ well being in case of unforeseen events in your life. When you take out a life insurance policy, the insurance company is liable to pay your beneficiaries the amount insured should anything happen to you, provided your policy is active. Term and whole life insurance are the two basic types of life insurance. With term insurance, you pay the premiums over a specified period in exchange for benefits when you die. You cannot invest using term life insurance. Known as permanent or cash value life insurance, whole life insurance protects you for your entire life but also earns cash value through investments. With whole life insurance, the insurance company uses the excess premium paid over that actual cost of death benefit as an investment, known as an accumulation account.
Mutual Funds Defined
Managed by fund managers from investment companies, mutual funds are pools of money that come from individuals or investors. If you invest in a mutual fund, you buy shares. Each person who invests in mutual funds gets a proportional amount of the profits and losses based on each person’s share. Investment companies may invest in stocks, bonds and cash. They may also invest real estate, annuities and precious metals.
Features, Benefits, Disadvantages and Risks of Life Insurance Plans
In general, compared to mutual funds, whole life insurance policies have lower returns on investments. However, life insurance policies have features that make them worthwhile financial endeavors; they include tax-deferred payments on growth dividends and guaranteed cash value, and proceeds of your insurance are tax-free to your beneficiaries. Keep in mind that the amount of your guaranteed cash value depends on the kind of permanent (whole) life policy you own, its size and how long you have owned it. If you borrow money against your insurance policy, you’ll reduce the death benefit and cash surrender value. Compared to mutual funds, life insurance poses lower risks; however, one major disadvantage of using life insurance as an investment is the associated high fees and expenses make it difficult to compete with the returns of mutual funds.
Features, Benefits, Disadvantages and Risks of Mutual Funds
Mutual funds are investment vehicles that create income, whether on a short- or long-term basis. The returns on mutual funds come in the form of stock, cash dividends or capital asset value appreciation. You can diversify with mutual funds to maximize your investment returns. However, investing in mutual funds involves higher risks than investing in whole life insurance. In addition, fees and taxes decrease the amount of the fund’s earnings. When investing in mutual funds, it is important that you choose the products that will match your goals that involve the least possible risk.
- New York State Insurance Department: Life Insurance -- Top 10 Questions
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