Is it better to keep a life insurance policy or cash it out and save/invest the money?

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Asked April 22, 2014

1 Answer

There are a few things that need to be considered before you decide to cash out a life insurance policy in favor of saving or investing. The first one is whether you are doing your family a favor by eliminating the life insurance policy, but you also have to look at things such as what it will cost to get another life insurance policy at a later time, and how effective the markets are going to be for investing.

Life insurance policies, even whole life, are primarily intended to leave money for bills and other uses after you have passed away. Even if you live to a ripe old age, accruing the face value of a life insurance policy through savings and investments is rare. In fact, you could pay life insurance premiums for many decades without coming close to paying the full face value of the policy, even before you consider the cash value of the policy.

If you only have on life insurance policy, the best option is usually to keep it active. Since the cost of premiums is based on your age and health, the cost of the premiums will increase over time. If you cash out an active policy and then decide to purchase a replacement policy a few years down the road, you will almost certainly have to pay more in premiums because the insurance policy is designed to allow the provider to recoup a calculated amount of the policy value from you.

Savings and investing are both good ways to increase your available cash flow, but they are both affected by inflation, interest rates, and investment performance. With a life insurance policy, you are guaranteed a specific face value even if the investment options of the policy perform poorly, where an investment portfolio can go completely bust, leaving you with little or nothing to show for the investment.

Answered April 22, 2014 by Anonymous

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