1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

Individuals buy life insurance to provide a benefit to a spouse, children, or heirs (collectively known as beneficiaries) in case they die.  The proceeds are known as a death benefit.  For this potential benefit, the insured individual agrees to pay annual premiums.

 

Life insurance offers a similar benefit to other types of insurance.  The pooling of individual risks in exchange for premiums allows an insurance company to pay benefits when they happen.  The mix of premiums received where no benefit ends up being paid with those that are paid represents the pooled risk.  Actuarial estimates of these two side of insurance leaves a reasonable profit as a benefit for the insurance firm’s shareholders, or policy holders in the case of a mutual insurance company where the policyholders are the underlying owners of the company.

 

There are a number of types of life insurance.  Term life insurance is the most basic and offers life insurance for a set term of time, such as 10 or 20 years.  Universal life insurance offers lifetime insurance and some flexibility on premium levels. Whole life insurance also offers lifetime insurance, but payments are more fixed.   Both universal and whole life insurance can let the policy holder build up a cash value, or the option to cash out for some cash value should the original motivations for the insurance no longer hold.

 

(For an in-depth discussion of these two types of insurance, see Intro to Insurance: Types of Life Insurance)

 

Objectives and Risks

 

Life insurance is meant to help replace income should the underlying policyholder pass away.  It may be important in a household where only one spouse works – if he or she dies, the other spouse could benefit from a lump sum payment.  As wealth levels increase or children age and become self-sufficient, the need for life insurance decreases.

 

How To Buy or Sell It

 

Insurance brokers sell life insurance.  It is increasingly available at banks and brokers, who serve as middle men with insurance companies and underlying brokers.  Brokers generally receive high commission rates for selling life insurance.  Once insurance is purchased, selling any cash value is somewhat difficult.  Therefore, liquidity is low.

 

Strengths

 

Life insurance serves its purpose in helping beneficiaries overcome the financial hardship of the policyholder dying

Pooled risk benefit of insurance

 

Weaknesses

 

Illiquid as an investment

Annual premiums can be expensive for whole or universal life

 

Key Considerations

 

Liquidity:  Low

Historical Returns:  Low

Inflation Protection:  Low


25 Investments: Mutual Funds
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