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Sunday, April 3, 2011

life insurance vs investment stocks

life insurance vs investment stocks : Financial experts say mutual funds are the best long term investment. Mutual funds are professionally managed, affordable, diversified, and easily liquidable. Investors should carefully check the prospectus before investing into a mutual fund. There are many out there and only a few of them can match your objective. Mutual funds have perform an average rate of return of 12% in the past 25 years.

Stocks are very risky investments and you take full risk on how your portfolio should perform. You need to constantly follow company earnings and reports and decide when to buy and when to sell. Rate of return is depended on how you invest it.

Life insurance policies are not investments, according the SEC. They are cash value or savings. Rate of return on cash value has been around 3-5% over a 20 year period. I say over a 20 year period because thats how long the insured needs to keep to earn that 3-5%. If they insured cancels the policy before that, its definetly less than 3%. In cash value life policies, no cash value is built up in the first two years. If you ever wanted to use the cash value, you have to borrow it and pay a monthly interest. Its just like a loan. Nobody knows this unless they have read their life policy. If you live to age 98, you get to keep all the cash value, but lose the death benefit because your policy expires at age 98. If you die before age 98, you lose all cash value, but your beneficiary gets the death benefit.

Life Insurance Vs. Investment

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.


Identification
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 a bank savings or money market account. 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 policy holder from the time it is purchased until death. It typically cannot be canceled except for non-payment 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.
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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 expires, 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
CNN Money advocates 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.

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