Any well designed personal financial plan should include life insurance, savings and investments. Sometimes the lines that separate these three distinct financial products get blurred, because certain types of life insurance include saving and investing components. When it comes to planning your budget, examine all three of these categories separately for best results.
Savings Versus Investments Versus Life Insurance
Savings is money that you set aside for emergencies or for big-ticket items. These funds should be kept in a safe account that is readily accessible, such as bank savings or a money market. Investments involve risk but are also expected to produce a higher rate of return than savings. Investments may include stocks, mutual funds and real estate. Life insurance is a policy that promises to provide a monetary settlement to help provide for your loved ones in the event of your death.
Whole Life Insurance
Most of the life insurance policies sold in America are some form of whole life insurance. Whole life is so named because it covers the policyholder from the time it is purchased until death. It typically cannot be canceled except for nonpayment of premiums. Whole life includes a savings component that pays a low rate of interest but can build up considerable cash value over the years.
Term Life Insurance
Term insurance is pure insurance that covers you for a specific period of time, or term, such as 10 years or 20 years. If you die during the term, the policy pays your beneficiaries the stated amount of the policy. If you are still alive at the end of the term, the policy will expire, although some policies are sold as guaranteed renewable policies. This kind of insurance policy does not build any cash value but is considerably cheaper than whole life insurance.
Keep Investments and Insurance Separate
Experts advocate keeping your insurance and investments separate. Whole life insurance may be attractive because once you have it, you can't lose it if you become ill. But whole life insurance is also expensive, so it may be difficult to afford the premiums to get the coverage you need. Whole life insurance should not be used for savings or as an investment because the return on your premiums in the form of cash value is low in comparison to other investment choices. Typically, you are better off purchasing a higher face amount of term insurance at a much lower premium and investing the difference in higher-yielding financial instruments.