Should I Invest in Life Insurance?

A listener asks:

I mostly hold individual stocks, index funds, and ETFs. But I have also been contributing to a Permanent Life Insurance policy…I’m thinking about canceling this policy because I don’t have any dependents and I know the market will out perform this policy over time. I’m paying $100 a month, at this rate I would contribute roughly $50,000 over 40 years. I could cash out when I retire with something like $120,000. What do you guys think? Can you consider this an investment or is this just insurance

I can’t give specific advice, of course. But I can take out my HP12C and let you decide.

If you contributed $100 a month for 40 years and wound up with a policy that had $120,000 in cash value, you would have achieved a 2.46% annual return.

I sure hope the stock market does a lot better than that, but if you’re risk averse, you can get that sort of returns with bonds. It’s true that bonds don’t have a death benefit, but being that you have no dependents, you probably don’t need life insurance today.

One more thing on that 2.46% annual return. If you cancel the policy when you withdraw this money, the difference between your premiums and what you take out, so $~70k in this case, would be taxed as ordinary income.

So, if you have maxed out all of your retirement accounts, and if you’re contributing a butt load of money every month into a brokerage account, and you still want to diversify into a life insurance policy with a cash value component, sure, why not?