Is Insurance a Good Investment?

Insurance and investing are different tools that are often confused. An investment is designed to grow money over time. Insurance is designed to protect you against a loss you could not absorb. Judging insurance by its return on investment is like judging a seatbelt by how fast it makes the car go - it misses the point, though there is one narrow case where the comparison is fair.

Pure insurance has no ROI by design

Term life, auto, home and health insurance are pure risk transfer. You pay a premium; the insurer agrees to pay a large sum if a specific bad event occurs. If the event never happens you "lose" the premium - and that is the correct outcome, because the alternative is worse. The value is the certainty of protection, not a financial return.

Expected value = probability of loss × size of loss − premium

Where an "ROI" comparison is fair

Permanent policies such as whole life and universal life bundle insurance with a savings or cash-value account. Here it is legitimate to ask what the cash value earns compared with alternatives. The typical findings are:

• Early-year cash value grows slowly, and surrendering in the first years often returns less than was paid.
• Guaranteed growth is modest, often below the long-run return of a diversified index portfolio.
• Premiums are several times higher than term for the same death benefit, which is the real cost of the savings component.

The opportunity cost test

The fair comparison is not "whole life cash value versus nothing" but "whole life premium versus buying cheap term and investing the difference." Subtract the term premium from the whole life premium, invest that difference at a reasonable expected return, and compare the projected balance at life expectancy with the guaranteed cash value. For most healthy buyers, buy term and invest the difference comes out ahead - but for some, the guarantees, tax treatment and forced-savings discipline of permanent coverage are worth the trade.

Frequently asked questions

Should I buy insurance to make money? No. Buy insurance to protect against loss, and invest separately to grow wealth. Mixing the two usually makes both less efficient.

Is any insurance a guaranteed return? Some annuity and permanent policies offer guaranteed rates, but those guarantees are usually modest and come with surrender periods.

Use the calculator below to compare the numbers for your own situation.