Pas Trustednews – How to Use Life Insurance As An Investment September 2023

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.

Life Insurance Policies To Invest With

When investing with 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 benefit 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.

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.

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 offer 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.

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.

The Bottom Line

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.

Heidi Mertlich is a licensed life insurance agent and seasoned writer for all things related to life insurance at A former elementary school teacher, Heidi enjoys watching sports and spending time with her family when she’s not at her keyboard.

Mike Miller is a writer with a decade of experience producing product and service content to help consumers make informed purchasing decisions. Mike has a bachelor’s degree in creative advertising. In his spare time, Mike enjoys riding and fixing motorcycles, reading a good book and spending time with his wife and two cats.

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