In recent decades, there has been an increased popularity of insurance products worldwide that offer protection as well as investment potential. The unit-linked insurance plan (ULIP) or variable universal life insurance (VUL) is a product that provides both life assurance and some potential for growth in assets.
With heavy marketing around these dual-purpose products, the question arises: Is insurance a good investment?
The Core Purpose of Insurance
By design, insurance serves to protect your finances against unexpected events such as death, critical illness, or accidents. Traditional life insurance provides peace of mind by ensuring your family is financially supported in the event of your loss.
However, products like ULIPs and VULs go a step further — part of your premium is invested in financial markets, offering potential asset growth. On the surface, this makes them seem like an attractive two-in-one solution: protection and profit.
David Blanchett, formerly of Morningstar Investment Management, where he served as Head of Retirement Research, opines: The worst of both worlds occurs when you combine insurance and investing, resulting in expensive insurance along with below-average investment returns.
This means that two different functions in the same product rarely create optimum value in both.
The Hidden Costs Behind the Promise
One primary concern is the high fee structure. In the early years of ULIP or VUL policies, up to 50% or more of your premiums can be consumed by various fees — administration, sales commissions, insurance charges, and more. This leaves very little of your money invested in the markets, especially in the first 5 years.
Consequently, the actual investment value assigned to the financial market is extremely low, particularly during the initial years of the policy.
Additionally, returns from investments in insurance products are often less competitive compared to self-directed investment products, such as mutual funds or ETFs (exchange-traded funds).
In an interview with Forbes Advisor, US-based certified financial planner Suze Orman said, “If you want insurance, buy term life. If you want to invest, go with low-cost mutual funds or ETFs. Don’t let one product try to do both poorly.”
Data backs this warning from experts. According to a report from the U.S. Securities and Exchange Commission (SEC), many VUL policyholders in the United States do not understand the hidden costs, market risks, and long-term performance of these products.
“Consumers need to be aware that these policies are not guaranteed investment vehicles,” the SEC wrote in its 2022 report.
When Insurance-Linked Investments Might Make Sense
This does not mean that insurance with an investment component has no place in the market. Under certain conditions, these products may be suitable for individuals who require life protection and wish to establish a disciplined savings habit.
For example, in inheritance planning or long-term protection needs, VUL or ULIP can provide more benefits than regular investment products.
This is recognized by Barbara Roper, Senior Advisor to the SEC, who said, “For disciplined savers who want life insurance as part of their long-term estate plan, these products can have a place – but only with a full understanding of their complexity.”
The Case for Separating Insurance and Investment
Many experts also suggest a strategy of separating protection and investment. This means buying term life insurance for protection needs, and investing separately through more efficient financial instruments. This strategy offers greater flexibility and potentially higher returns, as complex insurance costs do not encumber it.
As global financial literacy improves, this trend is beginning to shift. Younger generations in many countries are opting for more transparent and cost-effective approaches over bundled products.
According to the Allianz Global Wealth Report 2023, millennials and Gen Z prefer investment instruments that are flexible, easy to understand, and have high cost transparency.
Insurance can be a valuable part of your financial plan, but it shouldn’t be treated as a primary investment vehicle. If you’re considering a ULIP or VUL, be sure you:
- Understand all associated costs
- Know the expected returns
- Match the product with your actual financial goals
The decision to purchase an insurance product with investment elements should be made with a thorough understanding of the risks, costs, and financial objectives. As Suze Orman says, “Don’t mix what you want with what you need. Buy insurance for peace of mind, not for profits.”
