Life insurance isn’t like traditional investing. Here’s why.
Investing and life insurance are akin to two sides of a financial protection coin. One helps you prepare for the expected (building wealth for your future). The other enables you to plan for the unexpected (setting up your family with a financial safety net if you die prematurely). And while it’s true that you will never personally see a return from in life insurance, it’s still as important as the more traditional investment routes. So, although these two different avenues don’t accomplish the same goals, you should consider them both when planning for your future—a great financial protection strategy should always involve investing in the expected as well as the unexpected.
The Wyshbox Blog
- The difference between investing and life insurance
- Investing 101: The basics
- Making your money work for you via compound interest
- Is life insurance a smart purchase?
- But why insure when you can just invest?
- In conclusion
The difference between investing and life insurance
We can see how these two similar-ish terms can get confusing, so let’s break it down. Investing comes in many different forms—from stocks to mutual funds to real estate. It’s a crucial piece of the puzzle when it comes to setting yourself up for future financial success and planning for retirement. On the other hand, a life insurance policy is much simpler to define—it pays your loved ones a fair chunk of change in the event of your death (we’re talking around a half a million dollars on average here).
So, it’s easier to think about life insurance as an investment that protects you from risk versus something that might provide you with big gains somewhere down the line, à la investing.
Ultimately, our goal is to understand the difference between the two strategies as they live in two different worlds and serve two very distinct purposes.
Investing 101: The basics
The reality of life is that we’re all human, we’re all going to get old, and we won’t be able to work forever. There are no ifs or buts about it (regardless of how invincible you feel right now). So, how will you pay for life when you no longer have a steady income from a full-time job? And how will you save for retirement? Because savings alone probably won’t cut it. One of the most basic concepts of investing is that the longer you’re doing it, the better your returns will be. “Start investing young” is something we’ve all heard from our parents (or that one friend that somehow has their life together at the age of 25). But, investing young is truly sage advice.
So, where to start? From short term investments to long term investments to stocks to mutual funds to bond funds and more—there are so many options when it comes to investing that we can only really scratch the surface in this article. But, a good jumping-off point is just getting yourself familiar with the different options. Also, take some time to figure out how much you can realistically afford to invest.
You might even be able to retire a millionaire by investing just $35 a week.
Ain’t that a cushy deal? Finally, as Bill Gates once said, “to win big, you sometimes have to take big risks.” So, assess the level of risk you’re willing to take. This especially applies to your 401k investments. If you’re under the age of 35, it is suggested that you invest in an aggressive growth portfolio heavily weighted in stocks. But ultimately, it’s on you to do your research and see what works for your situation. Also, if your next question after reading through this section is to ask, “what is a 401k?” then we’ve got bigger fish to fry.
Making your money work for you via compound interest
So how do you make your money make you money? It’s all about the power of compound interest. While this may not be the sexiest term, it is an important one to know. Think of it this way: imagine you had $200 invested and that money earns 5% interest each year, which means you have $210 at the end of the year. So, year two comes around and you have $220.50. But how? Well, once again you earned $10 interest, but you also earned $0.50 on the initial $5. Now multiply that compound interest over multiple years of investing—we’re talking megabucks here. Even if you never add another penny to that investment, your money will continue to grow and grow.
Is life insurance a smart purchase?
You can’t buy peace of mind, but you can buy life insurance (which is the next best thing). As comforting as that is, the real value of insuring against the unexpected often goes overlooked. Yes, life insurance protects your loved ones if you pass away sooner than expected. But it’s so much deeper than that. For example, your life insurance provider can partner with your bank or lenders to directly pay off your mortgage, car payments, student loans, and more. Talk about a stress reliever. It can also pay for any future college tuition, childcare, and more. How’s that for peace of mind and future planning? If you’re still umming and ahhing about investing in your future, the question really boils down to whether you have people who financially depend on you. If yes, then you’ve got your answer. Also, policies get more expensive the older you get, so there’s that. Remember, you can’t predict the future, but you can prepare for it.
But why insure when you can just invest?
Let’s not get it twisted, life insurance isn’t just a rescue package handed to your loved ones should the worst happen. It’s actually an intricate strategy that comes with a lot of benefits. Ask yourself, what happens if you suddenly pass away before your investments come to fruition? Since all investments are considered assets, they’ll most likely get frozen when you die. This is so that the courts can assess the value and determine any costs that are outstanding on your estate. So, if you have named a beneficiary in your will, they’ll get your money in the long run. But, before they do, they’ll most likely need to file paperwork and potentially pay taxes and fees associated with transferring this over, as the estate will need to settle up before the remaining funds are released. Obviously, this might present a cash flow problem for those you’ve left behind. However, if you had life insurance, the death payout would most likely be quicker and would provide some much-needed financial relief. You could even get ahead of the curve and set your life insurance coverage to the potential value of any anticipated estate tax. Overall, you can think of life insurance as an investment—an investment into the future of your loved ones.
Life insurance through the ages
As you get older, your investments and savings should be substantial enough to cover your needs—this means life insurance costs can come down every year. For example, a $450k policy at age 30 can be reduced to around $80k at age 60.
Navigating the investment and insurance worlds may seem like daunting tasks, but armed with the right knowledge, the processes can be simplified—you just need to get your research on. As mentioned earlier, investing for both the expected AND unexpected is a great strategy to ensure you and your loved ones have a financially secure future ahead of you all.
By starting early and investing long-term, you’ll probably increase the likelihood of getting some awesome returns. The kind of returns that might help you build an extensive investment portfolio and allow you to retire comfortably. And on the life insurance side, a well-thought-out policy can be a powerful weapon in your overall financial protection arsenal—you’re paying relatively small premiums in exchange for the peace of mind. In our opinion, that’s an investment worth making.
As always, make sure you do a ton of research and are clued in to all the nuances of both strategies. That way, you’ll only invest in things that make financial sense for you and your loved ones.