Is life insurance a good investment?
[social_share]Life insurance is not often looked at these days as an investment, but it used to be one of the foremost ways in which Australians used to save and invest.
Endowments are different from term life insurance. Term life insurance pays out when a person dies within the term of the life insurance. It is a fairly standard insurance product and works in the same way that car insurance or home insurance works in that there are pools of risks of which a proportion will pay out. There are also versions of life insurance that also pay out if there is a life threatening illness or a disability that stops a person working. These are however on the same principle.
However this is not how endowments work. An endowments is better understood as an investment product that has a life insurance element in it. Endowment collect the premiums (which are much higher than a term life insurance product with a similar pay out) and then will invest them. After the term of the investment then the life insurance will pay out. However they will also pay out a set amount early if the person dies during this time.
Investing through life insurance products used to be tax friendly and was very common. With the growth of retail stock broking and unit trusts this has become less popular. However for some people it is a way to get a more secure and measured return without settling for the very low returns that banks give.
Endowments were used to fund a number of interest only mortgages. They gave a more certain return than investments on the stock market.
The reason that life insurance is often used as an investment vehicle is that insurance uses actuaries, who use statistical methods to determine whether a person is likely to die or have some other unexpected event. These have proved useful for a number of group investment products.
Pensions can be viewed as reverse life insurance. That is they will be paid up front and after that they will pay a premium for as long as the retiree lives. This premium is dictated by the actuarial tables.
These methods used to be seen as a sure fire win, with set investment goals that would always be met. This is not always the case, as they are reliant on the underlying investments.
