How to Balance Buying Life Insurance with Investing

Investing is important as is purchasing life insurance and you’ll need to do both in your lifetime. There are two different ways to do this. You can purchase insurance and investments either separately or bundled together.

Buying separately

If you want maximum flexibility, you can buy term life insurance and invest the difference. How much money are you willing to allocate to investments and insurance? Let’s say you’ve set aside $300 a month. You could:

• Buy low-cost term life insurance – Let’s assume this costs $30 a month.
• Invest the rest wherever you want – In our example, that’s $270 a month, which could go into a TFSA.

The premiums for term life insurance increase, usually every 10 or 20 years. To offset the cost, you can reduce your death benefit or cancel your coverage as your assets grow. Unless you do, the insurance becomes more and more difficult to afford.

You get more investment choice outside life insurance and the investment expenses are often lower. That’s appealing but will you really invest the difference? If you miss a term insurance premium, your coverage gets cancelled after a short grace period.

With that in mind, there’s also another option.

Bundled

Unlike term life, whole life and universal life insurance give you tax-sheltered investment growth. That lets you pay future insurance charges with investment earnings, which have never been taxed. You buy life insurance with your after-tax dollars and your beneficiaries get a tax-free death benefit.

If you miss a premium payment or want to pause them, the savings help keep your coverage going. You have coverage designed to last your entire life—ideal for estate planning.

The ideal form of life insurance depends on your investment style.

• Passive investors – If you know little or nothing about investing, consider whole life insurance where the investment decisions are made for you.
• Active investors – If you want to decide what investments to choose, such as mutual funds of guaranteed investment options, then you may want to consider universal life insurance.

You get additional advantages when investing inside insurance by building up equity and receiving creditor protection. If you file for bankruptcy, assets in your TFSA aren’t protected from creditors whereas life insurance policies have traditionally been given special protection.

How to decide

If you don’t want life insurance that lasts decades, term life may be better. And only certain types of insurance allow you to choose your own investments.

Before you make your decision, you should look at different scenarios. Doing so will help you decide whether your investments and life insurance are better together or apart.

Flickr: Ken Teegardin