You can use any permanent life insurance policy that has a cash value (e.g. whole life insurance) as an investment vehicle. It is not a good strategy for most people.
Whole life insurance and other types of permanent life insurance can be used as an investment vehicle. If you want to get the best returns, brokerage accounts and education accounts as well as retirement savings plans such IRAs or 401(k),s will offer greater value.
A term life insurance policy that does not have a cash value component is not considered to be an investment or asset. You pay a premium to keep the policy active, and if you die during the policy’s term, your beneficiaries receive a death benefit.
Permanent policies with cash value accounts can be more costly than those that are term. Also, the cash value may grow slower. Most people prefer to buy a simple term policy that is affordable and contribute to an investment account.
The Key Takeaways
- You can use whole life or other cash value life insurance to invest, but you cannot use term life insurance.
- Whole life insurance is not a good investment choice for most people because it’s expensive and has low returns.
- You may be able to benefit from your life insurance if you have excess assets that exceed the estate tax or you’ve exhausted all other investment options.
- Traditional investments such as a 401(k), IRA, or IRA will yield higher returns.
Is it worth investing in life insurance?
While permanent life insurance can be treated as an investment, the high cost of cash value policies and their associated fees and penalties means it’s usually not an effective way to grow your money. Cash value is a tax-deferred savings account which gains interest over time and can shrink or grow depending on the policy.
Is whole-life insurance a good idea?
For most people, buying whole life and other types permanent life insurance is not a wise investment. Whole life insurance policies cost an average of five to 15 times more than comparable term life policies, which means that they’re more expensive to maintain over time than other investments. As a result, 45% of policies are surrendered within 10 years of being purchased.
As with most investments, the majority of growth in your policy’s cash value occurs after you have held it for decades. Therefore, surrendering your policy within 10 years is unlikely to increase your cash value beyond the premiums you paid.
There are also hidden fees associated with cash value policies. They vary from one insurer to another, but the most common fees and penalties for cash value policies include:
- The insurer pays administrative fees and expenses.
- A reduction in the policy’s death benefit when you withdraw (or take a loan) from the cash value
- A policy lapse if you completely deplete your cash value
- Significant fees if you withdraw from the cash value during the surrender period
- You could lose all cash value if your policy is cancelled during the surrender period
Term life insurance, on the other hand, is cheaper for similar coverage and doesn’t have cancellation fees. Whole life policies often grow at a lower rate than traditional investment accounts like a 401k or IRA.
Permanent life insurance vs. term life insurance with traditional investment
Are you unsure whether permanent or term life insurance is right for you? Here’s a comparison of traditional investing and permanent life insurance. Also known as a life-insurance retirement plan (LIRP), we show you the costs of both.
Methodology: Rates calculated for a 35-year old female nonsmoker living in Ohio. She qualifies to receive a preferred rate class and a $500,000 term insurance policy. Rates will vary depending on the customer’s specific circumstances. Illustration of rates valid as of 4/20/2021
Is permanent life insurance a wise investment?
A term life policy is the best choice for most life insurance buyers. However, there are some instances when a cash-value life insurance policy might be a better investment.
Estate tax: When assets are subject to estate taxes
People with particularly high net worths can benefit from permanent life insurance. If your heirs will have to pay an estate tax on your assets when you die, a permanent life insurance policy can help offset some of those costs.
As of 2021, any assets above $11.7 million are subject to an estate tax. The death benefit of life insurance policies is exempt from tax, provided it goes to beneficiaries and not your estate. If your estate is valued at $13 million, and $1.3million of it is subject to estate tax, you might consider taking out $1.3million permanent life insurance to ensure that the money goes to your heirs tax-free when you pass away.
If your estate is dominated by fixed or long-term assets such as real property, a permanent life insurance policy may be of benefit to your heirs. If your assets aren’t liquid, your heirs will have to pay federal taxes on the estate within nine months. This financial burden can be eased by life insurance policies that have a sufficient death benefit to cover the taxes your family will owe.
Once you have exhausted your retirement savings.
For the same reasons that cash value life insurance isn’t a great investment, relying on cash value to supplement retirement income — a strategy sometimes called a life insurance retirement plan (LIRP) — isn’t recommended for most people.
High-income earners with high incomes may need an additional vehicle to tax-deferred save. If you have life insurance coverage that is not covered by your cash value policy, then a cash-value policy might be a good option.
Consult with a financial adviser who can walk you through the specifics of how to use life insurance in your retirement planning.
Permanent life insurance coverage is what you need
People with lifelong dependents, such as children with disabilities, may want permanent life insurance coverage.
A parent who has a dependent for their life can establish a special needs trust. This trust is designed to provide financial protection and support beneficiaries of estates and life insurance. Financial protection for dependents is possible by designating the trust beneficiary on a permanent insurance policy.
Are life insurances a good retirement investment idea?
Senior citizens don’t need life insurance because they no longer have financial obligations, such as a mortgage or minor kids.
Using a permanent policy or annuity to supplement retirement income can make sense for people with more complex financial needs (as mentioned above) or people who know they’ll need life insurance coverage for the rest of their lives.
There are situations where you might benefit from investing in your life insurer. However, cash value policies have limited investment options and low rates of return. Investing in whole-life policies will yield better returns over the long term if you buy term life insurance at a lower price and use dedicated investment vehicles such as a mutual fund or 401(k) instead.
Is life insurance a good way to invest?
Are life insurance investments a good idea?
For most people, life insurance is not the best investment. The cost of cash value life insurance is higher than term insurance, and it typically returns less than an investment account.
What are the best ways to invest in term life insurance
Term life insurance doesn’t have a cash value so you can’t invest in it. Permanent life insurance can only be purchased with a cash value.
Who should buy life insurance?
If you don’t contribute enough to your retirement accounts regularly, your estate could be subject to tax. Or, if you have a dependent that would benefit from your permanent policy for a lifetime, you may want life insurance.
