Term Life Insurance

• Term life insurance provides a death benefit in exchange for a premium payment for a set number of years. This eliminates the possibility of term life being used as an investment, since there is no investment component and no savings associated with the policy at all. The only way to use term life as an investment is to consider the policy an investment in your own death (or the death of a loved one).
  
  

Permanent Life Insurance

• Permanent life insurance provides life insurance until you turn 100 or 120 depending on the policy. Examples of this type of life insurance include whole life, variable life and universal life insurance. These policies build a cash reserve, called a cash value, which functions as a savings. This cash value is invested in a variety of investments, depending on the particular policy type. Whole life invests in bonds and other bond-like investments; variable life invests in mutual funds; and universal life invests in either bonds, mutual funds, a proprietary equity index option managed by the insurance company or a combination of the three investment strategies.
  
  

Effect

• Life insurance cash values build up slowly over time. Many policies are front-loaded. This means that all expenses of the policy are paid upfront before you get any cash value growth. Because of this, it's not uncommon to have to wait 10 years or more before you've recovered all of the premiums you've paid into the policy and the policy starts showing a gain. This makes permanent life insurance a poor short-term investment.
  
  

Considerations

• If you want your money to grow from day one, then consider more traditional investments. Invest directly in bonds or mutual funds, or buy bank CDs or even annuity policies. All of these financial products have the ability to delay costs or use a deferred sales charge to avoid the front-end load or fees found in life insurance policies. They also pay interest on your savings immediately instead of delaying your investment growth for many years.