Have you ever thought of using life insurance as an investment? Life insurance is a great investment in your family’s future, and it’s the best way to ensure that they have financial protection and income replacement after you are gone. Depending on the amount of premiums that have already been paid toward the policy when the death benefits start paying out, the return on a life insurance investment can be quite high. If the policyholder were to pass away in the first year of a 20-year term, the return on investment could be more than 10,000%!
When investing in life insurance, it often only benefits your dependents once you’ve passed away, but certain plans can allow the policyholder to also see some return on their life insurance investment by accruing cash value that can be used by the policyholder while they are still alive. These types of policies are referred to as cash value life insurance. Read on to learn more about how to use life insurance as an investment for your family’s future.
What Is Cash-Value Life Insurance?
Cash-value life insurance is a type of permanent life insurance that includes an investment feature in addition to death benefits. There are several types of investment life insurance options that offer this feature, with the biggest difference between them being how the cash-value savings is accumulated. The cash value will earn interest over time and can be used to further invest, take out a loan, or pay policy premiums. The cash can even be withdrawn by the policyholder, but this can lead to a reduction in the death benefits their dependents will receive. When determining which type of life insurance is the best investment for you and your family, you should also know that a cash-value life insurance policy is more expensive than other forms of life insurance that do not offer an investment feature.
Which Life Insurance Policies Build Cash Value?
What life insurance is best for building cash value? There are three types of permanent life insurance that accrue cash value: whole life insurance, universal life insurance, and (in some cases) guaranteed issue life insurance. Each of these life insurance policies differs in how the cash value can be accrued, but they are good options to invest in life insurance if you are also in need of coverage. Before withdrawing funds from your life insurance investments, it’s a good idea to check in with your adviser about taxes or other potential pitfalls you could face.
Whole Life Insurance
Whole life insurance is a form of life insurance that provides coverage for your entire life rather than for a specific period of time. The cost and coverage of whole life insurance remains the same throughout the entirety of the policy, although it can be two to four times as expensive as term life insurance and you must pass a rigorous health examination to be approved for coverage. It’s a good life insurance option for younger generations, since they will be able to lock in a lower premium while they are still healthy.
Is whole life insurance a good investment? Whole life insurance is one of the types of life insurance that can also be an investment, as it accumulates cash value throughout the life of the policy. Part of the premium goes into a cash-value account that grows at a fixed or variable rate depending on the policy. As the cash-value account earns interest, you can borrow against it in the form of a loan or withdraw from the cash you’ve already invested through premiums.
Universal Life Insurance
Universal life insurance is a permanent life insurance policy that offers lifelong coverage and builds cash value; it is similar to whole life insurance but much more flexible. The premiums, death benefits, and amount of savings can be altered throughout the life of the policy as the policy holder’s needs change. Universal life insurance offers two options for the death benefit: level or increasing. With the level death benefit, the amount paid out remains level throughout the policy, and either the death benefit or the cash value will be paid out, whichever is greater. As for the increasing death benefit, both the cash value and death benefit increase over time, and both are paid out.
How does the universal life insurance cash-value option work? The insurance company sets a minimum interest rate, generally in the 2-3% range, that they are obligated to pay even if their portfolio does not have a gain. If the insurance company’s portfolio does have a gain, then part of that increase will be added to the cash value up to the maximum percentage listed in the policy. There are two ways the policy holder can use the cash value that has built up in their policy: borrow against it as a loan without tax implications, or withdraw part of the cash value, which may be taxed.
Guaranteed Issue Life Insurance
Guaranteed issue life insurance is an option that guarantees life insurance without requiring a medical exam or having to answer questions about your health, It is generally available to people 50 to 85 years older. These benefits come with more of a risk to the insurer, and therefore, the premiums are higher.
Not all guaranteed-issue life insurance policies have a cash-value option, but select ones are able to build cash value that can be accessed through a policy loan. If this loan is not paid back before you pass away, it will be taken from the payout to your beneficiaries.
Which Life Insurance Policies Are a Good Investment Without Building Cash Value?
If the higher costs associated with permanent life insurance don’t work with your budget and if accruing cash value isn’t a requirement, there are other options for investing in life insurance. The costs associated with the type of life insurance you choose play a factor in whether a particular life insurance policy is a good investment for you and your dependents. Life insurance policies can range from simple and straightforward to more complex depending on your needs, and the cost will reflect that. Below is a list of other types of life insurance to consider, including links to where you can find more information on each of the different life insurance policies.
- Level term life insurance is the easiest and most straightforward type of life insurance. The policyholder is able to choose the amount and length of time they want the coverage for. The policy will also not be canceled if their health changes. Level term life insurance is an affordable option, and the premiums and coverage remain the same throughout the term.
- No-medical-exam term life insurance has been increasing in popularity due to the convenience of not requiring a medical exam, and these policies often have a minimal price difference compared to more traditional life insurance policies. Instead of having to undergo a medical exam, your risk is determined by your answers to health questions, medical records, and prescription history.
- Instant issue life insurance is a form of life insurance that requires no medical exam and has no waiting period. Once the application is submitted, the approval process can take just minutes or even seconds. This type of life insurance can be a good option when a business loan requires a life insurance policy or when a divorce requires a life insurance policy with the children listed as the beneficiaries.
- Final expense life insurance helps to cover the cost of end-of-life expenses, such as medical bills or funeral and burial costs. It is a life insurance policy that is meant to ease the burden of these costs on the grieving family. Applicants must be over the age of 50, but no medical exam is required and the approval process is quick.
- Group life insurance is life insurance coverage for which the policyholder is a group. These policies are commonly offered by employers to their employees. This type of life insurance is a good option for those who don’t qualify for individual life insurance, and coverage costs tend to be low or free to the employee. Even if you are covered under a group life insurance plan, it is recommended to also have individual life insurance coverage.
- Accidental death and dismemberment insurance is a very straightforward form of life insurance that only pays out if your death was the result of an accident. It will also pay out some of the benefits if the policyholder suffers an accident-based disability such as the loss of a limb or eyesight. It is a much more affordable life insurance option, since it is based on the result of an accident and a not health-related death.
Is Term Life Insurance a Good Investment?
Term life insurance is the other main type of life insurance, and it does not include an option for cash value to accrue. It only pays out a death benefit to your dependents if you pass away during the years your policy term covers. Term life insurance is generally much cheaper than permanent life insurance, which can make it a great option for life insurance investing. So is term life insurance worth it? It is always worth it to invest in your family’s future to ensure they will be taken care of after you are gone.
At What Age Should You Buy Life Insurance?
What is the best age at which to start investing in life insurance to protect your family’s future? There is no right answer to this question, although the sooner you can get life insurance, the better off you’ll be when it comes to coverage and premiums. Life insurance policies generally offer lower premiums to younger people, as they tend to be healthier. We believe that your 20s is the ideal time to purchase life insurance. The average cost of term life insurance policies for people in their 20s can be quite low, especially if they’re healthy and don’t smoke. One risk of buying term life insurance when you’re younger is that you run the risk of the policy expiring before it’s needed. In cases like this, investing in permanent life insurance may be the less risky option to ensure that your life insurance benefits will be there for the remainder of your life.
Through our Life Insurance Consumer Report Study 2022, we’ve found that younger generations tend to buy more life insurance coverage than older generations. Below is a quick look at the demographic breakdown of people who buy life insurance at various coverage levels, from less than $250,000 to more than $1,000,000 in coverage. The data is broken down into three age brackets, 18 to 44, 45 to 64, and ages 65 and up, to show the amount of life insurance coverage younger generations are more likely to buy compared to older generations.
