A sound family financial plan has a number of components. These include investments, such as bond mutual funds, and life insurance, which could be either term or whole life. Your investments provide for you and your family after you retire, while life insurance provides for your family's financial needs if you die. Both components are important to your family's well-being. They serve different purposes, although occasionally those purposes seem to intersect.
A bond fund is a mutual fund that invests primarily in bonds. The kind of bonds the fund invests in depends on the fund's investment objective. Some funds invest only in ultra-safe U.S. Treasury securities, while others seek high current income by purchasing low-rated corporate junk bonds. Still others attempt to provide a steady stream of tax-exempt income by investing in municipal bonds. One key to successful bond fund investing is finding the fund that most closely matches your investment objectives.
Whole Life Insurance
Whole life insurance, sometimes referred to as permanent life insurance, is a hybrid product with two components; savings and insurance. The savings component builds up cash value over time, while the insurance component pays your beneficiaries the face value of your policy in the event of your death. Because whole life insurance policies build cash value that you can borrow against, they are sometimes sold as retirement or investment products.
All investments in bond mutual funds involve some level of risk. Returns on a bond fund are not guaranteed, nor is the principal amount of your investment. Bond fund shares are not insured or backed by any agency of the federal government, even if the bonds held by the fund are. You can lose money when you invest in a bond fund.
There is considerably less risk with a whole life insurance policy. As long as you make your premium payments, your policy will pay out the face value when you die. The vase majority of your whole life premiums go toward policy expenses and commissions during the first three to five years, so it won't generate much in the way of cash value during that time. If you cancel your policy there might be a sizable surrender charge, leaving you with little or nothing to show for the money you paid in premiums. Any money you borrow against that cash value and don't pay it back will reduce the amount of the death benefit paid to your beneficiaries by that amount.
Insurance Vs. Investments
Investments are investments and life insurance is life insurance. If you are going to buy life insurance, as many people do, you should do so for its life insurance properties. You can usually buy a significantly larger amount of term insurance, which is pure life insurance without a savings component, for a smaller premium than you'd spend to buy a whole life insurance policy. If you bought a term policy and used the difference to buy shares of a bond fund that matches your investment objectives, chances are your investment will grow faster than the cash value in a whole life policy.
- CNN Money: Understanding Bond Fund Types
- Investment Company Institute: Understanding the Risks of Bond Mutual Funds
- Insurance Information Institute: Why Should I Purchase Permanent Insurance?
- Forbes: Should You Use Life Insurance as an Investment?
- Wall Street Journal: Whole-Life Insurance, Long Derided, Gets New Lease
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.