3 Things to Keep in Mind when Using Life Insurance as an Investment
While not typically considered as such, life insurance really is an investment, whether one made solely for the purpose of getting the family through tough times post the demise of a loved one, or in order to someday take back the funds that have grown in it, for a rainy day or retirement expenses.
What Do You Need to Consider about Life Insurance?
Distinguishing between which kind of life insurance to take is the real dilemma, since everyone has different personal and financial needs to consider, and both term and permanent insurance plans have their own pros and cons.
- In the real world, it makes more sense for an extremely wealthy person to invest in a permanent life insurance policy due to the various costs of managing it as well as the possibility of using it to pay off mounting estate taxes.
- While term insurance is often incorrectly considered as money thrown away, investing in it does help you reap peace of mind, knowing that your loved ones will be secure even if something untoward happens to you.
Choosing between the two can get awfully confusing, so it’s vital to not get flustered or swayed and make a sound decision. This is especially important since life insurance quotes for both types can vary drastically in assurance.
Consider the following questions before deciding what’s best for you:
How much life insurance do you actually need?
The amount of life insurance coverage you ideally require is solely determined by who is dependent on you financially, including relevant factors such as funeral costs, outstanding loans, mortgages, emergency funds, children’s education and a set monthly income stream that needs to be taken care of in case the policy ever kicks in.
It is fairly easy to calculate the necessary amount of required life insurance cover if one is honest about the major factors that need to be addressed. Purchasing an expensive permanent policy might sound lucrative but is not apt for someone who will not be able to reel in much cover, and so a term policy holds more promise there.
There is also no point in over-investing in a policy, since too much cover can be a waste of money – the life insurance claims will be far lower when compared to the premiums invested!
How long will you need the insurance?
The main advantage of a permanent or whole life insurance policy is that it lasts a lifetime, while a term policy comes to an end right after the chosen term has passed. They also get more expensive when you renew them, so even long-term policies may not make financial sense if they come to an end as you’re nearing retirement age.
Permanent policies build on cash value and can vary in size and structure when it comes to payouts. Most individuals consider life insurance as an investment for retirement planning, although around that time, chances are that dependents won’t really require much financial assistance.
A permanent retirement life insurance policy is ideal for persons who might not have enough estate to cover the departing expenses, those who do not have dependents to look after and especially those who have a sizable estate and require the insurance policy to make sure that the estate tax is covered. For others, it’s often best to buy a term policy and invest the difference.
Do the tax benefits outweigh the costs?
Choosing the right permanent policy could potentially reap tremendous rewards in the form of tax benefits, besides the chance to borrow funds against the growing cash value. Typically, part of the invested premium goes into a cash value account with the potential to grow if the dividends and interests in place, and the investment market, are on agreeable terms.
Being able to borrow tax-free money against the cash value of the account is by far the most prominent advantage of a permanent policy, especially when it helps to solve the problem of saving up for retirement, buying a dream house or sending the children to their desired universities.
Then again, the catch is that many life insurance companies charge through their noses in terms of fees and expenses to help maintain a policy. These are often most likely to offer up a return that adds up to similar benefits as traditional IRA’s, 401Ks or other retirement plans may unveil, but additional investments may be necessary if the market is facing turbulent economic times.
What it all boils down to is that when you pick the right kind of plan and get some expert advice, life insurance can indeed be a beneficial form of investment for the future. Make sure you do your research and understand all your options!