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Keep Investments & Insurance Separate

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I had a meeting with my accountant last week to discuss some business related items and we got on the topic of insurance, specifically life and disability insurance. He told me that his personal philosophy was to keep insurance and investments separate. The reason for this is that when you start mixing insurance and investment, you start muddying the waters and things become much more difficult to keep track of.

When it comes to insurance, he buys term life insurance. Term life insurance is the simplest type of insurance, you pay a premium for a set period of time and they pay out if you die. There is not an investment component and it’s a very simple concept. When I looked at four types of life insurance (term, whole, universal, variable), it confused me to no end. Generic terms, that are barely descriptive because they are so generic, tied to specific plans really mess me up.

Is this the most financially efficient method? I don’t know enough to know. Is it a clear, easy to understand, easy to execute plan with little room for error? I believe so. I prefer a plan I fully understand and can execute without problems over one that is half a percentage point more efficient that I could potentially screw up.

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12 Responses to “Keep Investments & Insurance Separate”

  1. Marie Casas says:

    I took the life insurance licensure exam so I know the basics. I haven’t gotten around to actually signing with the insurance company though so I can’t sell anything.
    Life insurance is for protection — if you *die*, your family gets the death benefit. Let me just share about the two basic plans, simplest in form. They’re both protection only, no investment component.
    Anyway, term insurance is most likely the cheapest. You pay a fixed premium, in return you’re covered for a fixed “term”, say, a year. So if you pay for it now, and you LIVE till next year, the term’s expired, you or your family don’t get anything. Next year, you have to pay another premium, usually higher than this year’s.
    Meanwhile, whole life insurance – you pay the same amount every year until you kick the bucket. And whenever that happens, your family gets the death benefit.
    Agents compare the two as term insurance is to renting as whole life insurance is to buying.
    Ah well, good luck with your decision. Personally, I’m rebuilding my emergency fund and just started my health insurance plan. When I’m done with that, I’ll most likely get VUL.

  2. Jill says:

    Anything other than term life insurance is a rip off. The insurance company is using your higher premiums to invest, receive a return on the investment & then pay you some arbitrary investment % return, less fees, expenses, etc. (all hidden in their inflated promises of high returns). That’s how they make money. They make a lot of money. Then, there’s the added complication of how to get at that “cash value”. The only reasonable life insurance is term life — pay less and invest the difference. Keep the high returns for yourself.

  3. ron says:

    term is the cheapest and is great if you have a need for insurance for a certain period of time (pay off house, get kids out of house,etc). there is a relatively new low cost product GTD to age 100-either an indexed UL or a conventional UL –very little cash build up when paying minimum premium –almost like a term policy gtd to 100! BUT if you want to “save” some tax deferred (free if used properly) dollars for “later” an overfunded whole life or UL can beat the daylights out of your bank savings account and if designed properly, you can basically have your own “bank” within 5 or six years –then instead of paying interest (all your life) to the bank, and credit card companies for all your major purchases (cars, etc), you borrow (and yes, pay) yourself from the insurance cash valuel. Instead of buying the most insurance for the least money, you buy the least amount of insurance for the most money allowed by IRS/gov’t.

  4. Michael says:

    Cool blog, great topic.

    As a general rule, I would agree that it is usually not a good idea to use life insurance as an investment vehicle.

    I do disagree with some of the comments that some of these types of life insurance are ripoffs and some are the only way to go. They are each designed for specific purposes and any of them could be a bad idea if they don’t match your goals. Universal Life insurance while it has been pushed on people as an investment vehicle really has its roots as an estate planning and high wealth tax deferral tool. Used for those purposes it is a great tool, but just sold to the average Joe looking to protect his family from his untimely death or looking to invest some savings it is probably not a great idea.

  5. Scott says:

    I think that insurance and investments are a good idea. It all depends on your outlook. They do charge a fee but if you are making 8% and they charge 1% in fees your still ahead of the game. I’m not an expert in life insurance but my understanding is that term is great until you actually need it later in life, then the premiums get outrageous. There are all kinds of ways to create your investments within a VUL or other investment vechicle where you can be aggressive or conservative. I just think about it as investment that works well for me while I am alive, and just happens to pay out to my loved ones if I die. A good book to read for the basics, as with all things some of it is good and some not so good, is Missed Fortune by Douglas Andrew. Once you get the basics do some research on your own and then sit down with an insurance agent to talk about the different strategies, though it sounds like your current one doesn’t want you to use insurance as an investment vehicle.

  6. Posco says:

    According to my gut feeling, insurance and investment are two very different tools to solve two very different problems. But I could use some help making this gut feeling more explicit and concrete. This sentence did not help clear up my muddy waters: “The reason for this is that when you start mixing insurance and investment, you start muddying the waters.”

    jim, can you please tell us why we should keep insurance and investment separate?

    Thanks.

  7. jim says:

    I should’ve elaborated that in the post. First, my accountant was merely giving me his personal opinion and wasn’t trying to influence mine. Second, the point he was making was that he liked being able to track his investments separately from his insurance.

    When you start talking about insurance as an investment vehicle, it gets confusing to separate what component of the insurance is actually insurance and what component is an investment. It also becomes harder to plan your investment approach when you add that layer of complexity. That’s what I meant by muddying the waters.

    If I’m investing my money, it helps to know where I have those funds invested. I have 80% stocks, 20% bonds; of the stocks I have 25% international and 75% domestic (for example). I have an expected rate of return and a good idea of my fees and expenses. With whole life, it takes an expert to figure that all out (according to SmartMoney).

    Independent of all this, many experts consider whole insurance to be a bad idea in the first place too.

  8. Byron Udell says:

    If you need life insurance for income replacement because you want to protect your family in the event that something should happen to you, then term life insurance is what you should purchase. It’s cost effective. This allows you to buy the amount of coverage you need. I like the old adage, “buy term and invest the difference.”

  9. Sammi says:

    JIM: giving percentages of where your money is invested and in which funds is misleading to the masses. Too many will take that as Bible, and it is not. Investing tools should depend on each individual’s age, risk tolerance, financial situation, financial goals and more. The way a person invests in his 30s and 40s, when he has time to make up for loses, is and should be entirely different from a person in his 50s or 60s+ who is more interested in return OF his investment, and less on return ON his investment. Safety, security and peace of mind are important in pre-retirement and retirement. Keeping what he has is more important than gambling his entire nest egg in the market. There are tools to help people who do not want the risk, but want solid growth.

    • jared says:

      and if you have ever read ANY of his other articles before replying you’d have seen that he always lets people know that.

  10. nishi Lal says:

    Hi,
    Depends what your goals are in relation to life insurance . If you want protection for a period of time, then TERM is the way to go. But if you want to use your life insurance to be a vehicle for retirement income , then IULs or VIULs or GIULs are effective ways to invest. Most of these give you a certain flexibility with deciding which companies you want to invest in. Or you can have your financial adviser guide you in picking depending on how aggressive or conservative you are.

  11. nishi Lal says:

    And also most of these policies provide you with a ceiling and a floor guarantee which can cushion you from the ups and downs of the market.


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