Most of us think of insurance as an expense instead of an investment. That's understandable considering that it ranks right up there with mortgage payments and taxes as a major financial outlay each year. Even when we reap a "return" via a claim on our auto insurance, homeowners insurance or health insurance, we rarely see the cash. It also offers only one form of compensation -- monetary -- for a host of calamities for which we could also use solace and compassion. For these reasons, insurance just doesn't feel like an investment.
But in these days of measly return rates, might we benefit by viewing it as one?
I put the question to Ray Lucia, a San Diego-based Certified Financial Planner, radio host and author of "The Buckets of Money Retirement Solution."
"The typical life insurance policy, over a short time period, cannot," says Lucia. "But an individual who is willing to invest for 20 years might be able to get a halfway decent return that is a little bit better than the fixed-income vehicle that you can buy with a shorter horizon. So no, I don’t think that a life insurance vehicle works.
"However, there are some insurance products -- for example, fixed-indexed annuities -- that carry with them a floor return of, say, 1.5 percent over a five-year period, so you can't do any worse than 4 percent. And then they'll tie the returns to some index, such as the Standard and Poor's 500 or whatever, and there's an outside shot at doing better than CDs by doing something like that."
Sure, you can beat 4 percent with something like a non-traded real estate investment trust, or REIT, but Lucia says you'll likely have to hold that for 10 years to do so.
I'll insert my own plug here for term life insurance, which today sells for about a third of what it cost in the 1990s. If you need term, this is a great time to invest in it. You might also check out the new term-universal life policies called "Term UL" that give you more options for about the same investment dollar.
Though he doesn't think the recession is anywhere near over, Lucia cautions against keeping all of our cash under the mattress.
"For some people, that’s the right thing to do, but for most people, it is not. Remember, we do get through recessions," he says. "In fact, if you look at the performance of the stock market 10 years out from each of the past five recessions, you ended up with a 13 percent compounded return for the ensuing 10 years. I don't think we're going to get anywhere near that in the stock market (this time), but history tells us that investing when there is blood on the street, making the tough move to put money into stocks and real estate when they are viewed as least likely by the media and the public to do well, actually ends up being the best time to be an investor."
To which I would add: May the Force be with you.
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