Life insurance as an investment tool

Life insurance as an investment tool

Investing in life insurance

Your financial adviser, friend or family member recommended that you invest in a permanent life insurance policy (including whole, universal, or equity index universal life). The adviser’s pitch can sound compelling. Life insurance as an investment tool is a solid financial strategy. Why purchase temporary term life insurance that you’ll likely never use? Isn’t that like throwing money away or betting against your self to die? With permanent life insurance, part of your premiums are invested and some of it can be borrowed tax-free for retirement, or your children’s college education, or anything else you’d like and your heirs will get a nice death benefit when you pass away.

But is life insurance as an investment tool really always as great as it sounds? If you listen to financial “gurus” like Suze Orman and Dave Ramsey, you’re likely to come away thinking that the only person who benefits is the insurance salesmen who reaps a big commission. Or Patrick Kelley who thinks permanent life insurance is the great investment opportunity. As with many controversies, the truth is somewhere in between. Whether it makes sense in your particular situation, depends on several factors:

1) How much life insurance do you actually need?  Life insurance as an investment tool

This is important for a couple of reasons. First, you want to make sure you purchase as much as you need. If a more expensive permanent policy means you can only afford to buy less, it’s probably not a good idea. After all, the whole point of insurance is to make sure your family has enough to be taken care of financially if something were to happen to you.

At the forefront of buying life insurance is to protect your family. The life insurance component is the most important part of life insurance. The investment opportunity or Cash Value is secondary. If you need $250,000 in insurance, but only can afford term life insurance, then buy term. If you can afford a permanent policy and like the investment aspect then you may consider your options. * On a personal note I actually have a Variable Universal Life Policy and my wife has a term policy.

2) How long will you need the life insurance?   

One of the main reasons that permanent insurance is so much more expensive is that it’s meant to cover you for your entire life (hence “permanent” insurance) while cheaper term policies tend to cover you when you’re younger and least likely to use it. However, most people don’t need much or even any life insurance once they retire. Either they don’t have any dependents (hopefully the “kids” will have moved out of the basement by that point) or their dependent (usually a spouse) will usually have enough income to live on from Social Security, their assets (included those they inherited from the person who passed away) and any pension survivor benefits they’ll receive.

So who needs life insurance in retirement? They generally fall into three categories. The first is someone who doesn’t have enough assets to cover their final expenses (like funeral costs) and wants a small policy to cover these expenses so they don’t burden their family.

The second is someone who has a dependent that won’t have enough income to live on after they pass away. For example, your spouse needs the extra funds she/he may lose from social security or a pension plan. Possibly even to pay off a mortgage?

The final scenario is someone who has a taxable estate (currently one worth over $5 million) and wants to use a life insurance policy to pay the estate tax. This is particularly useful if they don’t want their heirs to have to make taxable retirement account withdrawals or sell a business or a piece of real estate in order to make those tax payments. Needless to say, this is a very small percentage of the population.

If none of these sound like you, you probably don’t need life insurance for your entire life and a low cost term policy would likely suit you just fine. You may also want to look at “Return of Premium” Term life?

3) Life insurance as an investment tool

When you purchase permanent life insurance, part of your premium goes into a cash value account that can grow based on policy dividends, interest, and/or earnings from mutual fund-like sub-accounts. Each policy is different so make sure you understand the particulars of how it works before you buy it (like any investment). The main advantage is that you can borrow from this cash value for things like retirement or education expenses without paying taxes on it.

So what’s not to like? First, some of these sub-account investments involve risk and you may be required to add additional dollars to keep the policy going if the investments don’t do well. (This is primarily true with Variable Universal Life insurance)

To figure out whether it’s a good deal for you, compare it to purchasing a lower cost term policy and investing the premium difference. This strategy is commonly known as “Buy term and invest the rest”. This is strategy is good in theory, but I believe very few people are disciplined enough to actually practice the concept.

Benefits of using permanent life insurance as an investment can be outweighed by the costs. It’s always a good idea to run the numbers for yourself though because each person’s situation is different. For example, if you’re in a very high tax bracket and you’ve maxed out all your retirement plan contributions, the tax benefits of a permanent life insurance policy would be more valuable to you.

I few things I tend to always recommend in regards to life insurance as an investment tool

  • If you have a 401k opportunity to take advantage of it first
  • I am not a big fan of life insurance as a college tuition savings plan
  • I like life permanent life insurance as an emergency saving tool
  • I think it is an average tool in helping with long term retirement goals
  • Be careful you do not buy what you cannot afford long term



Life insurance as an investment tool




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