“Insurance policies rarely provide returns, it is highly unlikely and it does represent a poor investment.”

The headline doesn’t imply that life insurance is not recommended, because it is and generally they are required. The reasoning behind their recommendation is especially highlighted if you have a family depending on you. It is a policy which a financial advisor will or should have advised you to possess.

Life insurance is usually a topic we avoid talking about – as with most things related to your passing – but when you consider the importance that it will have to your loved ones and their financial security, it should become more important to discuss.

The whole idea is to think of life insurance as something your family can rely on in case you’re not around anymore, rather than something you can make a profit from, which is extremely unlikely.

Life insurance is not an investment

Contrary to some people’s belief, you can’t expect a big return for an insurance policy. As a insurance, it’s a safety net to protect your family members from financial hardship and something they can rely upon if you unexpectedly pass away.

As mentioned previously, paying to have life insurance doesn’t mean that once you pass, your family will inherit an extremely large and life sufficient sum of money. It’s actually reflected upon the amount you would have earned if you hadn’t unexpectedly passed away.

Life insurance policies were made so if a person passes away, his/her family has a financial aid during  difficult times. We are aware that most life insurance policies do come with a cash value element, but thinking that it can help as an investment for your retirement can be a lost cause.

When choosing life insurance you need to consider several factors but mainly you need to focus on the reasons you are making this decision. Seeking out the right guidance to choose life insurance is recommended as sometimes dealing with this rather dark subject can be troubling.

Cash Component

People believe that they can expect huge returns on life insurance policies due to the cash value component, which is attached to most life insurance policies. Most people look to build up that cash value instead of focusing on the insurance cover instead.

These cash components are attached when individuals take out whole life insurances (up to 99 years old) and select a policy which features this component.

In addition, they will commonly be attached with higher premiums to annually contribute. These policies come attached with cash components when you can surrender your policy for a cash return, whereby the cash return increases, the longer you are involved in the policy. However, most people do not see their cash return overtake their premium investment until severely into the policy and the return will still be significantly lower than the death benefit payout.

An example would be a 75 year old person with a whole life insurance and a cash component feature, after 47 years paying premiums into the policy (£54,200), the individual would discover their surrender cash components (£55,200) to be higher than the premiums paid (+ £1,000).

This would mean the person commenced the policy at 28 years old and contributed approximately £96.10 a month. Whereas if the individual passed away at 75 years old, these policies come attached with fixed death sums of commonly £100,000 outweighing the initial investment significantly and supporting your family for longer.

This difference is accentuated further when you include annual interest returns which for example where consistent at 3.25%, meaning surrender (£55,200 + £31,885 = £87,085) is further outweighed by death payout (£100,000 + £63,770 = £163,770).

What next?

Life insurance policies are for you to look after your loved ones after the inevitable happens,  when you don’t want to leave them in a financial struggle after you are no longer there to support them.

The benefits for your family will be greater if you see the life insurance as an aid and not an investment. There are other markets you can explore in order to get good, solid returns, without compromising the financial future of your loved ones.