Should I Buy Life Insurance or Stocks?

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When planning for the future, it's wise to take advantage of the different resources in your financial toolbox. This includes life insurance, as well as stocks and other securities. They all work a little differently, but together they can shore up your financial health and put you and your family in the best position for future financial security.

Life insurance and stocks may both be part of your financial plan, but deciding which one to prioritize has everything to do with your unique financial situation. Here's an overview of how they work:

Life Insurance vs. Stocks
Life InsuranceStocks
How they workLife insurance policies are designed to provide financial support to your beneficiaries if you pass away. They'll receive a death benefit to help them cover final expenses and recover financially.Stocks are investments you can buy and sell. When you buy a stock, you're assuming partial ownership of the business in which you invest. Stock prices can vary depending on company performance, economic conditions and other factors.
Financial benefitsIn addition to the death benefit, some insurance policies accumulate a cash value. This can provide you with some financial flexibility, especially in retirement.Selling individual stocks for more than you paid for them can net you positive investment returns. Many investors also choose to put their money in mutual funds or exchange-traded funds (ETFs), which hold a variety of individual stocks. This is a less risky approach and can help diversify your investment portfolio.
Financial risksWhile some policies cover you for life, others expire after a certain period of time, or term. If you choose to renew your term life policy when it ends, it could be much more expensive.Financial returns are never guaranteed on stock investments. Trying to time the market and predict the best moments to buy and sell can put your money at risk.

How Does a Life Insurance Policy Work?

With a life insurance policy, you make regular premium payments to an insurer to keep it active. Should you pass away while covered, your beneficiaries will then receive a payout called a death benefit. Policy terms and levels of coverage vary, but you may be able to add extra protections and flexibility with optional life insurance riders.

Life insurance is structured in the following ways:

  • Term life insurance: Coverage lasts for a predetermined amount of time, typically anywhere from one year to 30 years. Premiums usually stay the same for the life of the policy. Your coverage expires when your term ends, though you may choose to renew your policy (usually at a much higher cost). There is no cash value other than the death benefit your survivors receive when you pass away.
  • Whole life insurance: This type of permanent life insurance lasts for your entire life, as long as you keep up premium payments. Premiums tend to be higher with this type of policy, but it will accumulate a cash value in an account that works similarly to a savings account. It can provide financial peace of mind—and a source of guaranteed income in retirement.
  • Universal life insurance: Another form of permanent life insurance, universal coverage also accumulates cash value. But unlike whole life insurance, which has fixed premiums, a universal policy offers more flexibility. Your premium amount, payment amount and death benefit can all be adjusted during your coverage period.

With permanent life insurance, you can usually access the accumulated cash value of your life insurance policy via a loan, or by withdrawing funds and reducing your death benefit. Alternatively, you could surrender your policy and receive a lump sum of cash, though you may be charged a fee depending on how long you've had the policy. Either way, your cash value will grow on a tax-deferred basis: You won't be taxed on any gains until you withdraw funds.

How Does Investing in Stocks Work?

When you're ready to start investing, you can buy and sell individual stocks on exchanges like Nasdaq and the New York Stock Exchange. Stock prices tend to go up and down—and your investment reacts in kind. Stock investing is riskier than "safer" financial products like certificates of deposit or bonds, but the return on investment is historically better over time.

If you'd rather not pick individual stocks, you can invest in mutual funds or ETFs instead. Mutual funds are collections of investments that are managed professionally. With a mutual fund, the investor owns small shares across a variety of assets. Certain funds mirror a market index like the S&P 500, for example. ETFs are structured similarly, but they are often managed passively.

There's also the option of going with a robo-advisor, which is an automated investment service that takes the reins of your stock investment decisions. Equipped with knowledge of your goals and risk tolerance, a robo-advisor uses computer algorithms to analyze stock performance and make investment decisions for you.

Whenever you invest, it's important to keep in mind that your investment returns—called capital gains—are taxable. The amount you owe will depend on how long you've owned the stock, as well as your income. Your marital and tax-filing status also come into play.

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When It Makes More Sense to Buy Life Insurance

If you're paying off high-interest debt, lack an emergency fund, or are dealing with income insecurity, paying premiums for a life insurance policy may strain your budget. However, you may want to consider life insurance if any of the following situations apply to you:

  • You have a family. Term life insurance costs less than a whole life policy; even more so if you're young and generally healthy. If you're looking to provide your family with a safety net should the unthinkable happen, a term policy might be an affordable option. The average monthly premium for a 20-year, $500,000 policy for a healthy 35-year-old male costs about $30, according to Policygenius.
  • You're conservative with your money. Those who have their financial ducks in a row might like the idea of accumulating a cash value in a permanent life insurance policy. It offers a way to create a pool of money you can draw on if necessary—or leave to your beneficiaries.

When It Makes More Sense to Invest in Stocks

Like anything else, stock investing has its benefits and drawbacks. It might be right for you if:

  • You've got a high tolerance for risk. There's no such thing as a guarantee when investing in stocks. Company performance and economic conditions, among other things, can all influence stock prices. Stocks are inherently risky because there's no protection against loss, and market volatility is par for the course, particularly in the short term.
  • You're after a better return on your investment. Portfolios consisting of 60% stocks and 40% bonds have produced an average annualized return of around 10% over the past decade, according to investment research company Morningstar. That doesn't guarantee future performance, but with that kind of average return, it's an investment worth considering.

If you're contributing to a 401(k), you're already investing in stocks (typically in the form of mutual funds or ETFs). Before you open a separate brokerage account or try your hand at day trading, however, it's wise to first make sure you're on solid financial ground. This means:

You may not have to choose between buying life insurance and investing. The two can play different but equally important roles in your long-term financial plan. No matter what, you'll want to establish a strong financial foundation. This goes hand in hand with your credit. Checking your credit score and credit report with Experian is fast, easy—and free.