Before discussing how life insurance can financially boost your life, and the life of the beneficiary of your policy, it is important to understand what the purpose of life insurance truly is. Term life insurance is meant to provide temporary financial protection against a death, for a low cost to the owner. Permanent life insurance is meant to do the same, but for the entire life of the insured person. Permanent life insurance does have a cash value account that can grow, so it can also be used as a savings and investment vehicle.
You should not look at life insurance as a lottery ticket. It is meant to provide financially for heirs, to offset the financial cost of losing someone. It can also help facilitate transfer of wealth to future generations while avoiding estate taxes. Life insurance is a financial tool, and it can be quite complex. Ethical considerations aside from viewing death as a financial windfall, permanent life insurance can be quite complex and it can be quite easy to lose money owning a policy if you don’t understand how exactly it works.
Life Insurance Can be an Investment Tool
When you think about life insurance, you typically think about using it to protect your family in case of your death, not as an investment tool. However, there are many people who are turning to life insurance as a strategy to help them build wealth. You might be wondering if you can use life insurance to make you rich, and the answer is that it depends on how you use it and how it performs as an investment. Here’s what you need to know about using life insurance to build your wealth.
Permanent life insurance policies can help you save while avoiding taxes.
If you want to use life insurance as an investment, you’ll need to get a permanent life insurance policy as opposed to a term one, which can expire and doesn’t have the potential for wealth building. You can read more about how term compares to whole life here. There are a few types of permanent life insurance policies, but they all have a cash value account which can accumulate interest without being taxed. The growth in this account depends on what it is invested in. For a whole life policy, it is essentially invested in the company itself, and it grows through dividends and interest. For a universal life policy, it grows through changes in market interest rates, or if it is variable through changes in stock and bond markets. As you can see, the cash value component and its growth can become very complex. You will need a good financial advisor to walk you through the best option for you.
Life insurance also helps avoid taxes to the beneficiaries of the policy. Generally but not always, life insurance proceeds are paid tax free. Always consult a tax professional such as an accountant if you have specific tax questions.
When choosing a life insurance policy for investment purposes, you have two choices – whole life or universal life. While there are many similarities between these two, there are also some key differences to consider before committing to a policy.
Whole Life Insurance
Whole life insurance is designed for long-term coverage, and it’s the biggest commitment of any life insurance option on the market. You will need to pay premiums each month for a certain amount of time to receive the death benefit. After you’ve reached the end of this period, you won’t need to pay premiums. You also get a savings component with whole life insurance. A certain percentage of each premium payment goes into an investment account, where it can grow. Over time, as it accumulates, this becomes the cash value portion of your policy. If you were to die without ever withdrawing any of the cash value on your life insurance, your beneficiaries would receive the cash value in addition to the death benefit. However, you do have the option to eventually surrender your policy so you can take the cash benefit in full, something that many people choose to do once their cash value has hit a certain amount. You can also opt to borrow against that cash value if you need some extra money for any reason. In some cases, you may even receive dividends from your investment account if it is particularly successful.
Universal Life Insurance
Universal life insurance, on the other hand, is much more flexible, and is often considered the most flexible life insurance option on the market. You’ll need to make a specific number of initial premium payments, but after that, you’ll be able to adjust the amount you pay in premiums monthly within parameters set by the insurance company. You can also change your death benefit at any time. Universal life insurance is great because you can adjust it if your financial circumstances change.
Just like whole life insurance, universal life insurance also comes with a cash value component. You can adjust how much you put into your cash value component and how often you make contributions as you see fit. Once you have accrued enough money in cash value, you can then start to use it to pay your monthly premiums. One strategy is to start contributing to your cash value portion early in life, let it gain value, and then you essentially won’t have to worry about continuing to make payments. You can also continue to make the premium payments and use your cash value savings the same way you would with whole life insurance.
What should I consider when using life insurance for investment?
While there are many benefits to using your life insurance policy as an investment, there are also some potential downsides that are worth considering. The first is that permanent life insurance policies typically cost much more than term life insurance policies. For low to middle-income families, it doesn’t make much sense to spend this much money on life insurance, particularly if you don’t have many extra funds to move into your cash value savings. A term life insurance policy with lower premiums may end up being the more practical option. Permanent life insurance policies can also present problems if your income tends to fluctuate. You may be able to afford your insurance premiums now, but what happens if you lose your job or encounter serious expenses in the future? These are important questions to consider.
Another important thing to consider is that these investment accounts come with significant risk. There is always a chance that your money might not accumulate the way you expect it to, which could leave you without the funds that you were expecting. The investments that insurance companies use aren’t always the most competitive either. You might be better off putting your money towards another investment strategy that is more likely to yield a high return.
Before committing to any life insurance plan, especially a permanent one with an investment component, it’s important to talk to an insurance advisor. You should look at policy options from multiple life insurance companies to get an idea of your options and weigh the pros and cons of each offer. Not only should you compare the different types of life insurance against each other, but once you settle on a policy type you should compare quotes from different companies in order to get the lowest price and highest return. While you can earn quite a bit from using your life insurance policy as an investment, some of the return you get relies on luck, and you’ll need to be strategic in how you use your money.
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