Have you ever contemplated life insurance as an investment opportunity? It’s not just about securing financial protection for your loved ones after you’re gone. Some life insurance policies have a cash value component that generates accessible returns over time.
This approach combines the peace of mind offered by traditional life insurance with the potential for growth associated with investments. However, like any investment strategy, it has benefits and drawbacks.
Can You Use Life Insurance as an Investment?
Yes, you can use life insurance as an investment. A portion of every premium payment made for a whole life policy is placed into an independent account under the insurance company’s control.
This fund serves as a tax-deferred savings or investment account that provides the policy’s cash value. The cash value of a policy will continue to increase over time and policyholders can withdraw or borrow from their policies while living.
Although buying term life insurance doesn’t invest your money, term policies are typically much cheaper than whole. Some people choose to buy the cheaper term life insurance policies and invest the rest of the money that they would have sent had they gotten whole life insurance.
Life Insurance Policies To Invest With
When investing in a life insurance policy, it’s essential to consider the type of policy that best suits your needs. Not every policy features a cash value component. Only policies that do can be used as investment tools because they allow policyholders to borrow against accumulated funds.
There are three broad types of cash value life insurance products that a life insurance company may provide:
Whole Life Insurance
Whole life insurance, the most straightforward type of permanent life insurance, provides coverage for the insured’s entire lifetime. The premium payments contribute to a cash value account, which grows over time and can be borrowed against or invested.
Universal Life Insurance
Universal life insurance is another form of permanent life insurance that offers more flexibility than whole life insurance policies. It allows you to adjust your premium payments and death benefits while accumulating cash value.
Variable Life Insurance
A variable life insurance policy takes things one step further by allowing you to invest your cash value in sub-accounts similar to mutual funds. This could increase your returns but also introduce additional risk due to market fluctuations.
The timeline for seeing results from these investments varies depending on factors such as the amount of money you put into the policy, how well the investments perform and when you make withdrawals.
Researching and consulting with a financial professional before making any investment decisions is important, especially with complicated policy types like variable life insurance.
How To Use Life Insurance as an Investment
Life insurance can be a good investment tool, but the key is to use it effectively. Permanent life insurance can provide portfolio diversification, risk management benefits and help you achieve long-term financial goals.
Diversify your portfolio
Diversifying your portfolio is key to managing risk. Including permanent life insurance with a cash value component in your investment mix helps to spread financial risks across different types of investments. It’s good to have a backup plan if your other investments don’t perform as expected.
Limit financial risk
The death benefit provided by life insurance policies and their tax-deferred advantages offers a unique form of risk management that other investments don’t have. They’re an attractive option for conservative investors seeking steady growth over time.
Achieve Long-Term Financial Goals
Including life insurance as part of your comprehensive investment plan can help secure long-term financial stability. The cash value component grows over time and could serve as another income stream during retirement.
Investing involves risks, including possible loss of principal. Given the potential for principal loss, seeking advice from a licensed insurance agent or a financial professional is advisable before altering your investment approach. Don’t be afraid to ask questions and do your research to ensure you’re making the best decisions for your financial future.
What Is Cash Value?
The cash value component offered in most permanent life insurance policies is the primary vehicle for investing with life insurance. As you pay premiums on these policies, part of each payment funds the death benefit while another portion goes into an account that grows tax-deferred over time.
The insured person can borrow against the policy’s cash value before your death or even surrender the policy entirely to access these funds — effectively turning your policy into an income stream or nest egg for retirement.
In addition to providing a safety net for your family’s future needs, investing in a life insurance plan could offer tax advantages and asset protection. But it also involves fees and other costs that require careful consideration.
The Benefits of Using Life Insurance as an Investment
Investments always come with potential risks, but investing with permanent life insurance can yield substantial rewards when done right. This strategy offers a unique combination of financial protection and growth opportunities that other investments may not provide.
- Tax Advantages: The cash value in your policy grows tax-deferred, meaning you won’t pay taxes on any earnings until you withdraw them. If structured correctly, death benefits are generally income-tax-free to beneficiaries. Your family can be assured they will receive the entire benefit amount.
- Asset Protection: In many states, permanent life insurance policies are protected from creditors. This makes them a valuable tool for asset protection strategies, especially for business owners or professionals facing liability issues. You can safeguard your hard-earned money and assets from potential lawsuits and creditors.
- Potential Income Streams: A well-managed life insurance policy can be an income stream during retirement through policy loans and withdrawals. It’s like having a mini pension plan within your reach. You can enjoy a steady income stream during your golden years without worrying about market fluctuations.
A life insurance policy can provide a death benefit to your beneficiaries and may also include riders, such as long-term care coverage, that offer even more financial protection. Plus, if you require cash down the line, you can sell your life insurance policy as long as it is in good standing.
While these benefits make investing in a life insurance policy attractive, they should be weighed against the costs and limitations of life insurance before making any decisions.
Considerations and Drawbacks
Like any investment, you need to know the potential pitfalls before deciding. Despite possible financial gain, you must do your due diligence as an informed prospective investor.
- Fees and charges: Surrender charges can eat into your returns if you withdraw your cash value early. Administrative costs and premiums can also affect your overall return on investment.
- Potential conflicts with other investment strategies: Investing heavily in a life insurance policy might limit your ability to invest in other areas like stocks or real estate due to liquidity constraints.
- Comparatively low returns: Life insurance investments have conservative growth rates compared to traditional investments like equities or bonds. They offer stability but may not provide high returns, especially during market volatility.
- Potential medical exam: Most policies that include an investment component require some sort of medical underwriting, as opposed to no exam life insurance in which you skip the physical assessment. Your health must be evaluated to secure this type of life insurance.
- Limited Flexibility: Some types of permanent life insurance have limited flexibility when adjusting premium payments or death benefits, making them less attractive for certain investors who prefer more control over their financial planning decisions.
There are better forms of coverage if you are purely looking for financial protection for loved ones after your death. For example, if you want senior life insurance to cover end-of-life expenses, consider a burial insurance policy instead. Term life insurance allows you to pay only for the amount of insurance you need for a specific period.
We recommend speaking with a trusted financial advisor to determine the best life insurance to meet your needs and goals.
Evaluating the Potential Returns of Life Insurance
Unlike stocks or bonds, the return on a life insurance policy isn’t always straightforward and depends on your specific policy terms.
Suppose you buy a whole life insurance policy with $10,000 in annual premiums. Over two decades, you’ll invest $200,000 in this life insurance policy. A portion of this sum funds the cash value component, which grows according to interest rates and dividends paid by the insurer.
After 20 years, your cash value may have grown to $300,000, an increase of $100,000 over your $200,000 principal. Unlike other investments where gains are taxed annually, these gains can be tax-deferred or even tax-free in some cases. In other words, this is not a form of cheap life insurance.
The rate at which your cash value grows is influenced by several factors, including premium payments made, cost of insurance charges deducted from the account balance each year, also known as mortality charges, administrative fees charged by the insurer and any dividends declared by the company for participating policies.
Don’t worry if the calculation seems complex. An expert life insurance agent specializing in life insurance coverage will keep you abreast of your policy’s performance.
Factors That Influence Returns
When evaluating life insurance as an investment, be aware of the factors influencing returns, from premium payments to cash value growth and policy performance. These variables affect cash value growth and overall policy performance.
- Premium Payments: The amount you pay in premiums directly impacts the cash value component of your policy. Higher premium payments typically result in faster cash value accumulation.
- Interest rates: Life insurance policies with a cash value component tend to have interest rates that contribute to their growth over time. Changes in these rates can significantly affect your return on investment. So, watch these rates closely.
- Fees and charges: All life insurance policies have certain fees, such as administrative and mortality expenses. These charges can eat into your returns if not properly managed.
- Policy types: Different life insurance policies offer different benefits when used as investments. For example, whole life insurance policies guarantee a minimum rate of return, while universal life policies allow for more flexibility — and more risk.
Remember, every individual’s financial situation is unique; therefore, what works well for one person may not necessarily work well for another. As such, it is important to research your options and make an educated decision.
Final Thoughts
Permanent life insurance can be an effective investment vehicle for brokerage accounts and retirement planning. Consider the benefits and drawbacks of different policies, including the potential returns from the cash value component and market performance.
Research different types of permanent life insurance to determine if they are right for your investment portfolio and retirement planning. When using life insurance as an investment, it is crucial to understand how it works and evaluate potential returns.
Frequently Asked Questions About Investing With Life Insurance
Yes, there is always risk involved with investments, including those made through life insurance policies. Some forms of coverage include financial safeguards, while others carry more risk. It’s important to thoroughly understand the terms of your policy and seek the advice of a legal or financial professional if needed.
Borrowing against your policy’s cash value can provide tax-free income but reduces the death benefit and may reduce the cash surrender value and total return at liquidation. Only borrow what you need and pay it back as soon as possible to avoid interest charges.
Life insurance investments, particularly whole or universal policies, offer unique benefits like tax-deferred growth and potential for loans not typically available with traditional investments. However, it’s important to consider other investments, like retirement accounts, before making any decisions.
The ability to invest using life insurance often depends on health status rather than age alone. However, premiums tend to be higher for older individuals due to increased risk factors associated with aging. Consider investing in life insurance at a younger age to lock in lower premiums and potentially higher returns over time.
Methodology: Our System for Rating Life Insurance Companies
Our team researches and ranks life insurance companies using an in-depth scoring system that considers the factors most important to consumers like you. Our analysis includes a comprehensive review of each provider we feature based on available coverage, customizability, availability, customer service and company reputation. Here are the factors we take into consideration when rating life insurance providers:
- Brand trust (40%): Life insurance payouts can exceed $100,000 or more, which makes choosing a reputable and trustworthy insurance provider important. To assess brand trust, we use J.D. Power and Associates customer satisfaction surveys, AM Best credit rating scores and the National Association of Insurance Commissioners (NAIC) complaint index. The higher a company scores in each area, the more points it receives.
- Coverage (33%): The more policy options a life insurance company offers, the more opportunities you have to obtain the right coverage for your specific needs. For this reason, we give companies the most points for offering multiple types of life insurance, including various term, permanent and no-exam options.
- Availability and ease of use (19%): Since life insurance coverage options can be complex, we consider the ways a customer can reach a company — and how easy communication is. For this category, we research how many communication channels a company offers for general customer support, claims processing and the application process. Companies earn the most points for offering various ways to interact with an agent, both in-person and online.
- Riders (8%): Companies offering various life insurance riders or endorsem*nts allow policyholders to better customize their coverage. In this category, we determine how many riders a company offers and award the most points to providers with more than 10 options.
We use our rating system to compare and contrast each company against key factors to help us determine the best life insurance companies in the industry. To learn more, read ourfull life insurance methodologyfor reviewing and scoring providers.
AM Best Disclaimer
Heidi Mertlich is a licensed life insurance agent and seasoned writer for all things related to life insurance at GuaranteedIssueLife.com. A former elementary school teacher, Heidi enjoys watching sports and spending time with her family when she’s not at her keyboard.
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