Life policy as an investment?

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‘Legacy’ investment

I think most of us know that a ‘Life’ policy doesn’t need to be for life. It’s there to fulfill obligations we might have while we’re building up our investments You know – bonds, kids, trophy wives. Very few of us instantly have enough cash for those obligations when we’re young, so Life cover fills that gap, but let’s face it – it’s a grudge purchase. Nobody gets excited about making provisions for an obligation, except maybe the broker that is churning the policy every two years to make new commission.

If, as you’re coming into retirement, you have more than enough investments that can sort out your obligations, even if you live to 100 (and that is what you should be planning for), then common sense would suggest you dump your life cover. Life and Disability cover isn’t that different from car insurance. You cover the risk when you need it, but when you sell the car and no longer have the obligation, you cancel the insurance. In effect you ‘lose’ nothing (unless you’ve tied yourself into ‘bonuses’ which have effectively shackled you to a provider whether you like it or not). That is why it is called ‘risk’ cover – it isn’t an investment (so don’t be fooled by the clever sales-speak of slick brokers who play on your emotions and try and tell you otherwise).
Having said that…

What if you’ve reached 65, 70, 75 and have more than enough for retirement but would like to leave your loved ones – or a charity – a nice warm lump-sum to burnish your reputation once you’re dead. It’s a guaranteed investment – you’re guaranteed to die at some stage.

It’s fairly simple to work out how good an investment this is. You add up all the future premiums and work out how long it would take you to save and invest the same amount. This becomes the ‘break-even point’ and in most cases, especially with life cover that has been around for a while, that breakeven point is often in the 100+ range. This is the age at which you start to ‘lose money’ on the investment. There are a number of caveats:

1. Make sure the premium is level and not age rated (See HERE for more on that)
2. Because you’re on a ‘fixed income’ at retirement, it might be sensible to remove the annual increases too.

A combination of these two will give you one premium, unchanged, for the rest of your life.

Action: Check the premium pattern and increases on your life policy – how affordable are they going to be in the long term?
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Author Dawn Ridler  

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