Did you know that there can be circumstances when an insurance return, as in the lump sum payout from an insurance policy, can be better than the return you get from investing.
For example, if you have a lump sum available to invest or excess cash that you want to invest on a monthly basis, you could use that money to pay regular premiums on a life insurance policy. The payout from the life insurance policy could be greater than had you left the money invested.
It’s also a lot less risky too!
Insurance return examples
Let’s take a look at different scenarios when an insurance return could really work for you.
#1 – Leaving a legacy for your family
Let’s say you have £275 a month of excess cash available to save or invest. You want to put this in an account and build it up as a fund for your family when you die.
For a 50 year old male, taking out a whole of life insurance policy for £275 per month will pay out £250,000 on death.*
*Figures using Zurich whole of life calculator. Not guaranteed.
It would take until age 126 before the total monthly premiums equalled the payout.
If you stayed invested until life expectancy age of 81 then the investment return you would need to get to match the payout from the policy would be 5.1%. Remember though, investing comes with risk. The insurance policy doesn’t.
#2 – Protecting investment returns
The stock market has done quite well over the last 10 years and if you have remained invested you are probably pleased with your returns. But what if the stock market crashes just before you retire?
Worst still, what if you died just after a stock market crash had occurred. The portfolio left for your spouse could be seriously diminished.
One way to protect against this could be to take out investment life cover. Let’s say you invest £100,000. This type of policy guarantees your £100,000 on day 1. At the end of 5 years if your investment has fallen in value then you get £100,000 back minus charges. If the investment has gone up you get the higher investment value minus charges.
#3 – Increasing the pension income of the spouse
Typically I find that in a couple, one has more pension income than the other. This is usually because one has a decent defined benefit pension.
The problem is the defined benefit pension income usually reduces by half on first death. At the same time the deceased’s State Pension is also lost if the survivor already has a full State Pension.
One way to protect against this is to take out a whole of life insurance policy, meaning a lump sum payout for the surviving spouse. The surviving spouse can then use the payout to purchase a secure income in retirement to make up for the loss of pension income from the deceased.
Insurance return costs
One of the biggest objections to using insurance is the cost. Paying the monthly premium.
The key here is to work out two things:
- The total cost of premiums. When does the cost outweigh the benefit?
- The return required from an investment to beat the insurance payout.
As you can see from the number 1 example above, the costs can be far less than the overall benefits, especially if you are concerned about investment risk.
Even if you are concerned about costs on a whole of life policy there are ways to do alternative insurance policies, such as term assurance instead of whole of life that are half the cost.
The best way to think about insurance as you approach retirement is that it’s effectively another investment strategy. It could form part of your lower risk strategy whilst you keep other funds invested as part of your higher risk strategy.
If you would like more information on how insurance could be used in your investment portfolio then take advantage of our free 15 minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
