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?



(Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers click here.)