Kamis, 09 September 2010
Life insurance is a poor way to invest money
While waiting for a plane last weekend, I talked to a young man in his late 20s about the stock market and investing in general. He said he owned a variety of stocks, but had no clue about the companies. He said the only reason he bought the stocks was that he got a tip from a friend who said they would double within six months.
He has owned the stocks more than a year. When I asked how the stocks had performed, let's just say that as opposed to doubling in value, they went in the opposite direction. I explained that he didn't make an investment, he took a gamble. I explained that the only way to be a successful investor is to have a game plan, focus on a goal and never rely on tips.
As long as I have been involved in the financial world, people have bought investments based on some sort of hot tip. I have yet to see any of these hot tips pay off. In fact, when I get a hot tip, my general reaction is to ignore it. Consequently, my recommendation to anyone who receives a hot tip is ignore it.
The young man also mentioned that another friend is encouraging him to establish an investment program. The program is basically a life insurance policy. He asked my opinion. He said his friend sells life insurance and is pushing him in this direction. I suggested that he needs new friends.
For years, I've seen salespeople push life insurance as an investment vehicle. They provide all sorts of projections showing how much you can withdraw tax-free if you hold the policy for so many years. They make it seem as if this option is a no-brainer.
I believe that insurance is not an investment but, rather, a means of covering risk. Insurance and insurance-type vehicles are not the best way to establish an investment program. As far as I am concerned, it's one of the worst ways, if for no other reason than, when you buy an insurance policy, you are paying a significant cost for the life insurance. In addition, the investment alternatives within most insurance policies have higher costs and fees. Despite the favorable projections, which never come true, insurance policies are not good investment vehicles.
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That doesn't mean you shouldn't purchase insurance. If you have family members who are financially dependent upon you, you need life insurance to protect your loved ones upon your death. Your focus should be on what type of policy offers the best protection. For the majority of situations, I recommend term insurance. It is the most cost-effective type of life insurance, the easiest to understand and you can shop policies around and receive competitive bids.
My recommendation to the young man at the airport was there are many different types of investment vehicles that provide much greater flexibility and, most important, put more money in his pocket than life insurance. They include vehicles such as his company's 401(k) plan and investing any additional money into a Roth IRA.
I recognize that the stock market has been erratic at best and that some of the guaranteed returns countered by some insurance companies seem attractive, however, the devil is in the details. When you dig deep into the option to use insurance policies as investments, you soon realize that they are more about insurance than they are about investing.
As I got ready to board my plane, I told the young man to remember the story about the tortoise and the hare. When it comes to investing, the only way to achieve success is to have a game plan and to be patient.
Rick Bloom is a fee-only financial adviser. Observer & Eccentric readers can submit questions at firstname.lastname@example.org. For more information, visit Rick's Web site at www.bloomassetmanagement.com.