Insurance companies and insurance agents often market life insurance policies as an alternative to traditional investments (full disclosure, I am a licensed insurance agent). There is no doubt that some policies have investment-like characteristics, but are they good investments?
Basic life insurance concepts
Before we can evaluate life insurance as an investment alternative, we need a basic knowledge of how an insurance policy works. One important caveat, life insurance can be very complex. This article is not designed to unpack all of the intricate parts of an insurance policy, but only enough to help evaluate if life insurance should be used as an investment or just as a death benefit.
All life insurance policies have two essential components: the death benefit (what you receive) and the premium (what you pay). Insurance companies do not offer polices for free. This might seem obvious, but after hearing many life insurance sales pitches over the years, I could see how someone may be led to believe that the policy is essentially free. It never is.