Investing in life insurance is often thought of as a safety net for families. But investing in life insurance can also play a role in personal financial planning. The benefit of investing in Life insurance is the cash value built up with the policy, that can be used as retirement savings.
Many people are unsure whether life insurance is just protection or a potential investment. That too, with so many policy types available: term, whole, universal, and variable. Hence, it’s easy to get confused about which options might work for you.
Life insurance from an insurance company can help cover expenses after death. Nevertheless, certain policies also allow cash value growth and loans. Thus, making them a hybrid between protection and a financial asset. However, it doesn’t function like an S&P 500 market index or stock market investment vehicle.
At IBC Financial, our experts believe you need financial literacy on how it works and whether insurance is a good idea for you. That is key before making any financial planning or insurance-related decisions.
Whether investing in life insurance is a good idea for you depends mostly on your financial goals and circumstances. Investing in life insurance, a good idea or not, also depends on whether you’re choosing term life or permanent life insurance.
According to Julia Kagan in the Investopedia article How Whole Life Insurance Works,” there’s a cash value component in whole life insurance. On this cash value, the interest accrues on a tax-deferred basis.
Whereas term life insurance is cheaper and only offers protection for a set period. Typically, that’s annual, 10, 20, or 30 years. It’s straightforward, and the focus is on covering your family or dependents if something happens to you. Term life is generally not considered an investment because it doesn’t build cash value. Rather, it’s purely protection.
Permanent insurance policies, like whole life or universal life, mix protection with savings. They build cash value over time and may pay dividends. Hence, making them more of an investment option. Some people like this because it offers stability and guarantees. Though the returns are often modest compared with stocks or bonds.
Pros of investing in life insurance:
Cons:
· Fees and insurance cost can reduce growth
Yes, you can make money investing in life insurance. Making money by investing in life insurance is not like earning from stocks or mutual funds. According to Liz Knueven of CNBC Select, in the article titled “What is cash value in life insurance and how can you use it?”, the cash value in a life insurance policy allows you to withdraw or borrow against it. It also accumulates interest if it’s a whole life or permanent life policy.
Permanent life insurance policies include whole life, universal life, and variable life insurance. It can accumulate cash value that also grows over time. And sometimes it compounds through interest or dividends.
While it’s a form of financial gain, the pace is usually slow till maturity age. You don’t get big windfalls, but you do build an asset you can borrow against or use in the future.
Ways to make money from life insurance include:
It’s important to note that life insurance from a reputable insurance company is, first and foremost, protection. Any investment benefits are secondary. That’s why trying to use life insurance as your main wealth-building strategy usually isn’t recommended by IBC Financial experts.
Different types of Insurance policies and their uses:
The type of insurance you choose can make a big difference. Thus, you must pick depending on your stage in life, financial goals, and family situation. Policies vary in insurance cost, coverage amount, and additional benefits. So knowing what’s available helps you make a smarter choice:
This is coverage for a fixed period, usually 10, 20, or 30 years. It’s straightforward and generally affordable. It’s perfect for those who want to cover mortgages, education costs, or income replacement during their working years. The payout happens only if you pass away within the term.
Offers permanent life insurance coverage with fixed premium payments. Part of what you pay builds a cash value that grows over time. It’s helpful if you want lifelong protection and a savings component. Although its insurance cost is more than term life insurance.
A flexible permanent insurance policy that allows you to adjust premiums and death benefits. It also accumulates cash value, and you can change it as your financial situation evolves.
This one lets you invest the cash value component in separate accounts. This includes the stock market, market index, a fixed-rate account, or bonds. It has higher growth potential but also comes with more risk. Suitable for people who are comfortable managing investments alongside insurance.
The benefits of investing in life insurance include financial protection. The benefit of investing in Life Insurance is having both security and a small investment component in one policy. According to an article by the Financial Consumer Agency of Canada for Canada.ca, titled “Life Insurance,” a permanent life policy provides your family a lifetime coverage.
That way, if you die, the beneficiary gets the death benefit from the insurance company. Whereas if you cancel the policy, you get your cash value account back before maturity age. In a term life policy, you’re covered for a specific term or till you reach a specified age, typically 65 years.
Key benefits include:
Life insurance can act as a conservative part of your portfolio. Moreover, it helps in providing stability alongside more volatile investments like stocks.
Choosing a policy requires some thought:
By considering these points, you can find a policy that provides the coverage you need while supporting your financial plan. Life insurance is both protection and, sometimes, a small long-term asset if chosen wisely. However, you must consider the cost of insurance.
According to the IBC financial insurance experts, insurance is particularly useful for many. Especially for those people who want lifetime coverage along with wealth building. Insurance as an investment ensures their family is covered while also gradually growing a financial asset over time. For this, financial literacy is a requisite.
Life insurance policies do grow over time. The growth of life insurance policies depends on the policy type. According to Pat Howard in the Investopedia article “Life Insurance: What It Is, How It Works, and How to Buy a Policy”, your permanent life insurance grows at a fixed rate and sometimes pays dividends.
Universal life insurance is more flexible, though. And its growth is tied to interest rates or other factors. Variable life insurance lets you invest the cash value component in sub-accounts. That way, growth can be higher but also riskier.
Here are some growth examples:
This growth is slower than stocks or mutual funds. But the tax-deferred nature and guarantees in some policies make it appealing. Particularly for conservative investors. With the IBC Financial team at your disposal, you can understand your options better and make informed choices.
It helps secure your family’s future, even after you are gone. And you get to live in peace with the cash value component and dividends providing a financial security cushion.
Yes, you can withdraw cash from a universal life insurance policy. Cash withdrawals are allowed by many permanent policies, and you can even take out loans against the cash value. As per Ted Rechtshaffen in a Financial Post article titled “Borrowing against life insurance can be a unique source of cash — if you can do it,” many Canadians can benefit by using their insurance policy as a line of credit, too.
Apart from that, it provides you with capital that’s not associated with your personal assets. You have the option to use it if required. In case of death, the tax-free proceeds from the policy will be used to repay the loan.
How this works depends on the insurer and the type of policy.
Options include:
It’s important to understand that withdrawing or borrowing affects the death benefit. And it may impact the long-term growth of your policy. Always check the rules of your policy before accessing the cash value.
Investing in life insurance is not about making quick money. Rather, it’s about combining protection with slow, steady financial growth. Term life insurance is purely protective and affordable. Whereas permanent policies offer cash value growth and loans.
The main benefits include:
You must understand that the returns are generally modest compared to stocks or mutual funds. So life insurance should be seen as a conservative asset within a broader financial plan. And not as a primary investment vehicle.
It’s especially valuable for people who want both security for their family and cash value growth. This growth over time helps build wealth. Which is why our wealth-building and financial professionals recommend using insurance smartly. Get in touch with IBC Financial for estate planning and be your own banker.
