Is Life Insurance a Sound Investment Option?
While you develop money handling skills and learn to save money, you also need to learn to invest. Many people think that refers to stocks and bonds, but the world of investing remains far more diverse than that.
You also have the options of cryptocurrency, small business investment, real estate, collectibles such as watches, stamps, or coins, and life insurance as an investment. The latter might surprise you, but many higher-income earners turn to life insurance as an investment option. Corporations also often turn to it as an option to protect them from the loss when a C-level employee or board of directors member dies.
Life Insurance as an Investment
If all you know of life insurance consists of Globe Life commercials and the policy your parents bought when you were in grade school, you need this primer on life insurance.
Life insurance refers to a financial product that pays a monetary benefit to a policy’s beneficiary upon the death of the policy’s purchaser. When you purchase a policy, you can name more than one individual as a beneficiary, only one individual, or you can name an organization.
Two main types of policy exist – whole life and term life. A whole policy also gets referred to as a permanent life insurance policy. It lasts the policy purchaser’s entire life, so long as you pay the premium. On the other hand, a term policy only lasts 10, 20, or 30 years so long as you pay the premium.
Should You Consider Life Insurance As an Investment?
Life insurance as an investment makes an ideal way to begin saving and investing. You essentially kill two birds with one proverbial stone by protecting your family’s finances if you die and establishing an investment account. Since you get to save tax-free and you can make deposits to the cash value account or investment account over and above your premium payments, you can grow a significant savings and investment account without needing to pay taxes on any of it. If you do decide to access it in retirement, you will only pay taxes on it when you use it. You will not incur additional taxes or penalties but will pay your standard tax rate.
You would buy life insurance anyway, so it makes sense to purchase a policy that can help you save for your future. Your insurance agent will have many financial management tools available to help you get started and manage your account.
There really is no downside to opening a life insurance policy for investment purposes. You benefit now and your family benefits later.
Life insurance has become an integral part of estate planning. You need the policy to pay for your funeral and to provide for your family in your death. That contributes to your estate, but you can also build your investment portfolio by obtaining a policy. You just need the right kind.
Types of Whole Life Policies
Whole life policies are truly diverse in nature. Four main types exist.
Permanent life insurance: Permanent or whole life insurance refers to life insurance that does not expire so long as you pay the premiums. It may or may not include a cash value savings account as well as a death benefit.
Universal life (UL) insurance refers to a form of permanent life insurance that includes a cash value account that collects then invests savings. These premiums may be variable, meaning that they may reduce in the amount as the policy ages.
Universal indexed life (UL) insurance refers to a permanent life insurance policy that includes a cash value account that collects then invests savings.The investment account ties to an index, typically a major stock index such as the S&P 500. It also may feature variable premiums.
Variable universal life (VUL) insurance refers to a permanent life insurance policy that includes a cash value account that collects then invests savings. The variable in this refers to the premiums ability to change.
While term policies do not typically include a cash value component, you can obtain a few with that option. Another unique option is the guaranteed life policy which can contain a cash value account. This type of policy requires no health exam. It typically includes a small death benefit of $70,000 or less. The premiums on this type of policy are small, so the amount that rolls over into the cash value account remains small, too.
Considerations Before Purchasing
A life insurance policy with a cash value account lets you protect your family while saving for the future. Some account types do not invest the funds, some do. Some of the policies include a guaranteed return on investment of a specific percentage. If it includes a savings account only, then it will earn at a modest rate of interest. The money in the savings and/or investment account is tax-deferred, meaning you do not pay taxes on it now. You pay taxes on it when you access the money. Insurance agencies often encourage this type of policy since it reduces their risk. That is because as the cash value increases, it offsets the insurer’s liability.
You can use the cash value component as a source of funds for any need. You can also take out a loan using it as collateral. Withdrawing from the account can reduce the death benefit. While you can defer taxes on earnings from the savings and investment account, if you withdraw early from the account you must pay taxes on the distribution at the standard tax rate.
The number of withdrawals you can take from an account varies by the policy. Some let you make unlimited withdrawals, but others restrict the number of withdrawals you can take during a calendar year. Policies may also cap the removal amount or require a minimum.
You can use the cash value account for a loan, but this reduces the death benefit temporarily. The financial lender still charges interest. The death benefit goes back to normal once the policyholder completes the repayment of the loan. Some insurance agencies require you to repay the loan interest. If you die before repaying the loan completely, the outstanding loan and interest will be deducted from the remaining cash value.
You can also use cash value accounts to pay premiums so long as there exists a sufficient amount. If you need to stop paying premiums in for a time, you can have the insurance agency pull the payments out of the cash value account.
While they do help you save, these life insurance policies cost more than term insurance policies for two reasons. They require an added amount to go into the cash value account and permanent life policies always cost more than term policies. Meet with your insurance agent to discuss the type of cash value life insurance policy you need. Your choice depends on how you want to grow your cash value.
Also, discuss your options for accessing and using your cash-value account. Regardless of the rules, you should make withdrawals only when you really need the money or must take out a loan since it will reduce the death benefit. Your best strategy is to leave the cash value alone to grow. Do this in perpetuity if possible, but at least as long as you can. This lets you use it for premium payments later in the account life or transfer it to your death benefit.
The Investment Strategy
Since you can choose a savings or an investment account, you decide whether you want to build wealth as a low-risk or high-risk undertaking. The savings component lets you save at low-risk. The investment component lets you potentially earn more quickly, but it carries a higher risk.
If you opt for a savings account, here are some options to consider:
Some investment accounts provide a guaranteed rate of return. Some provide a minimum floor that the account balance cannot drop under regardless of how the stock market does. Most agencies provide a prospectus that includes a potential rate of accumulation (ROA).
You can purchase an endorsement that includes the accrued cash value plus the death benefit for your beneficiary. Without the endorsement, the insurance agency keeps the cash value, while the beneficiary gets the death benefit.
Who Is It For?
Since whole life premiums typically cost about two to three times as much as term and premiums for a cash value account increase that cost, these life insurance policies are typically purchased by higher-income people. While the guaranteed life with cash value accounts are accessible in cost to all, the typical purchaser of the universal life, universal indexed life, and variable universal life are affluent.
How does it pay?
You can earn money from your investments in three different ways – dividends, surrender, and settlement. Many insurance companies pay quarterly or annual dividends. The dividends usually consist of money left over from premium collection less overhead expenses and claims payouts. Dividends are non-taxable. The IRS considers these dividends a return of premium.
Surrendering value is another option. You need to wait until a policy has been in force at least three years and then you can cancel it. You get a surrender value cash payment. If you do this before the three years are up, you will pay fees to cash out in this way.
The third method is to opt for a life settlement. That refers to when you sell the policy to a third party and you get the cash.
While the money going into the account remains tax-free, once the policy pays when you die, the money incurs tax. Your beneficiary may be able to avoid taxes if your estate remains under a certain threshold. If you die while you have a loan extended on the cash value, you incur tax. If you sell or surrender the policy, you will incur tax at that time.
What About Term?
Term life insurance does not typically have a cash value component, but that does not mean that a term policy can’t help you. It can.
Although a term policy only guarantees payment if you die within the term specified, they cost much less than whole life. Most insurance agents recommend that recent college graduates obtain a term life insurance policy, so they have cheap coverage. They then suggest the policyholder invest the difference between the cost of the term policy and a whole life policy. This provides them with a small dollar amount with which to begin saving and investing.
As long as you pay the policy premium each month, the term premiums remain the same. This remains true for as long as you own the policy. If it is a 30-year term policy, the premiums remain the same for all 30 years. The price of a can of tuna might increase remarkably, the premium for your term life insurance policy will stay the same. Whole life will increase in cost as time passes. This provides you with an updated and increased value to save and invest since you should continue to invest the difference between the cost of term premiums and those of whole.
Life Insurance as an Investment for Businesses
Businesses have similar options to individuals. They can take out a cash value policy on their C-level employees or other key personnel. This will often get called key personnel insurance. This policy pays the company the benefit if the employee or board member dies.
The firm typically lets the employee have control of the cash value account, providing the incentive to them to let the company take out a life insurance policy on them. Like the cash value accounts for individuals, these are opened by those with high incomes, in this case, from a corporate structure. They also provide a tax-savings to the company.
To Sum Up,
Choose life insurance as an investment if you want to get started quickly and jumpstart your investment accounts. It works as a terrific option for individuals or companies. While most people using cash value accounts are higher income, some options exist for those a middle income, such as guaranteed life which provides the equivalent death benefit of one year’s annual salary of the average American.
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Explore the Wealthry store to learn more about life insurance and the investment benefits it provides. You can use life insurance to jumpstart your investing plus protect your family from loss of income in the event of your death. Consult with your insurance agent today to explore your options for a policy that provides wealth building and a death benefit.