Life insurance has become a new player in the new investment world. The back and forth reeling of the stock market, fear of higher tax brackets in the future for government sponsored programs, and lack of liquidity that comes with many traditional investments, has opened doors for safer and smarter investments. However, is life insurance one of them?
Well, let’s look at the fundamentals of an insurance policy and find out if this is something that makes sense.
In the past, life insurance has been sold by most insurance agents for the death benefit. There have been two types of insurance sold whole life and term (all other products revolving around one of the two).
However, in the past, both of these types of insurance could be extremely expensive. Whole insurance could take years to build up any cash value, and although there would be growth on the death benefit, seeing any of that money while living is nearly impossible. On the other hand, although term insurance may be cheaper, it is basically like throwing money out the window, as only 1 percent of term policies payout in a death claim.
Presently, there have been new ways of utilizing whole life insurance that differ from the traditional methods. Structured properly, this new type of investment utilizes whole insurance. However, it utilizes it for its cash values instead of the death benefit.
With this new strategy, you are able after a few years to have 100 percent of the cash you have put into the insurance policy growing as an investment. In this way, the life insurance becomes an asset, not a liability.
Now that we have an understanding, let’s look at some of the advantages and disadvantages of this type of investment.
Tax-deferred growth – like a 401k or IRA, an insurance policy grows tax deferred. However, unlike most government sponsored programs, the money going into a life insurance policy has already been taxed. Therefore, if a life insurance policy is treated correctly, it will never be taxed again. In this way, it differs from a 401k or an IRA, which will be taxed in the future.
Tax-free retirement – as in the above situation, an insurance policy can provide you with retirement funds that will not be taxed.
Tax-free transfer (death benefit) – this is still an insurance policy, meaning that it still provides a death benefit or a portion of actual insurance. This insurance, or death benefit, is not taxable at death, it transfers tax-free (all cash values are included in the death benefit).
No market growth, no market risk – Life insurance isn’t tied to the market. It adjusts with the market. However, there is no upswing for good years, and no downswing for bad years. Many of the companies used for the life insurance investment system have paid out an increase throughout multiple recessions and depressions. This is why people utilize this strategy, for its safety, not for its huge market returns.
Liquidity, use, and control – An insurance policy allows you to take loans based on cash values, in this way you always have access to your money. In fact, this is the reason most individuals put their money into life insurance. It gives them a way to save money and have growth, while at the same time using their money for purchases they need such as cars, boats, homes, etc.
No penalties – various government sponsored programs, you can always liquidate a life insurance policy with no penalties, although you may pay some taxes on growth.
Time to build – an insurance policy will take a few years to build up. In this way, it takes some planning to utilize the full benefits of this strategy.
Death benefit costs – although every dollar that is paid into the actual death benefit (life insurance) costs transfers to your heirs at death, there are costs. A proper insurance policy does guarantee growth over costs (you will always be in the positive every year). However, it is good to be aware that a small portion of your total growth will be going to cover the life insurance costs.
Now you have a pretty good understanding of the benefits and disadvantages of utilizing whole insurance. This system is most commonly used to be treated as a banking system (where you can fund your purchases and pay yourself back with interest) However, speak to a professional to properly set up a life insurance policy for its benefits. If done improperly, you will lose out on all the advantages of the system.