In a time of low interest rates it can often be hard to put aside money in a savings account and see barely any interest being earned. While the money is safe and easily accessible, it can be disheartening to see returns of less than 1%. Like ancient Greek sailors temped by the Sirens and lured to their ruin, you may be tempted by the call of higher yields for your immediate savings. Lash yourself to your mast and put your blinders on before you take your savings and make any investments in life insurance or precious metals. While they can be appropriate investments in some, limited circumstances, investments in life insurance and precious metals like gold and silver are subject to market risk and liquidity risk. The values of these kinds of investments can fluctuate in the short term. Moreover, these investments can be illiquid and, hence, difficult to access quickly in an emergency.
Most people consider life insurance to be a death benefit. They see it as a windfall to their loved ones in the unfortunate event that they die early. However, there is more to some insurance policies than just a death benefit. A whole life, or permanent, insurance policy has both a death benefit and a cash value portion. Throughout the life of the policy, as long as premiums are paid, both the death benefit and the cash value should grow. Depending on the company, the cash value portion can earn a material returns. There are two key things to keep in mind: the financial strength of the company, and fundamentally it is still life insurance. A company with a poor financial strength record (before purchasing ask the agent what their ratings are) will advertise dividend interest rates that end up being quite a bit higher than what is actually paid. For those interested, a good strong mutual insurance company is the best way to go. These policies are a lot more expensive than their term counterparts. Moreover, getting this cash can be difficult and expensive.
Gold and Silver
Investing in gold, silver or other precious metals can sound sexy. The ads on TV make it seem like anyone could do it. Make no mistake that the value of investments in gold, silver and other precious can and will change dramatically in the short term and long term. If you are determined to invest in precious metals, only invest what you can afford to lose.
There are two ways to invest in gold and silver. A person can purchase ETF’s that track the spot price, or they can purchase physical bullion. There are advantages and disadvantages to both methods.
Some investors consider precious metal ETF’s as a hedge against inflation. Through a discount brokerage a person can systematically buy ETF’s at very low commissions. Investing in a precious metal ETF is not the same as buying the metal itself. You cannot cash in your ETF for the actual metal.
Physical bullion is a more difficult to deal with. An investor has to verify both weight and purity before purchase. The investor then needs to determine if they are receiving a market price. Finally, an investor will need to find a place to store the metal after purchase. Unless you store your precious metals at home (and at risk to theft or loss), you will have storage costs that will reduce the return from your precious metal investment. Accessing the value of your investment requires time and expense as any prospective buyer will have to verify both weight and purity of the metal. There are not too many people who want to go through the hassle.
While making investments in life insurance or precious metals with your savings may be temping, you’re better off taking your short-term savings and leaving it in an FDIC insured account at your local bank or credit union. While investments in life insurance or gold and silver can sound exciting, unless you understand and are prepared to live with their idiosyncratic risks and liquidity, you’ll sleep better with investments that you understand.