Life Insurance as an Investment
Life Insurance such as WOL
Insurance is primarily designed to pay a sum assured. Any investment value which accrues within a life insurance is unlikely to be at a high level – realistically perhaps 5% - 7%
Remember this is not a bonus, the client has paid more premium than a term life in order to have an underlying investment
For those clients who have insufficient money to both protect fully and invest fully it can provide a reasonable compromise, providing some of each
Life Insurance is often seen quite literally as ‘dead’ money – it has no tangible benefit that the policyholder will normally receive personally – at least insurance policies which include investment will have a potential return and therefore can feel better value. *
* It is worth noting that this is an observed perception of many individuals and not a view advocated by H&B
Policy values can be used to secure loans without having to surrender the cover – thus releasing money early if needed.
| Advantages | Disdvantages |
Protection against uncertainty Suitable for long-term investment Protection for dependants against loss of income arising out of premature death No or low risk Accumulation of funds for specific purposes |
For dependant benefit rather than self Low yield Need to have insurable interest at the inception of life insurance policy Very limited liquidity Lack of flexibility Acceptance of purchase dependent upon underwriting decision of the insurer |
Investment Linked Life Insurance
- Flexibility of a mutual fund inside a life insurance package.
- Primary objective is investment return rather than protection
- This is a means for life insurance companies to provide investments, rather than simply insurance, within their regulatory restraints.
- Has some additional charges but carries additional benefits for the client.
| Advantages | Disdvantages |
Premiums guaranteed against premature death Optional waiver of premium benefit Policy loans available Wide choice of fund houses Flexible switching / re-directing, particular advantage between fund houses |
Higher charges than direct mutual fund investment Short term returns low Some have unclear charges and surrender fees |
Annuities
An annuity is a series of periodic payments to an annuitant for life or other agreed term, in return for a single payment or series of payments.
Immediate annuity – This is usually purchased with a single payment. Benefits or installments begin one annuity period immediately thereafter ( one month or six month ).
Deferred annuity – Benefits or installment payments begin at some specified time or specified age of annuitant.
Variations – A number of possible variations. One provides for installment payment to be paid for a fixed number of years only ( whether death occurs in the meantime or not - annuity certain),
Another provides for installment payment to be paid for at least a specified numbers, whether death occurs or not, and for life if longer than number of years – known as guaranteed annuity ( or life income with period certain ).
| Advantages | Disdvantages |
Stable cash flow Suitable for retiree Suitable for long-term investment Protection against loss of income arising out of excessive longevity Accumulation of fund for specific future purposes Regular and guaranteed income No to low risk Hedge against adverse financial developments |
Decreasing purchasing power with fixed payments if inflation exists Retiree may outlive the annuity Low return Illiquid in the short term Lack of flexibility |
