Life insurance is a smart investment?
The pros and cons of investing in permanent life insurance
There are many variations of life insurance plans, but they generally fall into two categories: permanent and term. Duration policies work similarly to other types of insurance policies you may carry, such as car insurance; You pay cash every month (for a certain period or period, hence the name), and if something bad happens - in this case, your early death - there is interest paid. On the other hand, permanent life insurance includes an investment component, and it allows policyholders to accumulate cash value.
When you hear financial advisors and, more often, life insurance agents advocating life insurance as an investment, they point to the cash value component of permanent life insurance and how you can invest and borrow that money.
Many financial advisors recommend against permanent life insurance due to exorbitant management fees and agent commissions, and instead, repeat the common phrase "buy duration and invest the difference." This advice is based on the fact that short-term life insurance is usually much less expensive than permanent life insurance, which leaves money free for other investments that may provide a better return.
But in some cases, permanent life insurance can be a smart investment. Let's look at some of the most common arguments in favor of investing in permanent life insurance and how other investment possibilities might compare.
The main concerns
Whether or not life insurance is a good investment depends on your finances as well as how long you'll need to cover it.
You can also borrow against the cash value of buying a home or paying for your kids' college costs, tax-free.
Alternatively, it is considered term life insurance, your payments are set against death compensation to the beneficiaries, with no monetary value and thus no investment component; this means small payments for a large death benefit.
Pros and cons of permanent life insurance
There are several arguments in favor of using permanent life insurance as an investment. However, many of these benefits are not limited to permanent life insurance. Here are some of the most prevalent benefits of permanent life insurance.
1. You get tax-deferred growth.
This means that you do not pay taxes on any interest, dividends, or capital gains on the monetary value component of your life insurance policy until you withdraw the proceeds. 1 However, you can also take advantage of tax benefits with several different retirement accounts, including Independent retirement accounts, and 401 (k) s, and 403 (b) s.
If you are reaching the maximum of your contributions to these accounts year after year, investing in permanent life insurance for tax reasons might make sense.
2. You can keep most policies even over the age of 100, as long as you pay your premiums.
Another promoted benefit of permanent life insurance over life insurance is that you do not lose your coverage after a set number of years. The policy expires when it reaches the end of your term, and for many policyholders, they are in their 60s. But by the time you turn 120, who will need the death benefit? Most likely, the people you got a life insurance policy to protect - your spouse and children - will either be self-sufficient or have passed away as well. However, if you expect people to be dependent on you financially beyond the length of the usual policy (for example, a child with a disability), then this feature may be attractive to you.
3. You can get a loan for cash value.
If you need cash to buy a home or pay college fees, you can borrow against the cash value of a permanent life insurance policy. Conversely, if you put money into a retirement plan with tax liens like a 401 (k) and want to take it out for a purpose other than retirement, you might have to pay fines. 2 Moreover, some retirement plans, such as 457 (b) make it difficult or even impossible to take money for such purposes.
However, it's generally a good idea to put retirement at risk by raiding your retirement savings for another purpose. Moreover, when you borrow money from your permanent insurance policy, the interest on it will accrue until you pay it off, and if you die before the loan is paid off, your beneficiaries will receive fewer death benefits.
4. You can get fast benefits if you fall ill.
You may be able to receive between 25% to 100% of your life insurance policy's death benefit before your death if you develop a specific condition such as a heart attack, stroke, invasive cancer, or kidney failure at the end of the stage. The positive aspect of the accelerated benefit The disadvantage, as it is called, is that you can use it to pay your medical bills and possibly enjoy a better quality of life in recent months. 4 The disadvantage is that the beneficiaries will not receive the full death benefit that you intended when the policy was withdrawn. Also, your health insurance may already provide adequate coverage for your medical bills. (It might be an additional cost as well.)
Pros and cons of order insurance
When you buy a term policy, all of your installments go to insurance of death benefit for the beneficiaries. Unlike permanent life insurance, life insurance does not contain any cash value and therefore does not contain an investment component.5 If you are still alive at the end of the term, the policy simply expires and you and your beneficiaries will not see any cash...
However, you can think of life insurance as an investment in the sense that you pay relatively little in premiums for peace of mind.
Example of a fixed term life insurance
A 30-year-old, non-smoking woman in excellent health might be able to take out a 20-year insurance policy with $ 1 million death compensation for $ 480 a year. If this woman dies at the age of 49 after paying in installments for 19 years, her recipients will get $ 1 million tax-free when she paid only $ 9,120. Term life insurance provides an unbeatable return on investment if the beneficiaries are to use it. However, it does provide a negative return on investment if you are among the majority of policyholders whose beneficiaries have not made any claim. In this case, you will have paid a relatively low price for your peace of mind, and you can celebrate the fact that you are still alive.
Example of permanent life insurance
What if the same woman mentioned above bought permanent life insurance instead? To get a full life insurance policy from the same insurance company, you can expect to pay $ 9,370 annually. So how much cash value would you collect for that extra cost?
- After five years, the document's guaranteed cash value is 19,880 USD, and you will have paid in installments of $ 46,850.
- After 10 years, the document's guaranteed cash value is $ 65,630, and you will have paid in installments of $ 93,700.
- After 20 years, the document's guaranteed cash value is $ 181,630, and you'll have paid $ 187,400 in insurance premiums.
But 20 years later, if she had bought $ 480 a year and invested the difference of $ 8,890, at an average annual return of 8%, she would have earned $ 480,806 before taxes.
You say sure, but your permanent life insurance policy guarantees her return. I am not guaranteeing an 8% return in the market. It is true. But even if the woman described above put an additional $ 8,890 per year into a savings account with 1% interest, she would have $ 20,8671 after 20 years, which is still more than the guaranteed cash value of the standing document of $ 181,630.
The bottom line
Using permanent life insurance as an investment might be a logical investment for some high net worth individuals looking to lower property taxes. But for the average person, buying for the duration and investing the difference is usually the best option.
Even if you are primarily purchasing life insurance for investment purposes, it is still important to search for the best life insurance companies to ensure you get the most beneficial policy possible.
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