Life insurance as an investment, but how smart is it?
With any financial obligation that you opt in to, there are benefits and drawbacks.
Life insurance can be a smart investment if you know what you’re doing. Many people use life insurance as a way to continually invest money.
At a certain age, you might not be looking to begin a new investment. That’s okay; there are other benefits that come from life insurance policies.
Different Types of Life Insurance
Term life insurance policies only last for the pre-set term, and expire afterwards. These are short-term (usually twenty years or less).
These policies offer zero investment opportunities or interest.
Also known as whole life insurance, this policy doesn’t end on a term. Instead, it ends when you cancel it, or when you fail to uphold your end of the arrangement (missed payments).
Permanent life insurance is the best of these three options for investing.
Universal life insurance is similar to permanent, because you get this policy for life.
However, these have flexible premiums, and allow you to use your interest earned to pay for premiums.
Universal life insurance policies are a decent investment opportunity, though they are considered more volatile than permanent policies.
Benefits of Life Insurance as an Investment
120-Year Permanent Term
There’s two types of life insurance: permanent policies, and term. Term life insurance ends at a certain predefined age, which is usually no older than 70-years-old.
Permanent policies often last up until you’re 120-years-old. To date, only one person in all of recorded history has lived over the age of 120. You’re good to go.
You’re taking out a life insurance policy to protect the ones that you love if a financial burden hits, and so long as you pay the premium, you can keep that policy. We would consider that a smart investment.
There are no taxes to account for when you invest money in your life insurance policy. Dividend yields and capital gains are tax-free when invested in your life insurance.
This is just another way to enjoy tax-deferred growth: it is not the only way. Traditional IRA accounts are also another way for retirees to enjoy tax-deferred growth.
Read the fine print of your life insurance policy. You may be eligible to receive 25% to 100% of your permanent life insurance policy if you incur life-threatening medical conditions.
This includes heart attacks and strokes, as well as renal failure and cancer. These will be specific in your policy.
It may seem like a grim thing to focus on, but the benefit of this is that you can pay your medical bills with the money from your life insurance policy.
You won’t find benefits like this on any term life insurance policies.
Keep in mind that this means your beneficiaries will not receive the withdrawn amount in the event of your death.
They will receive whatever is left with no penalties for early withdrawal, under these conditions.
Apart from the money that you invest in your life insurance policy, you will also receive a death benefit for permanent policies.
It’s important to know that you may waive the right to the death benefit if you withdraw money early through accelerated benefits.
Even so, it still adds a boost to the final payout, which is one of the reasons that it is better than term life insurance.
Your Money is Protected and Invested
In a permanent life insurance policy, your money isn’t just sitting in a savings account with a small APY interest rating.
It’s protected and insured by your provider, but it’s also being invested at the same time.
You don’t have to choose how it is invested, which is one of the great things about it.
You will receive intermittent deposits of interest into your policy as it accrues money, but you will not have the same risks of an unsecured money market account.
Drawbacks of Life Insurance as an Investment
Higher Premiums for Monthly Installments
Permanent life insurance policies can usually be paid annually or monthly.
Monthly installments will cost more than annual payments, and the “extra” money you pay might not go to your policy.
When you pay annually, you’re making the process more simple for the insurance company, which makes their jobs easier.
If you can open your permanent life insurance company with one lump sum to start, it will work better for you, but that’s not what the average policy shopper does.
Term Policies Are Not an Investment
There’s a lot of confusion surrounding term and perm policies. Term life insurance policies cost significantly less, but provide far less coverage.
The average cost of funerals in America is constantly rising, and term life insurance policies rarely pay out enough to cover those costs while also leaving some money for your loved ones.
Term policies are not an investment, regardless of what you read. If it doesn’t pay you back or invest your money in a secured manner, like a permanent policy, then it isn’t worth your time.
Is Life Insurance a Smart Retirement Investment?
When you begin any financial obligation in retirement, it is slightly more difficult.
Your credit score can take a hit when your income frequency drops (once monthly pension payouts versus a weekly wage).
Opening a life insurance policy is more difficult as well. It’s wise to do it just before retirement, or one year prior to your retirement age.
Your age defines how much you’ll pay for a life insurance policy, and what benefits you will receive initially.
The older you are, the more volatile your policy is. Insurers may have to pay out sooner than expected, which can cause you to pay more for monthly premiums.
If you are investing in a permanent life insurance policy, you will already be paying higher premiums. That’s because there are far more benefits than with a term policy.
Depending on your age, the monthly or annual premium for your permanent life insurance policy might be too expensive.
You could end up missing out on good interest rates by opting in too late.
Can You Get Life Insurance at Any Age?
Yes. The best time to get life insurance is technically right after birth. Permanent life insurance policies that go up to 120-years-old would be perfect to get at a young age.
You can start a permanent life insurance policy at any point in your life. The older you are when you enroll for one, the more you can expect to pay for monthly premiums.
Life isn’t meant to go according to plan; things will come up.
Mortgages, student loan debts and other major life-changing financial hurdles can interact with your permanent life insurance policy.
Failing to pay major debts could mean that money is taken from your perm policy.
If you’re currently in the throws of debt, it’s wise to wait until those are either manageable or completely paid off before starting a permanent life insurance policy.
You can get life insurance at any age, just be sure that your finances are stable. If you miss a premium payment, it could cause your account to close.
Can You Use Life Insurance to Pay for Retirement?
Yes you can.
There’s something that comes with a permanent life insurance policy called cash value.
You can borrow against your cash value (like collateral for a loan) and withdraw from it if you need it at a later date.
You receive interest on a monthly basis from your permanent life insurance policy.
If you have been working on your policy (paying premiums) for ten or twenty years, the interest is going to add up to a nice amount.
This can be withdrawn from your account to pay for expenses, or you can increase your interest earned each month.
How Does a Permanent Life Insurance Policy Work?
The money you spend on your premiums, whether they’re monthly or annual, go into three different areas of your policy.
- Some of your premium goes directly to the life insurance cost and death benefits.
- Some of your premium goes to cash value, or investments in a permanent life insurance policy.
- Some of your premium goes towards the costs of managing your account (paying the insurance agents). Annual payments can reduce your overall premium cost.
Permanent life insurance is non-taxable until you withdraw money from your policy.
The money that your policy makes for you through cash value and investments is also non-taxable.
Death benefits are non-taxable as well. In the event of your death, your loved ones will receive that money tax-free in most situations.
This is where it pays to read the fine print in life insurance contracts.
Lastly, if you withdraw death benefits from your policy due to a serious medical situation (as mentioned earlier), that is non-taxable. It is filed under death benefits to avoid taxes.
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