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Are you using life insurance as a retirement investment?

Insurance is essentially a financial tool that’s meant to manage risk. But how to use a life insurance as a retirement investment?

In the case of life insurance, policy providers seek to mitigate mortality rates among its policyholders. With the premiums that are collected, insurance companies reinvest these funds in low-risk investments, and then reimburse the accumulated money once a policy matures or when the holder passes away.

Why be insured?

While the primary purpose of life insurance is to protect the insured and their beneficiaries in the case of death or illness, more and more individuals (and companies) have started to see life insurance as a retirement investment.

With people in general living longer and healthier lives, and therefore able to enjoy (hopefully) long and peaceful retirements, policyholders can now also depend on life insurance policies to supplement pensions and other income sources.

Protection

Insurers use algorithms and demographic data to estimate a person’s life. This means that factors such as age, sex, and habits influence the value of the premiums that insured individuals are expected to pay.

With life insurance, a guaranteed sum of money is given back to the insured once they reach a certain age, or to a beneficiary in the event of the insured’s death.

Retirement investment

In recent years, insurers have also started selling investment-type products such as annuities, which are intended to pay out a steady stream of income for retirees and may come with higher premiums. These investment policies are aimed at capital growth, leading to some insurers competing with other financial services by offering alternative services, such as estate planning.

What to consider?

More than just information about their specific products, insurance advisers would also likely present some financial figures about their company and maybe even offer to explain what it all means. That’s great, but it’s even better to already have an idea of the metrics (or red flags) to look out for – go ahead, show them that you know a thing or two about insurance!

Liquidity

The most important thing to consider when choosing an insurance company is its actual ability to fulfill its obligations to policyholders.

Does it have the proper fundamentals to ensure investment growth or stability? You wouldn’t want to learn too late that your insurance company lacks the financial power to cover a large or unexpected number of claims.

Does the company have enough assets to offset current liabilities? Is the company able to maintain a positive cash flow? Does the company’s bond portfolio contain too many high- and medium-risk investments? All these factors can clue you in on the overall stability of an insurer.

Profitability

There are 2 primary sources of income for insurance companies:

Underwriting income

It comes from the insurance premiums collected from customers. It’s useful to note an insurer’s lapse ratio to gauge its competitiveness by dividing the number of policies that have lapsed or matured within a given period by the total number of policies in force at the start of the same period.

Investment income

This one comes from returns on bonds, equities, or other securities. Look at where the company places its investments and how those are generating income. More traditional metrics like Return on Assets or Return on Equity should ideally be kept at 0.5-1% and 10-15%, respectively.

Other types of life insurance

Being in a mature industry, insurance companies usually provide similar life insurance products, and would mainly compete on pricing and convenience. However, competitive pressure to innovate has also resulted in a wider range of products that better fit certain needs, such as more-flexible universal life insurance, and the less-expensive (but gruesome-sounding) accidental death and dismemberment insurance.

Below are two of the more common types of life insurance that you might encounter.

Term life insurance

In contrast to the more common permanent life insurance, term insurance is only meant to cover an individual for a predetermined period. This type of insurance offers most of the same benefits, and usually carry lower premiums at the expense of not being able to accumulate money within the policy.

Mortgage life insurance

This type of insurance is specifically constructed to repay a mortgage in case of the insured’s death or any disability that prevents work. These policies guarantee you and your beneficiaries the peace of mind of owning a mortgage-free home, with only property taxes and insurance to cover separately.

Conclusion

Bringing up the subject of death or retirement may naturally cause unease for some people, but when your budgets and savings allow, taking out a good life insurance policy will always be a good investment to get started on RIGHT NOW. 

Especially if you’re looking to supplement your post-retirement incomes, it’s best to start investing at an earlier age because of how annuities and compounding work. The longer you are invested, the better your potential benefits will be (plus, insurance premiums tend to get quite expensive as you age).

Be sure to evaluate your insurance company carefully and read through all the fine print on different products that might better fit your specific situation, needs, or objectives. 

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