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: The Money Market
Related Articles
  1. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  2. Insurance

    Life Insurance

    Life insurance is an important component of basic financial planning. Find out how life insurance works and how insurance companies are able to profit through providing financial security to ...
  3. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  4. Insurance

    How To Easily Understand Your Insurance Contract

    Understanding your insurance contracts can go a long way in making sure that your advisor's recommendations are on track. Learn how to read yours today.
  5. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  6. Insurance

    How Good of an Investment Is Life Insurance?

    Compared to other options, does it ever make sense to include cash-value life insurance in your investment portfolio? A look at the pros and cons.
  7. Insurance

    The Best Type Of Life Insurance For You Right Now

    Different stages of life call for different amounts of life insurance coverage. Find out what you need, when and why.
  8. Insurance

    3 Things to Know About Life Insurance

    Many life insurance salespeople would prefer you didn't know these three things.
Trading Center