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Is it wise to mix insurance and investment?

Is it wise to mix insurance and investment? The answer is No and for good reasons. Mixing life insurance with investment is one of the costly mistakes many investors have made.

Many even have a basket of insurance policies in their portfolios, thinking they have the best mix ever. Blamed the advice they got from friends and uncles who knew nothing about investment. Or insurance companies who are all about selling their policies for their own gains.

To go into technical jargon won’t cut it, here are the top reasons why investment and insurance might not go well. Including some tips on how to go about it. 

Insurance and investment are not the same 

To get something straight, insurance is not an investment. Insurance is like a contract between a company or the state and an individual to provide financial reimbursement against losses. The aim is to provide a hedge against risk of financial losses or life. 

The insurance plans many tried to include in their portfolios go by different names. This includes life insurance, Unit-linked insurance plan, variable annuity, money back policy, whole life policy and so much more. 

Investments on the other hand are assets acquired with the aim of generating profits and building wealth overtime. The various types of investment include mutual funds, bonds, stocks, options, commercial papers and many other financial instruments. Each of these financial products come with their own risk and returns. It all depends on individual risk level and financial goals to determine which one to go for.

Insurance is a cost for compensation in case of loss, not investment

A quick explanation on life insurance:

When you invest money in a term plan or any other life insurance, you are paying to compensate your family for any loss in case of untimely. 

You are betting your life that you might die  and your family needs to be compensated. 

In case you didn’t die, you aren’t paid a premium or additional return.This means no one gets anything. But when you die, your family gets everything. That is , a dependent beneficiary gets approximately everything you might have earned if you had been alive. 

This is the reality of most insurance and mixing them together with a portfolio might not do much but only yield poor returns. 

This explains the reason why term plan premiums are also low. Why would anyone invest in insurance when they can divert the money in an investment vehicle for profits? 

Investment in insurance carries tax benefits

This is one attractive benefit many people consider but one that shouldn’t be a sole determinant. Permanent life insurance can help you in generating thousands of tax savings. Even the beneficiaries can enjoy a guaranteed amount of tax – deferrement on the premium paid until death happens. 

This is no doubt another great way to grow wealth on the basis of tax-deferment. It implies that you have been exempted from paying taxes on interests and dividends. And this continues until the insurance plans expires. It’s not surprising many are opting for mixing insurance with investment in order to avail of the tax benefits. 

However, never forget that there are other financial instruments that even perform better than insurance when it comes to tax benefits.  For instance,403(b)s, 401(k)s and IRAs boasts of great cash value that exceeds that of insurance. These retirement accounts allow you to benefit from upront tax deductible and a tax- free growth over the years. 

There are even certain investment account that has certain benefits you can invest in to generate profit. The tax-deferment shouldn’t be a reason to opt for insurance. Don’t fall into the bait of insurance sales people. 

Investment with a goal is what yield results

Investment without a goal is like driving a car without a destination. Many people mix investment with insurance because they don’t have adequate knowledge of them. While some are being convinced by financial agent who are more after their own pockets. 

You need to invest with a goal in mind and works towards achieving it. If you are looking to provide a death benefit, pay off debt and provide your loved ones income after death, then insurance makes sense. But if yours is to aquire assets that will increase in value and grow your wealth overtime. There are various short and longer term investment that are great for that. 

Final thoughts

There is no point mixing the two together when they are two different things serving different purposes. Mixing them can take a toll on your portfolio like lower returns on investment and inadequate life insurance cover. A wise person will have a solid insurance plan and a solid investment plan. It’s like having the best of both worlds and reaping the benefits. Not the mix of it.

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