In the world of financial planning, life insurance is often seen as just a tool for providing security to your family in the case of your passing. But beneath the surface, life insurance has more uses than that. A major component of life insurance is the potential to be used as an investment tool. Today we’ll explore what that means exactly and see how life insurance can be more than just a safety net.
Table of Contents
The Basic Types of Policies
First, lets do a run-down on a basic life insurance policies. They come in quite a few different forms, the two most common being term and whole life. Now don’t get me wrong – at their core all of these policies are designed to keep your family afloat financially if you were to pass away. But whole life policies (or variations of it) also have a components to them that allow you to access your money that you’ve spent years paying into.
Cash Value Accumulation
A life insurance policy that you can access before you die? You read that right. In term life, you are paying for the death benefit. Premiums are generally lower for term policies. With whole life, you are typically paying a bit more in premium, but you are paying for more than just the death benefit. How it works is the premium you are paying goes towards the insurance carrier to invest in the stock market. This invested money grows over time and you get a guaranteed accumulation (this can vary based on the exact policy and carrier). Even if the markets are down, your money keeps growing unlike an IRA, Roth or other similar products. Typically this growth is between 5-7%. Think of it like a piggy bank that keeps growing, or a financial cushion you can fall on when things get a little tight.
For savvy investors, you could possibly make more money if you invested the difference in price of a term and a whole life yourself. That requires time, effort, and knowledge, and along with it, risk. With a life insurance policy, you set it and forget it. At least until the premium is due!
Whole Life vs IRA
Imagine yourself in twenty years. If you’ve been investing, that cash value is probably starting to look pretty substantial. This might make you wonder when is the right time to begin withdrawing. But how much in that piggy bank are you going to be able to keep? When planning for retirement, every penny counts.
If you look at the differences of taxation in investment vehicles, you will soon realize the advantages of a whole life policy over a traditional IRA. Traditional IRA’s are subject to taxation, and come with penalties if you were to withdraw before you turned 59. The average balance in an IRA is about $113,000. At an average tax bracket of 24.8%, you could look at a taxation of $25,000. Poof. Wink and its gone.
With a whole life policy you are able to withdraw money tax-free. You already paid the taxes on the money you put in. Its not all rainbows and sunshine though. Its important to know when to withdraw. If you withdraw too early there could be a surrender charge that will significantly reduce the amount. You just have to wait until it grows more, usually at least five years. An experienced and knowledgeable life agent can help you navigate those waters.
Loan and Withdrawal Options
Life insurance is a unique investment offering more diversification in your assets. While I wouldn’t recommend it as a one size fits all investment, it can be particularly effective in times of emergencies or when your other investments are underperforming. By combining a life policy, you add another layer of financial security. This ensures you have resources in various situations.
With the cash value component, there are different goals it can help you meet. Goals might include college tuition or buying a home. Another way it can help is by helping you through enormous, unexpected medical expenses. It is worth noting that loans and withdrawals will reduce the death benefit that is paid out.
Now you can see how life insurance policies offer more than their primary function. They can also be an investment tool that come with unique advantages. The deferred tax advantage, the cash value component, and the withdrawal options all help you achieve your financial goals. Its essential to understand how to do it right. Our door is always open, so if you ever have a quick question or want to schedule a consultation, you can do so on this site. We are here to help you along the process and find what is right for you.