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Are you one of many wondering, “how is life insurance an investment?” A majority of policyholders who have set aside a budget to buy life insurance buy the product as a form of protection.
While buying life insurance for protection serves a purpose for you and your family, it can also be purchased as an investment vehicle.
Some life insurance policies make it possible for the policyholder to accumulate cash that can be borrowed, withdrawn or paid in the form of a death benefit tax-free.
If you have been planning for your retirement, you know how beneficial it is to choose an investment vehicle that offers you tax-free growth with little tax implications.
With permanent life insurance products offer policyholders cash value along with life insurance protection that will pay out if a claim needs to be filed.
This is why some categories of life insurance are becoming a viable option for people looking for a place to invest their money where it counts.
Life insurance can be purchased with the intentions of adding it to your investment portfolio, but you need to decide if it is a smart investment before you put your money in a vulnerable situation where it cannot grow like you want it to.
If you need help understanding life insurance as an investment, read this straightforward guide so that you can discover how life insurance compares to the alternatives.
Use the FREE comparison tool at the top of this page to start your search for life insurance.
What is the difference between term and permanent insurance?
Not all life insurance policies can be purchased as an investment, and buying the wrong type of plan can be a major mistake if you do not understand what you are buying. Term insurance offers pure life cover for a specified period of time.
If the named insured passes away during that term, the policy will pay the death benefit to the named beneficiaries. If nothing happens, most policies will end and the money that you paid will be the company’s to keep.
Term insurance is often called the rental property of life insurance because the money that you pay into the plan is gone as soon as it is paid.
A permanent insurance plan is much more like buying a home because the money that is paid into the policy will sit and accumulate interest.
Instead of only paying for pure life insurance, a permanent life insurance plan includes a term life component and an investment component that makes it possible for the policy to stay in force for life instead of a short 10, 20 or 30 year term.
What types of permanent insurance can be used for investment?
There is more than just one type of permanent plan. Whole life, universal life and variable life products all have an insurance and an investment component, but they are all structured in unique ways.
The type of insurance that you choose is very important because it can affect how your money performs while it is sitting in the cash account. Here is a breakdown of how the different types of permanent life insurance work:
Whole Life Insurance Characteristics
A whole life plan is the oldest and most common type of permanent insurance sold today. It offers you a level death benefit and a cash account where money is paid and will accumulate over time.
The premiums that you are charged to keep your coverage in place will stay level for the entire life of the policy.
While the death benefit will not grow, the cash value can grow as you earn dividends and as your premiums sit and earn a guaranteed interest rate.
Universal Life Insurance Characteristics
Whole life is a traditional option, but universal life insurance offers you greater flexibility and better possibilities to watch your money grow.
The way that a universal life policy is structured makes it unique but can also make it a confusing choice if the policy is not well-maintained.
When you buy a universal life insurance policy, you can decide how much you would like to pay into the policy to fund it. As time passes and you age, you will need to raise this amount unless you have an illustration that shows that the policy will stay paid.
You must fund the policy wisely if it is taken out for investment purposes.
If you do not keep the policy funded, the money in the investment account of the policy will be eaten up paying premiums and will not be available when you need it.
If you are not committed to staying on top of the policy and its performance every year, Universal Life may not be right for you.
Variable life is a bit more risky than other options because the money is invested in stocks and bonds instead of just giving you the power to earn the money market interest rate. There is risk involved because the interest that your money earns is not guaranteed.
If the market is not performing well, the money that you have in your investment account will go down and so could your death benefit. Many policies do, however, have a guaranteed death benefit.
What are the arguments that favor buying life insurance for investing?
You should always learn about the pros and cons before you make a major investing decision. Some argue to buy term life and invest the rest, but these “experts” may not have considered the advantages of investing in life policies.
Here are some factors that you should consider before you put all of your money into an 401k, an IRA or another type of retirement account.
Enjoy Tax-Deferred or Even Tax-Free Growth
When the money is growing in your life insurance policy, you are not going to have to pay any taxes on the money that is accumulating every year in the form of dividends and interest. For many retirement accounts you would have to pay interest on these capital gains and this taxation takes away from your nest egg.
If you are maxing out contributions in other accounts that give you tax-deferred growth, you could buy a permanent life policy for additional investment tax advantages.
Invest Money While You Pay for a Death Benefit
You never know when something might happen to you. If you are worried about investing, chances are you understand the importance if having life insurance as a form of financial protection.
When you invest in life coverage, you have the savings component and you also have the life insurance until you are 100. This helps pay for final expenses while also covering your mortgage and other living expenses your family would have had to pay with your assets.
Accelerated Benefits and Withdrawals For Times You Cannot Predict
A majority of life insurance companies will allow you to access your death benefit if you are diagnosed with a critical illness. This is called accelerated benefits in the industry.
Accelerated benefits make it so that the company will pay you 30 to 100 percent of your benefits to pay for your living expenses and medical expenses if you develop a medical condition.
These are living benefits that you can use for a better quality of life that you would not have if you chose another type of investment vehicle.
If you did not have the benefit, you would be left using your savings to stay happy near the end of your life instead of using a benefit.
There is also the option to withdrawal money with no penalties if you buy a home or are paying for your child’s education.
What are the arguments against using life insurance?
There are benefits to buying term insurance and investing the difference in another vehicle as well. This option is better if you need a large death benefit on a budget now and want to invest money later.
The money that you invest will not be connected to your life insurance policy so that you do not have to worry about your plan ever lapsing. If you have medical conditions and you cannot qualify for a permanent plan, this is not a strategy for you.
Some argue that they are able to find a vehicle that does not charge the account maintenance fees that are charged near the beginning of the life of a permanent plan. While there are fees that do take away from your account value in the beginning, the costs for maintenance do go down over time.
This is what you need to remember as you are financial planning.
You have to consider your current situation and where you are going to make a decision.
Using a permanent life insurance policy as an investment vehicle is a good choice for people who can afford the premiums.
If you do not mind paying more for permanent life coverage that will help you build cash values, investing in permanent life is something that you can add to your investment portfolio so you have protection and build value.
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