Understanding Savings Life Insurance
As an expat financial advisor & investment manager, one of the most common enquiries I encounter is the need for robust, lifelong, financial planning tools, enter “Savings Life Insurance Plans!”
Life Insurance Savings seem to be one of the most versatile and beneficial insurance and investment tools that appear to be a perfect way to save and protect your family. Essentially, it merges the security of a traditional life insurance policy with the growth potential of a savings component.
This give the appearance that your life insurance isn’t costing you as much, you are getting it for free and even better You Are Making a Profit from this plan.
Here’s the Jaw-Dropping part: It’s just Life Insurance companies playing around with numbers. Life insurance and investment should remain distinct from one another. But can a $9.8 Trillion industry be mistaken? No, it’s the consumers who choose them who might be the misguided ones!
In this article, we will discuss the benefits and drawbacks of Savings Life Insurance Plans.
Life Insurance with Savings: A Closer Look
Life Insurance with Savings is not just a safety net for your loved ones; it’s an investment for your future. A portion of your premiums is allocated towards some form of investment, which is usually an investment administered and owned by the insurance company. Over time the money accumulates, offering a dual advantage – protection and growth.
For expats, this becomes even more critical, considering the potential uncertainties and risks associated with living abroad.
Furthermore, if you are out of your national social security system, then the investment will help support you in later life.
The Best Savings Life Insurance Plans
The Best Savings Life Insurance Plans offer flexibility, competitive interest rates, and transparency. You need to know where your money is invested!
As an expat, it’s crucial to compare various plans, keeping in mind currency fluctuations and potential tax implications. Unfortunately, there are not many expat options available that offer this dual service, so your ability to shop around is limited.
When taking out a life insurance policy you must make sure that it covers you as an expat, not as someone who is just working abroad. Insurance companies do not like paying out, so it must be an expat plan.
What are the Investment Choices in Life Insurance Savings Plans
From my experience, the options are very limited. For instance, the plan that Hampton Bridge used to advise our clients to take up only had two options:
1. Ultra Safe Fund of Funds Investment Portfolio
2. Very Safe Fund of Funds Investment Portfolio.
While we haven’t examined every policy available, it’s rare to find life insurance savings plans with outstanding investment options. Such products are becoming dated and are dwindling in popularity. Firms like ours have chosen not to offer them anymore, believing they no longer align with sound financial guidance.
Often the investment structure is heavily weighted towards government bonds, with maybe a limited mixture of safe index-tracking funds. These types of funds are very safe and offer the investor very limited growth potential.
What are Fund of Funds
Fund of Funds are what certain insurance and investment companies use primarily to make more money from your investment. A fund of funds will be a collection of funds that carry their own set of charges, and instead of being dropped into a portfolio as individual funds, they will be wrapped up in another fund.
You might be presented with options such as the “Bank of Enigma’s “Conservative Fund”, “Medium Risk Fund”, and “Aggressive Fund”.
Bank of Enigma may even hold all these funds. They profit when you invest in them, and then they earn again by channelling these investments into another set of funds, like the Low/Medium/Aggressive ones mentioned, incurring additional charges on you, doubling your fund charges.
So, in reality, you are being charged twice for the same investment. If you now consider that these funds are also ultra or very safe because they are heavily weighted towards bond funds, it now becomes practically impossible for you to make a decent return from the investment side of savings life insurance plans.
What is Wrong with Putting Bond Funds in Savings Life Insurance Plans?
If you are an ultra-safe investor, or you are in your retirement, then you can justify buying Bonds or Bond Funds.
The whole point of investing in Bonds is that they pay an income. If you are in retirement then you will need an income, so Bonds are a good, safe, stable asset which can provide a living for you.
However, if you are working and you have an income you are earning enough to be able to invest, then your money should be going into more volatile assets such as Mutual Funds or ETFs.
If you are a safe investor who wants to gain a larger return, then invest in an index ike the S&P 500. It has a track record of “Jaw Dropping” results and should be part of everyone’s investment portfolio.
You can read more about investing in the S&P here in our “Best Low-Risk Investments of 2023” or our “Invest in the S&P 500” blog.
What Should I Use Instead of Savings Life Insurance Plans?
Simple, keep them seperate.
Buy life insurance and then invest your money on a monthly basis into a monthly savings account. You would never choose to use the fund selection available in savings life insurance plans if you had a limitless choice of investments, so create a scenario where you have an endless choice of investments.
Read our blog here on “Monthly Savings Plan”.
Do not invest your money into a life insurance policy just for the illusion that you are buying free insurance coverage.
Why do Investment companies use fund of funds in Savings Life Insurance Plans?
In highly regulated countries, it has become difficult for investment companies to make money as there have been waves of new global regulations put in place since the subprime mortgage crisis of 2007/2008 after the world had been de-regulating itself for many years.
The big banks used this de-regulation to their advantage to create CDOs (Collateralised Debt Obligations), which is a structured investment product (which at the time were a collection of mixed quality investments).
The use of fund of funds is permitted and is a way for banks and investment managers to make extra money from your investment.
Unveiling Savings Life Insurance Plans Benefits
These plans often come with tax benefits, making them an attractive investment for expats looking for estate planning benefits. Life insurance is taxed differently from standard investments.
You can invest in a typical investment which is wrapped up in a life insurance structure.
How is this possible?
If you die during the life of your investment plan, then the investment company will pay out 101% of the value of the plan, meaning that if you have $100,000 in your account then the beneficiary will be paid $101,000.
This option is much better for tax and estate planning than using savings life insurance plans.
When investing in a Personalised Portfolio Bond (PPB), which you can read about in our “Lump Sum Investment: What is an Investment Platform” blog, you can take full advantage of the tax benefits coupled with a limitless investment choice.
Tax planning is pivotal in shaping your financial strategy. Always explore all available options to enhance your financial position. It is essential not to neglect your options, as tax optimization and wise investment choices are the primary catalysts for financial success.
You can also save every month into a savings plan, which is viewed as life insurance under the same arrangements as the PPB option above. You can learn more about this plan in our “Monthly Savings: Are 8% Returns Possible” article.
How to Compare Savings Life Insurance Plans
To Compare Savings Life Insurance Plans effectively, consider factors like premium amounts, interest rates on the savings component, flexibility in terms of withdrawal, and any additional perks or bonuses.
There may be some excellent savings life insurance plans available that I haven’t been fortunate enough to find. I would be delighted if anyone could write in and let me know about them if they find one available in the offshore world.
Savings Plan vs Life Insurance: What’s Best for You?
When weighing up a Savings Plan vs Life Insurance, understand your primary goal. If it is long-term growth with a safety net, the latter might be more suitable, especially for expats.
Frequently Asked Questions (FAQs)on Savings Life Insurance
What are the main advantages of Savings Life Insurance?
It offers dual benefits – life coverage and a savings component that grows over time.
How different are they from traditional life insurance?
Unlike traditional life insurance, these plans have an added savings component, which accumulates growth.
Are they suitable for expats?
Yes, but we believe there are much better options you should consider.
Can I withdraw from the savings component?
Maybe. Some plans allow partial, or full withdrawals, but it’s essential to understand any associated charges or conditions. It is rarely a beneficial to extract money from a structured investment and insurance product.
Final Thoughts
Savings Life Insurance Plans are an innovative financial tool, especially for expats.
They not only assure life insurance but also serve as a savings avenue. By understanding their intricacies and comparing various options, one can make an informed decision to ensure a secure financial future for their family.
Utilising savings life insurance plans and taking out a policy is better than doing nothing. You will protect your family against your death and there will be some savings for them as well.
However, considering everything that is written above about the drawbacks, I do implore you to keep these plans separate. The financial benefits and potential growth opportunities are enormous compared to dual savings life insurance plans.
Opting for two policies does require a bit more effort than just purchasing one plan; but time invested now results in money earned later on in life.
The purpose behind our blogs is to bring forward the lesser-known nuances and complexities of the financial world for the benefit of our clients and the broader public.
Today’s financial and investment landscape is arguably more intricate and complicated than ever.
I always abide by a straightforward philosophy: Keep things uncomplicated. Invest only in what you can grasp, ensuring it’s transparent and cost-efficient.
