So, youre finally settled down and are ready to invest. You know you want to leave a nest egg for your spouse and children in the event of an untimely death, but youre not sure if going the conventional methodgetting term life insuranceis the right option for you. Other methods, like investing in stocks, might sound more appealing, but they are also more risky. So, what is the best way to invest your money?
The best decision is made on a case-by-case basis. Not everyone is willing to drop a few thousandor even a few hundredin risky stocks. On the other hand, not everyone wants to pine away the years hoping that their term life insurance plan will cover enough in the event of their untimely demise. The issues dont stop there either. This financial decision is much more than simply a question of risk. Here are five factors you must consider when deciding between term life insurance and stocks.
1. TaxesHow Much Is Taken Out?
The main factors here are time and percentage: would you rather be taxed lower now or have your spouse or loved ones taxed higher later? If you choose to purchase stocks, you will be taxed 15 percent yearly. You also pay 15 percent when you sell stock, so that number does not shift based on profit (or lack thereof).
On the other hand, term life insurance plans are not taxed while you are alive and paying premiums. If you pass away during your life insurance term, the sum that your loved ones received might be taxable through the estate tax (40 percent or more). However, this amount depends on the total worth of your estate, as well as the taxation laws in your area. Before deciding on a plan of action, research the amount of taxes that will be applied in either option. This will affect your familys returns in the event of your death.
2. EmergenciesCan I Access My Money?
What happens if your child picks an expensive college to attend and you need the money immediately? What if you lose your job and cant afford to pay the bills? With term life insurance, the money youve invested might be impossible to access, but with stocks, you can sell at any time. Of course, this is the simple answer. There are a few stipulations you should also keep in mind.
First, there is no guarantee you will sell your stock at the price you bought it for, and even if you do sell it at that price, you will likely not break even because of taxes. So, you might only get back a portion of the money you had invested. Second, there is a specific type of term life insurance policy that will allow you to get back at least part of the money you invested. The policy is called a Return of Premium (RoP) policy or a RoP rider, and with it, you can recover all or part of your premiums. So, at the end of the term, you will get all or a portion of the money back. However, this policy also costs more upfront, so you will be out more money earlier on. You also cannot get this money before the end of your term life insurance, so you cannot access your money in an emergency.
3. FeesAm I Getting All The Money I Can?
Both an insurance agent and a financial advisor make money off of the products they sell. The amount he or she is paid depends solely on the company, or, if they work for themselves, the amount they decide to take. For an insurance agent, commissions might run anywhere from five to eight percent. A financial advisors salary could come from an account management fee (usually one percent of the account balance) or commissions and fees from sales of stock.
How your insurance agent or financial advisor makes money is important because it might influence the advice they give you and how much you will end up with. Before deciding on a plan of action, ask your agent or advisor how much they will be making off of the deal. The question might seem rude, but it is important to know for such a long-term investment.
4. SurvivalWhat Happens If I Live?
Now, onto less morbid thoughts: what happens if you survive the 10-30 years during which you are investing? If you own stock, nothing will change. You can cash in your stock and have a little extra for retirement, reinvest the money, or keep it as is and let it grow in revenue. Depending on the term life insurance plan you purchased, you might or might not be able to recover the money.
People who purchase term life insurance have a couple of options. As mentioned before, those with a RoP policy or rider can get back all or part of their investment. Before your term life insurance is up, you can also convert your term life insurance into a permanent plan, which would make a payout to your loved ones inevitable. If you do not do anything to your term life insurance plan and it expires, you will not be returned any of the money you spent on premiums.
5. RiskCould I Lose Everything?
Insurance is a game of risk. By considering term life insurance, you are acknowledging that you might leave your family at a moments notice. At the same time, investing in the stock market is also a risky decision, as millions found out in the latest recession. The question, then, becomes: how much of a risk are you willing to take?
If youre willing to take large risks for possible big gains, then investing in the stock market might be for you. If youre willing to take more of a financial hit for more stability, then purchasing term life insurance and converting it to permanent insurance later on or purchasing a RoP rider might be the right choice. Or, you could do a combination of both by buying term life insurance and investing the money you would use in a RoP rider to purchase stock. In each option, you could lose significant sums of money. The only difference is, in one instance you will know when you will lose the investment and in another, you might not.